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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-84685
PROSPECTUS
[FANNIE MAY LOGO]
ARCHIBALD CANDY CORPORATION
[FANNY FARMER LOGO]
EXCHANGE OFFER FOR
$40,000,000
[SWEET FACTORY LOGO]
[LAURA SECORD LOGO]
10 1/4% SENIOR SECURED NOTES DUE 2004
GUARANTEED BY:
SWEET FACTORY GROUP, INC.
SWEET FACTORY, INC.
SF PROPERTIES, INC.
SF CANDY COMPANY
ARCHIBALD CANDY (CANADA) CORPORATION
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We are offering you the opportunity to exchange in the exchange offer your
10 1/4% Series A Senior Secured Notes due 2004 for an equivalent principal
amount of 10 1/4% Series B Senior Secured Notes due 2004 that will be registered
under the Securities Act of 1933. Your unregistered notes are not registered
under the Securities Act. Exchanging your unregistered notes for registered
notes will provide you with notes that should be easier to sell and transfer.
TERMS OF THE EXCHANGE OFFER
- The exchange offer expires at 5:00 p.m., New York City time, on November
9, 1999, unless extended to allow additional tenders of unregistered
notes.
- All unregistered notes that are validly tendered and not validly withdrawn
will be exchanged.
- Tenders of unregistered notes may be withdrawn at any time prior to the
expiration of the exchange offer.
- The exchange offer is not subject to any conditions other than that the
exchange offer not violate any applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission.
- The exchange of notes will not be a taxable event for U.S. federal income
tax purposes.
- We will not receive any proceeds from the exchange offer.
- The terms of the registered notes and the unregistered notes are
substantially identical, except that the unregistered notes are subject to
transfer restrictions and registration rights.
- Your unregistered notes and the registered notes are guaranteed by our
guarantor subsidiaries.
- There is no existing market for the registered notes, and we do not intend
to apply for their listing on any securities exchange.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER PRIOR TO
TENDERING YOUR UNREGISTERED NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS OCTOBER 6, 1999.
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THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS THAT ARE NOT CONTAINED
IN OR DELIVERED WITH THIS PROSPECTUS. THESE DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE UPON REQUEST FROM DONNA M. SNOPEK, SECRETARY, AT ARCHIBALD CANDY
CORPORATION, 1137 WEST JACKSON BOULEVARD, CHICAGO, ILLINOIS 60607, TELEPHONE
NUMBER (312) 243-2700. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY NOVEMBER 2, 1999.
TABLE OF CONTENTS
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Prospectus Summary.................................................................... 1
Risk Factors.......................................................................... 13
The Exchange Offer.................................................................... 24
Use of Proceeds....................................................................... 32
The Acquisition....................................................................... 33
Capitalization........................................................................ 34
Unaudited Pro Forma Condensed Consolidated Financial Statements....................... 35
Selected Historical Financial Data.................................................... 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 44
Business.............................................................................. 52
Management............................................................................ 63
Capitalization of Holdings............................................................ 69
Principal Stockholders................................................................ 73
Certain Transactions.................................................................. 76
Description of the Revolving Credit Facility.......................................... 79
Description of the Registered Notes................................................... 81
Material United States Federal Tax Consequences....................................... 109
Plan of Distribution.................................................................. 111
Legal Matters......................................................................... 112
Experts............................................................................... 112
Where You Can Find More Information................................................... 112
Information Incorporated by Reference................................................. 113
Index to Financial Statements......................................................... F-1
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FANNIE MAY-REGISTERED TRADEMARK-, FANNY FARMER-REGISTERED TRADEMARK-, LAURA
SECORD-REGISTERED TRADEMARK- AND TRINIDAD-REGISTERED TRADEMARK- ARE REGISTERED
TRADEMARKS OF ARCHIBALD CANDY CORPORATION. SWEET FACTORY-REGISTERED TRADEMARK-
IS A REGISTERED TRADEMARK OF UNITED SWEET FACTORY LIMITED, WHICH HAS GRANTED TO
OUR SUBSIDIARY SWEET FACTORY GROUP, INC. AN EXCLUSIVE LICENSE THEREFOR FOR USE
IN THE UNITED STATES AND MEXICO.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS.
IT LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. THIS
PROSPECTUS INCLUDES THE TERMS OF THE REGISTERED NOTES WE ARE OFFERING, AS WELL
AS INFORMATION REGARDING OUR BUSINESS AND DETAILED FINANCIAL DATA. WE ENCOURAGE
YOU TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT INDICATES
OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "WE," "US," "OUR" OR THE "COMPANY"
REFER TO THE COMBINED BUSINESS OF ARCHIBALD CANDY CORPORATION AND THE LAURA
SECORD RETAIL BUSINESS OF NESTLE CANADA INC. OUR SUBSIDIARY ARCHIBALD CANDY
(CANADA) CORPORATION ACQUIRED SUBSTANTIALLY ALL OF THE ASSETS OF THE LAURA
SECORD RETAIL BUSINESS OF NESTLE ON JUNE 8, 1999. THE TERM "HOLDINGS" REFERS TO
FANNIE MAY HOLDINGS, INC., THE SOLE SHAREHOLDER OF THE COMPANY.
UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS IN THIS PROSPECTUS ARE IN
U.S. DOLLARS. IN ADDITION, FOR PURPOSES OF THE PRO FORMA FINANCIAL STATEMENTS
AND INFORMATION PROVIDED HEREIN, WE HAVE CONVERTED ALL LAURA SECORD BALANCE
SHEETS FROM CANADIAN DOLLARS TO U.S. DOLLARS BASED ON THE CURRENCY EXCHANGE RATE
IN EFFECT ON THE DATE OF THE RESPECTIVE BALANCE SHEET, AND WE HAVE CONVERTED ALL
LAURA SECORD STATEMENTS OF OPERATIONS FROM CANADIAN DOLLARS TO U.S. DOLLARS
BASED ON THE AVERAGE CURRENCY EXCHANGE RATE IN EFFECT DURING THE PERIOD COVERED
BY SUCH STATEMENTS OF OPERATIONS. THE TERM "PRO FORMA" REFERS TO WHAT OUR
BUSINESS MIGHT HAVE LOOKED LIKE IF OUR RECENT ACQUISITIONS OF SWEET FACTORY
GROUP, INC. AND LAURA SECORD AND THE RELATED FINANCINGS HAD OCCURRED AT THE
BEGINNING OF THE APPLICABLE PERIOD WITH REGARD TO INCOME STATEMENT ITEMS OR, ON
THE DATE INDICATED, WITH REGARD TO BALANCE SHEET ITEMS. UNLESS OTHERWISE
INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO STORES INCLUDE RETAIL STORES AND
KIOSKS, BUT NOT CARTS, AND ARE AS OF MAY 29, 1999, EXCEPT WITH RESPECT TO LAURA
SECORD, IN WHICH CASE REFERENCES TO STORES INCLUDE RETAIL STORES, BUT NOT KIOSKS
OR CARTS.
COMPANY OVERVIEW
The Company is a manufacturer and marketer of quality boxed chocolates and
other confectionery items. Founded in 1921, we manufacture a variety of candies
and operate confectionery retail chains under the Fannie May, Fanny Farmer,
Sweet Factory and Laura Secord brand names. As of May 29, 1999, we operated 735
retail stores in 40 states and Canada: 233 Fannie May stores, 74 Fanny Farmer
stores, 253 Sweet Factory stores, and 175 Laura Secord stores. We also sell our
Fannie May, Fanny Farmer and Laura Secord branded products in approximately
9,300 third-party retail outlets. In addition, we sell our Fannie May and Fanny
Farmer branded products through our quantity order, mail order and fundraising
programs. We believe that consumers widely recognize our products for their
quality, freshness and value, and that the Fannie May, Fanny Farmer, Sweet
Factory and Laura Secord brand names are among the strongest in the
confectionery industry and offer significant opportunities for growth.
Our pro forma sales for fiscal year ended August 29, 1998 were approximately
$258.2 million. Pro forma earnings before interest, income taxes, depreciation
and amortization for the same period was approximately $35.1 million. For
further information, see "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
THE EXCHANGE OFFER
On June 8, 1999, we sold $40.0 million of our 10 1/4% Series A Senior
Secured Notes due 2004 through an unregistered offering. Such unregistered notes
are guaranteed by our guarantor subsidiaries. At the same time as the
unregistered offering, we and our guarantor subsidiaries agreed to provide the
holders of the unregistered notes with registration rights pursuant to a
registration rights agreement dated as of July 2, 1997 between us and the
initial purchasers identified therein. Under the registration rights agreement,
we must deliver this prospectus to the holders of the unregistered notes and
complete the exchange offer on or before November 20, 1999. If the exchange
offer does not take place on or before November 20, 1999, we must pay liquidated
damages to the holders of the unregistered notes until the exchange offer is
completed. In the exchange offer, you may exchange your unregistered notes
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for registered notes with substantially the same terms. The registered notes
will be guaranteed by our guarantor subsidiaries in the same manner as the
unregistered notes are guaranteed. You should read the discussion under the
heading "Summary of Terms of the Registered Notes" and "Description of the
Registered Notes" for further information regarding the registered notes.
We believe that holders of the registered notes may resell the registered
notes without complying with the registration and prospectus delivery provisions
of the Securities Act, if they meet certain conditions. You should read the
discussion under the headings "Summary of the Exchange Offer" and "The Exchange
Offer" for further information regarding the exchange offer and resales of the
registered notes.
We sold the unregistered notes to help finance the acquisition by our
subsidiary Archibald Candy (Canada) Corporation of the Laura Secord retail
business of Nestle for a total purchase price of $62.0 million (Cdn.), or
approximately $42.2 million (U.S.). You should read the discussion under the
heading "The Acquisition" for further information regarding the Laura Secord
acquisition.
BUSINESS STRATEGY
Our business strategy is to grow our 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. We acquired the Fanny Farmer
brand in fiscal 1992 to complement our existing Fannie May brand. Our
acquisition of Sweet Factory in December 1998 provided us with a leading name in
non-chocolate, bulk candy retail and our acquisition of Laura Secord in June
1999 provided us with the leading retailer of boxed chocolates in Canada. We
expect to continue to grow our brands with a strategy that includes the
following key elements:
- CONTINUE TO IMPROVE COMPANY-OPERATED STORES. Our retail store strategy
consists of two main components: (1) continuing to improve same store
sales by enhancing merchandising, customer service and product selection
and (2) reducing store operating costs, primarily by selectively closing
unprofitable stores.
- INCREASE PRODUCT AVAILABILITY THROUGH COMPANY-OPERATED STORES AND
THIRD-PARTY RETAIL PROGRAMS. Our strategy of increasing product
availability is based on cross-marketing Fannie May and Sweet Factory
product offerings in Company-operated stores as well as increasing sales
of all of our brands through third party channels.
- GROW NON-RETAIL SALES. We have developed several non-retail sales
channels for our Fannie May and Fanny Farmer brands, including our: (1)
quantity order program, (2) mail order program and (3) fundraising
program. We believe that these non-retail sales channels provide potential
future sales growth for all of our brands without the overhead generally
associated with maintaining a retail store.
- PURSUE STRATEGIC ACQUISITIONS. We intend to continue to pursue selective
acquisitions that complement or provide further opportunities to use our
brands, manufacturing resources and/or distribution systems.
MANAGEMENT
We believe that the depth, experience and ability of our management team has
led to the successful execution of our current business strategy. Our executive
officers and key managers, led by Ted A. Shepherd, President and Chief Operating
Officer, average over 19 years of industry experience. Mr. Shepherd, who joined
the Company in late fiscal 1994, and the rest of our current management team
have been chiefly responsible for the development of our business strategy and
improved operating results as reflected in the increase in our EBITDA from $8.2
million in fiscal 1994 to $19.0 million in fiscal 1998.
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The stockholders of Holdings include affiliates of, and funds advised by
affiliates of, The Jordan Company LLC, a private investment firm that has
completed over 80 transactions and currently has a portfolio of investments
representing over $3.0 billion in annual sales. Affiliates of, and funds advised
by affiliates of, The Jordan Company hold a majority of the voting common stock
of Holdings and maintain majority representation on our and Holdings' Boards of
Directors. The other primary stockholders of Holdings are funds affiliated with
TCW Capital, an investment management firm, and the Company's management.
Affiliates of TCW Capital hold the remaining positions on our and Holdings'
Boards of Directors.
Archibald Candy Corporation was incorporated in Illinois on May 31, 1922.
Our headquarters are located at 1137 West Jackson Boulevard, Chicago, Illinois
60607, and our telephone number is (312) 243-2700.
SUMMARY OF THE EXCHANGE OFFER
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Registration Rights............... We sold the unregistered notes on June 8, 1999 to
Jefferies & Company, Inc., the initial purchaser. The
initial purchaser then sold the unregistered notes to
institutional investors. At the same time as the initial
sale of the unregistered notes, we agreed to provide the
holders of the unregistered notes with the registration
rights contained in the registration rights agreement.
The registration rights agreement provides for the
exchange offer.
You may exchange your unregistered notes for registered
notes, which have substantially identical terms. The
exchange offer satisfies your rights under the
registration rights agreement. After the exchange offer
is over, you will not be entitled to any exchange or
registration rights with respect to your unregistered
notes.
The Exchange Offer................ We are offering to exchange $40.0 million total
principal amount of our 10 1/4% Series B Senior Secured
Notes due 2004, which have been registered under the
Securities Act, for your outstanding 10 1/4% Series A
Senior Secured Notes due 2004, which were issued in an
unregistered offering on June 8, 1999. The unregistered
notes are, and the registered notes will be, guaranteed
by our guarantor subsidiaries. To exchange your
unregistered notes, you must properly tender them, and
we must accept them. We will exchange all unregistered
notes that you validly tender and do not validly
withdraw. We will issue registered notes at or promptly
after the end of the exchange offer.
Resales........................... We believe that you can offer for resale, resell or
otherwise transfer the registered notes without
complying with the registration and prospectus delivery
requirements of the Securities Act if:
- you are acquiring the registered notes in the ordinary
course of your business;
- you are not participating, do not intend to
participate, and have no arrangement or understanding
with any person to participate, in the distribution of
the registered notes; and
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- you are not an "affiliate" of the Company, as defined
in Rule 405 of the Securities Act.
If any of these conditions is not satisfied and you
transfer any registered notes without delivering a
proper prospectus or without qualifying for a
registration exemption, you may incur liability under
the Securities Act. We will not assume or indemnify you
against such liability.
Each broker-dealer that receives registered notes for
its own account in exchange for unregistered notes that
such broker-dealer acquired through market-making or
other trading activities must acknowledge that it will
deliver a proper prospectus when it transfers any
registered notes. A broker-dealer may use this
prospectus for a limited period for an offer to resell,
a resale or other transfer of the registered notes.
Expiration Date................... The exchange offer expires at 5:00 p.m., New York City
time, on November 9, 1999, unless we extend the
expiration date to allow additional tenders of
unregistered notes.
Conditions to the Exchange
Offer........................... The exchange offer is subject to conditions, some of
which we may waive. Such conditions are more fully
described later in this prospectus under "The Exchange
Offer--Conditions to the Exchange Offer."
Accrued Interest on the Registered
Notes and the Unregistered
Notes........................... The registered notes will bear interest from July 1,
1999. If we accept your unregistered notes for exchange,
then you will waive all interest accrued but unpaid on
such unregistered notes.
Procedures for Tendering
Unregistered Notes.............. We issued the unregistered notes in global and
certificated form. When the unregistered notes were
issued, we deposited a global note with The Bank of New
York, as book-entry depositary. The Bank of New York
issued a certificateless depositary interest in the
global note, which represents a 100% interest in the
note, to The Depository Trust Company, commonly known as
"DTC." Beneficial interests in the unregistered notes,
which are held by direct or indirect participants in DTC
through the certificateless depositary interest, are
shown on records maintained in book-entry form by DTC.
You may tender your unregistered notes held in global
form through book-entry transfer in accordance with
DTC's Automated Tender Offer Program, or "ATOP". To
tender your unregistered notes by a means other than
book-entry transfer, a letter of transmittal must be
completed and signed according to the instructions
contained in the letter. The letter of transmittal and
any other documents required by the letter of
transmittal must be delivered to the exchange agent by
mail,
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facsimile, hand delivery or overnight carrier. In
addition, you must deliver the unregistered notes to the
exchange agent or comply with the procedures for
guaranteed delivery. See "The Exchange Offer--Procedures
for Tendering Unregistered Notes" for more information.
Do not send letters of transmittal and certificates
representing unregistered notes to us. Send these
documents only to the exchange agent. See "The Exchange
Offer--Exchange Agent" for more information.
Special Procedures for Beneficial
Owners.......................... If you are a beneficial owner whose unregistered notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and wish
to tender your unregistered notes in the exchange offer,
please contact the registered holder as soon as possible
and instruct it to tender on your behalf and comply with
our instructions set forth elsewhere in this prospectus.
Withdrawal Rights................. You may withdraw the tender of your unregistered notes
at any time before 5:00 p.m., New York City time, on the
expiration date.
Appraisal or Dissenter's Rights... Holders of unregistered notes do not have any appraisal
or dissenters' rights in the exchange offer. If you do
not tender your unregistered notes or we reject your
tender, you will not be entitled to any further
registration rights under the registration rights
agreement, except under limited circumstances. However,
your notes will remain outstanding and entitled to the
benefits of the indenture governing the unregistered
notes and the registered notes. You should read the
discussion under the heading "Risk Factors--
Consequences of Failure to Exchange Unregistered Notes"
for further information.
Federal Tax Consequences.......... We believe that the exchange of notes is not a taxable
exchange for United States federal income tax purposes
and that you generally will not recognize any taxable
gain or loss or any interest income as a result of such
exchange. For additional information regarding federal
tax consequences, you should read the discussion under
the heading "Material United States Federal Tax
Consequences."
Exchange Agent.................... The Bank of New York is serving as the exchange agent in
the exchange offer. The exchange agent's address, and
telephone and facsimile numbers are listed in the
section of this prospectus entitled "The Exchange
Offer--Exchange Agent" and in the letter of transmittal.
Use of Proceeds................... We will not receive any proceeds from the exchange
offer, and we will pay the expenses of the exchange
offer.
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You should consider carefully the information set forth under the caption
"Risk Factors" beginning on page 13 and all other information set forth in this
prospectus before deciding whether to participate in the exchange offer.
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SUMMARY OF TERMS OF THE REGISTERED NOTES
The form and terms of the registered notes are the same as the form and
terms of the unregistered notes, except that the registered notes will be
registered under the Securities Act. As a result, the registered notes will not
bear legends restricting their transfer and will not contain the registration
rights and liquidated damage provisions contained in the unregistered notes. The
registered notes will represent the same debt as the unregistered notes and our
currently outstanding $130.0 million of registered notes. The unregistered
notes, the registered notes and our currently outstanding registered notes are
governed by the same indenture and secured ratably by the collateral granted
under the indenture. In addition, all such notes are guaranteed by our guarantor
subsidiaries.
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Securities Offered................ $40,000,000 aggregate principal amount of 10 1/4% Series
B Senior Secured Notes.
Maturity Date..................... July 1, 2004.
Interest Rate..................... We will pay an annual rate of interest equal to 10 1/4%.
Interest Payment Dates............ Every six months on January 1 and July 1, beginning
January 1, 2000. Interest will accrue from July 1, 1999.
Ranking........................... The registered notes will be:
- senior secured obligations;
- senior in right of payment to any of our subordinated
indebtedness;
- equal in right of payment with any of our senior
indebtedness; and
- effectively junior in right of payment to the lenders
under our revolving credit facility with respect to our
owned store locations and our and certain of our
subsidiaries' accounts receivables, raw materials and
finished goods inventories.
As of the date of this prospectus, we had borrowings
equal to approximately $5.0 million and letters of
credit in the amount of $0.7 million outstanding under
our revolving credit facility.
Security.......................... The registered notes will be secured by:
- liens on our and our subsidiaries' equipment, fixtures
and general intangibles, including trademarks and
trademark licenses;
- our ownership interest in certain of our subsidiaries;
and
- mortgages on certain of our owned real property.
The registered notes will be secured ratably with our
currently outstanding registered notes and with any
unregistered notes that are not exchanged pursuant to
the exchange offer. The registered notes will not be
secured by our owned store locations or our or our
subsidiaries' accounts receivables, raw materials or
finished goods inventories. See the discussion under the
heading "Description of the Registered Notes--
Collateral" for further information regarding the
collateral that secures the notes.
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Guarantees........................ The registered notes will be guaranteed by all of our
subsidiaries other than subsidiaries treated as
unrestricted subsidiaries. If we cannot make payments on
the notes when they are due, our subsidiary guarantors
must make them instead. Subject to exceptions, if we
create or acquire new wholly-owned subsidiaries, they
also will guarantee the notes. You should read
"Description of the Registered Notes-- Guarantors" for
more information regarding the guarantees of the notes.
Optional Redemption............... After, July 1, 2001, all or some of the notes may be
redeemable at our option at the following premiums, plus
accrued interest:
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FOR THE PERIOD BELOW PERCENTAGE
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On or after July 1, 2001................................ 105.125%
On or after July 1, 2002................................ 102.563%
July 1, 2003 and thereafter............................. 100.000%
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Prior to July 1, 2000, up to one-third of the principal
amount of the notes issued under the indenture may be
redeemed at our option with the net proceeds of certain
public equity offerings at 110.250% of the face amount,
plus accrued interest.
Mandatory Offer to Repurchase..... If we experience specific kinds of changes of control,
we must offer to repurchase the notes at 101% of their
face amount, plus accrued interest to the date of
redemption.
Certain Covenants................. The indenture contains covenants for your benefit which,
among other things and subject to exceptions, restrict
our ability to:
- incur more debt;
- create liens;
- make some payments or investments;
- enter into transactions with affiliates;
- sell assets;
- consolidate or merge;
- transfer or sell assets; and
- allow our subsidiaries to issue capital stock.
Form of the Registered Notes...... The registered notes will be represented by one or more
permanent global securities in bearer form deposited
with The Bank of New York, as book-entry depositary, for
the benefit of DTC. You will not receive notes in
registered form unless one of the events set forth under
the heading "Description of the Registered
Notes--Certificated Notes" occurs. Instead, beneficial
interests in the registered notes will be shown on, and
transfers of these interests will be effected only
through,
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records maintained in book-entry form by DTC with
respect to its participants.
Absence of a Public Market for the
Registered Notes................ While the unregistered notes are presently eligible for
trading by qualified institutional buyers in the Private
Offerings, Resales and Trading through Automated
Linkages market, commonly known as "PORTAL," of the
National Association of Securities Dealers, Inc., there
is no existing market for the registered notes. The
initial purchaser of the unregistered notes has advised
us that it currently intends to make a market in the
registered notes following the exchange offer, but it is
not obligated to do so, and any market-making may be
stopped at any time without notice. We do not intend to
apply for a listing of the registered notes on any
securities exchange. We do not know if an active public
market for the notes will develop or, if developed, will
continue. If an active public market does not develop or
is not maintained, the market price and liquidity of the
notes may be adversely affected. We cannot make any
assurances regarding the liquidity of the market for the
registered notes, the ability of holders to sell their
registered notes or the price at which holders may sell
their registered notes.
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For additional information regarding the registered notes, see the
"Description of the Registered Notes" section of this prospectus.
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SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following table summarizes financial data from the unaudited pro forma
condensed consolidated financial statements included elsewhere in this
prospectus. The pro forma condensed consolidated income statement and other data
for the year ended August 29, 1998, and the nine-month period ended May 29, 1999
are intended to give you a picture of what our business might have looked like
if the Sweet Factory and Laura Secord acquisitions and the related financings
had occurred on August 31, 1997.
It is important that you read the summary unaudited pro forma condensed
consolidated financial data presented below along with "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Selected Historical Financial
Data," "Management's Discussions and Analysis of Financial Condition and Results
of Operations" and the financial statements and accompanying notes included
elsewhere in this prospectus.
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PRO FORMA CONSOLIDATED
PRO FORMA CONSOLIDATED NINE-MONTH
YEAR ENDED PERIOD ENDED
AUGUST 29, 1998(1) MAY 29, 1999(2)
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(DOLLARS IN THOUSANDS)
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STATEMENT OF OPERATIONS DATA:
Net sales:
Company-operated retail(3)..................................... $ 217,219 $ 172,218
Third-party retail(4).......................................... 23,976 27,403
Non-retail(5).................................................. 17,024 16,323
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Total net sales.............................................. $ 258,219 $ 215,944
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Gross profit..................................................... 164,099 137,141
Operating income (loss).......................................... 17,344 23,391
OTHER DATA:
EBITDA(6)........................................................ 35,064 36,861
Depreciation and amortization.................................... 17,402 13,177
Capital expenditures............................................. 5,430 5,185
STORE DATA:
Company-operated stores at period end(7)......................... 751 735
SELECTED RATIOS:
Ratio of EBITDA to net interest expense(8)....................... 2.1 2.8
Ratio of total debt to EBITDA(9)................................. 4.9 4.6
Ratio of earnings to fixed charges(10)........................... 1.0 1.5
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(1) The pro forma financial data for the fiscal year ended August 29, 1998
includes financial data for Sweet Factory for the twelve-month period ended
August 29, 1998, and Laura Secord for the twelve-month period ended
November 28, 1998.
(2) The pro forma financial data for the nine-month period ended May 29, 1999
includes financial data for Sweet Factory for the period from August 30,
1998 to December 6, 1998, and Laura Secord for the nine-month period ended
May 1, 1999.
(3) Company-operated retail includes sale of products through Company-operated
Fannie May, Fanny Farmer, Sweet Factory and Laura Secord stores.
(4) Third-party retail includes sale of Fannie May, Fanny Farmer and Laura
Secord branded products through grocery stores, drug stores, department
stores and other independent retailers that purchase such products at
wholesale pricing for resale to the consumer.
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(5) Non-retail includes sale of Fannie May and Fanny Farmer branded products
through our quantity order, mail order and fundraising programs.
(6) Pro forma EBITDA for either period presented above is defined as 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 generally accepted accounting principles, it
is included herein to provide additional information with respect to our
ability to meet our future debt service, capital expenditure and working
capital requirements. Although EBITDA is not necessarily a measure of our
ability to fund our cash needs, we believe that certain investors find
EBITDA to be a useful tool for measuring our ability to service our debt.
(7) The term "stores" includes kiosks and carts, except with respect to Laura
Secord.
(8) For the year ended August 29, 1998, based on pro forma EBITDA of $35.1
million and pro forma net interest expense, including interest on capital
leases and seasonal borrowings, of $16.8 million. For the nine-month period
ended May 29, 1999, based on pro forma EBITDA of $36.9 million and pro
forma net interest expense, including interest on capital leases and
seasonal borrowings, of $13.0 million.
(9) For the year ended August 29, 1998, based on pro forma total debt of $170.2
million and pro forma EBITDA of $35.1 million. For the nine-month period
ended May 29, 1999, based on pro forma total debt of $170.2 million and pro
forma EBITDA of $36.9 million.
(10) For the year ended August 29, 1998, based on pro forma earnings of $0.7
million and pro forma fixed charges of $29.8 million. For the nine-month
period ended May 29, 1999, based on pro forma earnings of $10.6 million
and pro forma fixed charges of $22.2 million.
10
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL DATA
The summary historical financial data as of and for each year in the
three-year period set forth below has been derived from our audited financial
statements. The summary historical financial data set forth below for the
nine-month periods ended May 30, 1998 and May 29, 1999 has been derived from our
unaudited consolidated financial statements. The historical results for the
nine-month periods are not necessarily indicative of the results of operations
for the full year. The unaudited historical financial data reflect all
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of our financial
position, results of operations and cash flows as of and for the periods
presented. The information set forth below should be read in conjunction with
"Unaudited Pro Forma Condensed Consolidated Financial Statements," "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
FISCAL YEAR ENDED ENDED
---------------------------------- ----------------------
AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1996(1) 1997(1) 1998(1) 1998 1999(2)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Net sales:
Company-operated retail(3)......................... $ 88,938 $ 89,276 $ 91,488 $ 79,125 $ 116,947
Third-party retail(4).............................. 14,924 17,074 18,230 16,243 22,536
Non-retail(5)...................................... 13,486 15,583 17,024 16,418 16,323
---------- ---------- ---------- ---------- ----------
Net sales........................................ $ 117,348 $ 121,933 $ 126,742 $ 111,786 $ 155,806
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Gross profit......................................... $ 76,338 $ 79,649 $ 82,764 $ 72,724 $ 99,767
Operating income (loss).............................. 7,945 10,801 12,539 17,733 18,638
<CAPTION>
AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1996(1) 1997(1) 1998(1) 1998 1999(2)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 380 $ 15,801 $ 13,081 $ 29,924 $ 23,844
Working capital (deficit)............................ (4,349) 23,475 26,988 35,842 35,029
Total assets......................................... 78,668 95,660 98,089 109,053 148,768
Total debt........................................... 72,721 100,521 100,145 100,190 130,240
Shareholder's equity (deficit)....................... (15,448) (16,619) (14,944) (5,807) (4,589)
<CAPTION>
NINE-MONTH PERIOD
FISCAL YEAR ENDED ENDED
---------------------------------- ----------------------
AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1996(1) 1997(1) 1998(1) 1998 1999(2)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................................ $ 14,731 $ 16,868 $ 18,964 $ 22,761 $ 27,243
Cash provided by (used in):
Operating activities............................... 4,117 3,919 4,206 18,325 18,089
Investing activities............................... (1,121) (3,688) (4,709) (3,370) (32,956)
Financing activities............................... (3,098) 15,190 (2,217) (832) 25,630
Depreciation and amortization........................ 6,807 5,932 6,233 4,833 8,396
Capital expenditures................................. 2,280 3,688 4,574 3,370 4,954
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
FISCAL YEAR ENDED ENDED
---------------------------------- ----------------------
AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1996(1) 1997(1) 1998(1) 1998 1999(2)
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STORE DATA:
Company-operated stores at period end................ 340 322 317 319 560
Increase in same store sales(7)...................... 2.6% 5.2% 4.2% 4.7% 0.5%
</TABLE>
- ------------------------
(1) In 1995, we changed our fiscal year to the last Saturday in August from the
last day in August. As a result of this change, fiscal 1996 had 53 weeks
(371 days). Fiscal 1997 and fiscal 1998 each had 52 weeks (364 days).
(2) Includes information for Sweet Factory for the period after December 6,
1998.
(3) Company-operated retail includes sale of products through Company-operated
Fannie May and Fanny Farmer stores and, for the period after December 6,
1998, Sweet Factory stores.
(4) Third-party retail includes sale of Fannie May and Fanny Farmer branded
products through grocery stores, drug stores and other independent
retailers that purchase such products at wholesale pricing for resale to
the consumer.
(5) Non-retail includes sale of Fannie May and Fanny Farmer products through
our quantity order, mail order and fundraising programs.
(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 generally
accepted accounting principles, it is included herein to provide additional
information with respect to our ability to meet our future debt service,
capital expenditure and working capital requirements. Although EBITDA is
not necessarily a measure of our ability to fund our cash needs, we believe
that certain investors find EBITDA to be a useful tool for measuring our
ability to service our debt.
(7) 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.
12
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS BEFORE MAKING A
DECISION TO EXCHANGE YOUR NOTES IN THE EXCHANGE OFFER.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
NOTES.
We have a significant amount of indebtedness. The following table shows
important credit statistics:
<TABLE>
<CAPTION>
PRO FORMA
AT MAY 29, 1999
------------------
<S> <C>
Total debt................................................................ $ 170.2 million
Shareholders' equity (deficit)............................................ $ (4.6) million
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
FISCAL YEAR
ENDED AUGUST 28, 1998
---------------------
<S> <C>
Ratio of EBITDA to net interest expense................................ 2.1x
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- increase our vulnerability to adverse economic and industry conditions;
- limit or prevent our ability to fund future working capital, capital
expenditures and other general corporate requirements, including the
renewal of the Sweet Factory license;
- limit or prevent our ability to fund Holdings' redemption obligations;
- limit or prevent our ability to fund a change of control offer;
- limit our flexibility in planning for, or reacting to, changes in our
business and industry;
- place us at a competitive disadvantage compared to our competitors that
have less debt;
- limit our ability to borrow additional funds; and
- result in an event of default if we fail to comply with the financial and
other restrictive covenants in the indenture and our revolving credit
facility.
You should read the discussions under the headings "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Selected Historical Financial
Data," "Description of the Revolving Credit Facility" and "Description of the
Registered Notes."
ADDITIONAL BORROWINGS AVAILABLE--WE MAY BE ABLE TO INCUR SUBSTANTIALLY MORE
DEBT, WHICH COULD FURTHER INCREASE THE RISKS DESCRIBED ABOVE.
We may be able to incur substantial additional indebtedness in the future.
The indenture permits borrowings of up to $25.0 million in aggregate principal
amount under our revolving credit facility. As of the date of this prospectus,
we have approximately $5.0 million of borrowings and letters of credit in the
amount of $0.7 million outstanding under our revolving credit facility. The
indenture also permits additional borrowings of up to $10.0 million in aggregate
principal amount. If new debt is added to our current debt levels, the risks
that we now face relating to our substantial leverage will increase.
See "Capitalization," "Selected Historical Financial Data," "Description of
the Revolving Credit Facility" and "Description of the Registered Notes."
13
<PAGE>
ABILITY TO SERVICE DEBT--TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our ability to fund operations, to make payments on or refinance our
indebtedness, including the notes, and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This ability, to an
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.
Based on our current level of operations and anticipated operating
activities, we believe our cash flow from operations, available cash and
available borrowings under our revolving credit facility will be adequate to
meet our future liquidity needs for at least the next eighteen months.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations to enable us to pay our indebtedness, including the
notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness, including the notes on or before maturity. We may
not be able to refinance any of our indebtedness on acceptable terms or at all.
EFFECTIVE SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS
EFFECTIVELY SUBORDINATED TO OUR REVOLVING CREDIT FACILITY TO THE EXTENT OF THE
COLLATERAL SECURING OUR REVOLVING CREDIT FACILITY.
The notes and the subsidiary guarantees are effectively subordinated to up
to $25.0 million of potential borrowings under our revolving credit facility to
the extent of the assets securing such indebtedness. See "Description of the
Revolving Credit Facility." Our revolving credit facility is secured by a first
lien on our and our subsidiaries' accounts receivable, raw materials and
finished good inventories and our owned store locations and the proceeds
therefrom. As a result, upon any distribution to our creditors or the creditors
of the subsidiary guarantors in bankruptcy, liquidation, reorganization or
similar proceedings, the lenders under our revolving credit facility will be
entitled to be repaid in full before any payment is made to you from the
proceeds of the assets securing such other indebtedness.
LIQUIDATION OF COLLATERAL--THE PROCEEDS OF THE COLLATERAL MAY NOT BE SUFFICIENT
TO REPAY THE NOTES.
If an event of default occurs under the indenture with respect to the notes,
the liquidation of the assets securing the notes may not result in proceeds in
an amount sufficient to pay the principal of, premium, if any, and interest on
the notes. The ability of the trustee under the indenture to foreclose on any
assets will be subject to the provisions of the security documents covering
those assets. In addition, the ability of holders of notes to foreclose on the
assets securing such notes in a timely fashion, if at all, will be subject to
limitations arising under applicable bankruptcy and insolvency laws. See
"Description of the Registered Notes--Collateral."
RESTRICTIONS IMPOSED BY INDEBTEDNESS--WE MAY BE PROHIBITED FROM ENGAGING IN
CERTAIN TRANSACTIONS.
Our revolving credit facility requires us to maintain specified financial
ratios, including interest coverage and total leverage ratios. In addition, the
indenture and our revolving credit facility restrict, among other things, our
ability to incur additional indebtedness, dispose of assets, incur guarantee
obligations, repay indebtedness or amend debt instruments, pay dividends, create
liens on assets, make investments, make acquisitions, engage in mergers or
consolidations, make capital expenditures and engage in transactions with
subsidiaries or affiliates. A failure to comply with the restrictions contained
in the indenture or our revolving credit facility could lead to an event of
default under both the indenture and our revolving credit facility which could
result in an acceleration of substantially all of our indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Description of the Revolving
Credit Facility."
14
<PAGE>
TERM OF REVOLVING CREDIT FACILITY; NEED FOR SEASONAL FINANCING--WE MAY NOT BE
ABLE TO EXTEND OR RENEW OUR REVOLVING CREDIT FACILITY TO SATISFY OUR SEASONAL
WORKING CAPITAL NEEDS.
Our revolving credit facility, which is designed to address our seasonal
working capital needs, expires April 15, 2001. We cannot assure you that, upon
the expiration of our revolving credit facility, we will be able to extend or
renew our revolving credit facility or obtain alternative financing to meet our
seasonal working capital needs. In the event that we do not have a revolving
credit facility in place, we may not be able to satisfy our seasonal working
capital needs, which could have a material adverse effect on our results of
operations.
FRAUDULENT CONVEYANCE MATTERS--IF ANY GUARANTOR BECOMES THE DEBTOR IN A
BANKRUPTCY CASE OR HAS OTHER FINANCIAL DIFFICULTY, A COURT MAY VOID ITS
GUARANTEE.
Under the fraudulent conveyance provisions of federal bankruptcy law and
corresponding state laws, a court may void (I.E., cancel) a guarantee if (1) the
guarantor received less than fair consideration or reasonably equivalent value
for its guarantee and (2) when it entered into its guarantee or, in some
jurisdictions, when payments became due thereunder, it either (a) was or was
rendered insolvent, (b) was engaged in a business or transaction for which its
remaining unencumbered assets constituted unreasonably small capital or (c)
intended to incur or believed, or should have believed, that it would incur
debts beyond its ability to pay.
The court could also subordinate the claims of the guarantee's beneficiaries
to the claims of the guarantor's other creditors. If the court voided or
subordinated a guarantee in this manner, it could order the return of any
payments made by the guarantor to the guarantor or to a fund for the benefit of
its creditors.
The measure of insolvency for the above purposes will vary depending on the
law of the jurisdiction being applied. Generally, an entity will be considered
insolvent if (1) the sum of debts, including contingent or unliquidated debts,
is greater than the fair value of its property or (2) if the present fair
salable value of its assets is less than the amount that will be required to pay
its probable liability on its existing debts as they become absolute and
matured.
A court would likely conclude that a guarantor did not receive fair
consideration or reasonably equivalent value except to the extent that it
received direct or indirect benefits from the issuance of the notes.
On the basis of historical financial information, recent operating history
and other factors, we believe that each guarantor, after giving effect to its
guarantee, will not be insolvent, will not have unreasonably small capital for
the business in which it is engaged and will not have incurred debts beyond its
ability to pay such debts as they mature. There can be no assurance, however, as
to what standard a court would apply in making such determinations or that a
court would agree with our conclusions.
CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS
NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of a change of control under the indenture, we may be
required to offer to repurchase all of the notes. It is possible that we will
not have sufficient funds at the time of a change of control to make the
required repurchase of the notes or that restrictions in our revolving credit
facility will not allow such repurchases. See "Description of the Registered
Notes--Repurchase Upon Change of Control."
15
<PAGE>
INTEGRATION OF OPERATIONS--ANY DELAY OR INABILITY TO INTEGRATE ACQUIRED
BUSINESSES COULD ADVERSELY EFFECT OUR FINANCIAL HEALTH.
We face significant challenges in integrating the Laura Secord and Sweet
Factory brand names, stores and operations with our existing operations. The
integration will require substantial attention from our management. The
diversion of management's attention from our existing business could have an
adverse impact on our operating results and financial condition. Additional
risks related to the integration of operations, which could have an adverse
impact on our operating results and financial condition, include:
- the failure to realize expected operating efficiencies from the
acquisitions;
- the failure to improve the performance of the Laura Secord or Sweet
Factory stores;
- the costs and time required for the integration of operations exceeding
our expectations;
- the failure to effectively cross-market products or expand product
distribution; and
- unexpected costs or liabilities in Laura Secord's or Sweet Factory's
operations.
Sweet Factory experienced negative same store sales results in each of 1997
and 1998. Laura Secord experienced negative same store sales results in the
first and second quarters of 1999. We cannot assure you that these results will
not continue. Although we intend to apply to the Sweet Factory and Laura Secord
stores many of the same strategies that have been successful in improving our
Fannie May and Fanny Farmer store-level performance, we cannot assure you that
we will be successful in doing so.
RISK OF ACQUISITION STRATEGY--WE MAY NOT BE ABLE TO CONTINUE TO IDENTIFY
SUITABLE ACQUISITION CANDIDATES.
We intend to continue to pursue selective acquisitions that complement or
provide further opportunities to use our brands, manufacturing resources and/or
distribution systems. However, we cannot assure you that we will be able to
identify suitable acquisition candidates or that, if identified, we will be able
to finance such acquisitions or acquire such businesses on suitable terms.
Moreover, other companies are competing for acquisition candidates, which could
result in an increase in the price of acquisition targets and a decrease in the
number of attractive companies available for acquisition.
HALLMARK COMBO STORES--THE LIQUIDATION AND WIND-UP OF COMBO STORES COULD
ADVERSELY AFFECT OUR OPERATIONS.
In connection with the Laura Secord acquisition, we acquired Nestle's
interest in eighteen (18) combo stores, which are co-branded Laura Secord and
Hallmark retail stores that sell Laura Secord products and gifts together with
Hallmark greeting cards and gifts in a single, integrated unit. The agreement
between Laura Secord and Hallmark provides that Laura Secord receive a
management fee equal to 4% of net sales and that Laura Secord and Hallmark share
equally the profits and expenses of the combo stores. Pursuant to this
agreement, Laura Secord and Hallmark have agreed to liquidate and wind-up the
combo stores if a joint venture agreement has not been formalized by July 30,
2000. If we are unable to reach an agreement with Hallmark by July 30, 2000 to
continue the combo stores, Hallmark could liquidate and wind-up the combo
stores, which could adversely affect our results of operations.
TERMINATION OF LAURA SECORD CO-PACK ARRANGEMENT--OUR INABILITY TO MANUFACTURE
LAURA SECORD PRODUCTS UPON TERMINATION OF THE CO-PACK AGREEMENT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
In connection with the Laura Secord acquisition, we entered into a co-pack
agreement with Nestle under which Nestle will manufacture for us until June 7,
2000 the products sold by Laura Secord that
16
<PAGE>
Nestle manufactured at the time of the Laura Secord acquisition. Any failure by
Nestle to perform its obligations under the co-pack agreement could have a
material adverse effect on our results of operations. By the expiration of the
agreement, we intend to manufacture in our Chicago, Illinois manufacturing
facility all of the Laura Secord products covered by the co-pack agreement. If
at the expiration of the agreement we are unable to manufacture all or a portion
of such products at our facility or to properly replicate the product formulas
or recipes for the Laura Secord products, our inability to do so could have a
material adverse effect on our results of operations.
DEEMED DIVIDEND BY FOREIGN SUBSIDIARY--WE WILL BE OBLIGATED TO INCLUDE IN OUR
GROSS INCOME FOR U.S. INCOME TAX PURPOSES ALL OF THE EARNINGS OF LAURA SECORD.
We acquired substantially all of the assets of the Laura Secord retail
business through our Canadian subsidiary Archibald Candy (Canada) Corporation.
Under the terms of the indenture, all of our restricted subsidiaries are
required to guarantee the notes. Under current U.S. federal income tax law, if a
controlled foreign subsidiary of a U.S. shareholder directly or indirectly
guarantees or pledges its assets to secure an obligation of a U.S. person, the
controlled foreign subsidiary is deemed to distribute all of its earnings and
profits in each year in which the guarantee or pledge supporting the
indebtedness is outstanding, up to the principal amount of the obligation
secured. Therefore, we will be required to include in our gross income for U.S.
income tax purposes all of the earnings and profits of Archibald Candy (Canada)
Corporation up to the principal amount of the notes guaranteed by such
subsidiary, for each of our taxable years during which the guarantee is in
place, regardless of whether the subsidiary actually distributes any dividends
to us.
COMPETITION--THE CONFECTIONERY INDUSTRY IS HIGHLY COMPETITIVE AND FACES
COMPETITION FROM MANUFACTURERS, DISTRIBUTORS AND RETAILERS OF OTHER SNACK FOOD
PRODUCTS.
The production and sale of confectionery products is highly competitive. We
compete with numerous businesses that manufacture, distribute or retail boxed
chocolates and other confectionery products, including confectionery
manufacturers, distributors and retailers who supply or seek to supply various
segments of the confectionery market that we currently target for growth and
development. Our primary competitors in the boxed chocolate segment of the
confectionery industry are Russell Stover, Whitman's, Godiva Chocolatier Inc.
and Purdy's. Our primary competitors in the bulk candy segment of the
confectionery industry are Mr. Bulky, Candy Express, FAO Schweetz and Sweets
From Heaven. In the scooped ice cream segment, our management believes that
Laura Secord competes primarily with Baskin Robbins, a scooped ice cream store
chain, and numerous independent retailers. We also compete with manufacturers,
distributors and retailers of other snack food products, including cookies, ice
cream and coffee, as well as with grocery stores, gift distributors and
retailers, such as florists and card and gift shops, that offer products at
price points comparable to those of our products or, in some cases, at price
points lower than those of our products. Some of our competitors have greater
name recognition and greater financial, marketing and other resources.
Competitive market conditions could have a material adverse effect on our
results of operations. See "Business--Competition."
DEPENDENCE ON REAL ESTATE LEASES; CONTINUING OBLIGATIONS ON LEASES--WE MAY NOT
BE ABLE TO RENEW OUR LEASES ON FAVORABLE TERMS. WE MAY CONTINUE TO BE LIABLE
FOR LEASE PAYMENTS FOR UNPROFITABLE LOCATIONS.
We lease locations for all of our Fanny Farmer, Sweet Factory and Laura
Secord stores and substantially all of our Fannie May stores. Our success
depends in part on our ability to secure leases in high quality locations at
rents we believe to be reasonable. Within the next four years, approximately 58%
of our store leases are due to expire. We cannot assure you that we will be able
to renew our leases or that the terms of such renewals will be favorable to us.
We believe that the market for the type of locations historically leased by us
is highly competitive. As a result, we cannot assure you that we will succeed in
renewing or obtaining such leases in the future at rents that we believe to be
17
<PAGE>
reasonable or at all, or that if we are successful at renewing leases, that our
assumptions about what are reasonable rents will be accurate. Moreover, if
certain locations should prove to be unprofitable, we may continue to be liable
for lease payments if we determine to withdraw from such locations.
LAURA SECORD STORES' LANDLORD CONSENTS--THE FAILURE TO OBTAIN REQUIRED LANDLORD
CONSENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
We lease all of our Laura Secord stores. A significant number of these
leases require the consent of the landlord for Nestle's transfer of the lease to
us. In the event that any required consents are not obtained, Nestle has agreed
that it will make available to us the benefits of such leases until such
consents have been obtained. We cannot assure you, however, that in such a
situation, the landlord will not terminate the lease. If a landlord terminates a
lease due to the failure to obtain its consent or seeks additional payments in
order to obtain its consent, we have limited indemnification rights against
Nestle. In the event a store lease is terminated by a landlord, our right to
indemnification may not fully compensate us for the loss of such store, which
may have a material adverse effect on our results of operations.
SEASONALITY--OUR SALES AND EARNINGS FLUCTUATE BASED ON SEASONAL FACTORS OVER
WHICH WE DO NOT HAVE CONTROL.
Our sales and earnings are highly seasonal, particularly sales and earnings
resulting from our Fannie May, Fanny Farmer and Laura Secord operations.
Historically, our Fannie May and Fanny Farmer operations have realized a
majority of their annual sales and earnings during the periods preceding
Christmas, Valentine's Day and Easter. Laura Secord's operations historically
have exhibited a similar seasonality. If for any reason demand for our Fannie
May, Fanny Farmer or Laura Secord products during any such holiday season is
insufficient, our total sales and earnings will be materially reduced for such
period and for the fiscal year in general. Further, we must establish inventory
levels in anticipation of projected seasonal demand. To the extent that we
underestimate such demand, we could lose sales and earnings. To the extent that
we establish inventories in excess of actual demand, we may have to sell
inventory at reduced prices or write-off the excess inventory as unsaleable. You
should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results and Seasonality" for more information
regarding the seasonality of our sales and earnings.
FLUCTUATIONS IN COST OF SALES AND IMPACT ON PRICING--WE MAY NOT BE ABLE TO PASS
THROUGH INCREASES IN THE COST OF SALES TO OUR CUSTOMERS.
The principal components of our Fannie May, Fanny Farmer, and, following the
expiration of our co-pack agreement with Nestle, Laura Secord cost of sales are
raw materials, purchased product, labor and manufacturing overhead. The
principal component of our Sweet Factory and, prior to the expiration of our
co-pack agreement with Nestle, Laura Second cost of sales is purchased product.
The overall supply and price of our raw materials and purchased products have
been relatively stable in recent years. However, there are many factors over
which we have no control, including market fluctuations and economic, political
and weather conditions affecting commodity supplies, that may significantly
affect the supply and price of specific raw materials and purchased products. We
have long-standing relationships with many of our principal raw material and
candy product suppliers and generally do not depend on any single supplier for
key ingredients or products. Nevertheless, a significant or prolonged increase
in the prices of chocolate, nutmeats or other key ingredients or purchased candy
products, or the unavailability of adequate supplies of such materials or
products of the quality or brand sought by us, could have a material adverse
effect on our results of operations.
We have entered into non-exclusive supply agreements with Blommer Chocolate
Company, Merckens Chocolate Company and Peter's Chocolate Company, which
suppliers account for over 90% of the total coatings we purchase. The loss of
services from any of these suppliers could have a material adverse effect on our
results of operations.
18
<PAGE>
In many of our sales channels, we must set our prices prior to or at the
beginning of the fiscal year. Therefore, if our cost of sales or operating
expenses rise unexpectedly during the year, we may be unable or limited in our
ability to pass along such cost increases to our customers through higher
prices. Furthermore, we generally may be unable or limited in our ability to
pass along cost increases to our customers through higher prices either because
of real or perceived competitive issues or consumer resistance. Our sensitivity
to cost increases and inability to raise prices may have a material adverse
effect on our results of operations. See "Business--Products."
REGIONAL CONCENTRATION OF OPERATIONS--ADVERSE DEVELOPMENTS IN PARTICULAR
GEOGRAPHIC AREAS MAY HAVE SIGNIFICANT ADVERSE EFFECTS ON OUR BUSINESS.
A majority of our Fannie May and Fanny Farmer stores and third-party
retailers carrying Fannie May and Fanny Farmer products are located in the
Midwestern United States, particularly in the greater Chicago metropolitan area.
Many of our remaining Fannie May and Fanny Farmer stores are located in and
around large metropolitan areas in the Northwestern, the upper Midwestern and
the Northeastern United States and Florida. A significant number of our Sweet
Factory stores are located in the Western United States, primarily in
California. All of our Laura Secord's stores are located in Canada, with a
majority concentrated in the provinces of Ontario and Quebec. As a result, we
are susceptible to adverse developments in the economy, weather conditions,
competition, consumer preferences or demographics in any of these geographic
areas. For example, severe weather conditions in any of our principal geographic
markets may have a material negative impact on customer traffic and sales,
especially if such weather occurs during one of our peak selling periods. The
current geographic concentration of our business may have a material adverse
effect on our results of operations. See "Business--Marketing and Sales."
OTHER FACTORS AFFECTING SALES AND PROFITABILITY--OUR SALES AND EARNINGS
FLUCTUATE BASED ON FACTORS OVER WHICH WE DO NOT HAVE CONTROL.
A number of factors beyond our control may adversely affect our sales and
profitability. Such factors include:
- general customer traffic in shopping centers and malls in which our stores
and third-party retailers of our products are located;
- the timing of the Christmas and Valentine's Day holidays (I.E., the days
of the week on which such holidays occur);
- changes in discretionary spending priorities; and
- changes in consumer tastes, preferences and eating habits.
We believe our sales are strongly influenced by the amount and proximity of
pedestrian traffic near the stores we operate and third-party retailers of our
products. Because a significant percentage of our stores are located in shopping
malls, a decline in mall traffic could adversely affect our results of
operations.
GOVERNMENTAL REGULATION--FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
As a manufacturer and retailer of food products, we are subject to extensive
regulation by various federal, state, provincial and other regulatory agencies,
including the Food and Drug Administration. In addition, all of the retail
stores operated by us are subject to licensing and regulation by the health,
sanitation, safety, building and fire agencies of the respective states and
municipalities or provinces in which such stores are located. A failure to
comply with one or more regulations could result in the imposition of sanctions.
Such sanctions could include the closing of all or a portion of our facilities
for
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an indeterminate period of time or the recall of products that were manufactured
under improper conditions, either of which could have a material adverse effect
on our results of operations.
Under various federal, state, provincial and local laws, ordinances and
regulations, an owner or operator of real estate may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on or in such
property. Such liability may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. A number of properties owned or operated by us were formerly
operated as gasoline stations. We have engaged in a limited review of these
properties and removed underground storage tanks and associated contamination
where such underground storage tanks were identified. Although we are not aware
of any environmental conditions that require remediation under federal, state,
provincial or local law at these properties, we cannot assure you that we have
identified all of the potential environmental liabilities at these properties or
that such liabilities would not have a material impact on our financial
condition.
CANADIAN OPERATIONS--CANADIAN REGULATIONS MAY ADVERSELY IMPACT OUR BUSINESS IN
CANADA.
All of our Laura Secord retail operations are conducted in Canada and are
subject to numerous additional risks, including the impact of Canadian
government regulations, currency fluctuations and differences in business
practices. In addition, following the expiration of our one year co-pack
agreement with Nestle, we intend to produce substantially all of our Laura
Secord chocolate products in our Chicago, Illinois manufacturing facility. In
such event, these products will be subject to import/ export tariffs and quotas
and other Canadian and U.S. regulations. Either the U.S. or Canadian government
may adopt regulations or take other actions that could have an adverse impact on
our business operations in Canada.
LABOR COSTS--AN INCREASE IN LABOR COSTS COULD REDUCE OUR INCOME FROM OPERATIONS.
We are dependent upon the available labor pool of unskilled and semi-skilled
employees. We also are subject to the various laws which govern such matters as
minimum wage, overtime and other working conditions. Numerous proposals have
been made on federal, state and provincial levels to increase minimum wages. A
shortage in the labor pool or other general inflationary pressures or changes in
applicable laws and regulations could increase labor costs, which could have a
material adverse effect on our results from operations.
LABOR RELATIONS--UNIONIZATION OF OUR EMPLOYEES COULD INCREASE OUR OPERATING
COSTS.
We currently are subject to seven collective bargaining agreements, all of
which expire on or before March 31, 2003. We historically have had satisfactory
labor relations with our employees and their labor unions and have not
experienced an organized work stoppage in over 15 years. Future union contracts
with us are likely to result in higher wages and benefits paid to union members
and, therefore, increased operating costs, which could have a material adverse
effect on our results of operations. A work stoppage or strike by our employees,
especially preceding or during one of our key selling periods (I.E., Christmas,
Valentine's Day or Easter), could have a material adverse effect on our results
of operations. None of our Sweet Factory or Laura Secord employees currently are
represented by a union. However, we cannot assure you that such employees may
not attempt to unionize in the future. The unionization of Sweet Factory or
Laura Secord employees could result in higher wages and benefits for such
employees and, therefore, have a material adverse effect on our results of
operations.
LITIGATION--LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS.
In the ordinary course of business, we are involved in routine litigation.
Although we maintain insurance, we cannot assure you that such insurance or the
coverage thereunder will be adequate. In
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addition, although litigation has not adversely affected us in the past, we
cannot assure you as to the future effect of any litigation involving us.
Although we are not currently subject to any product liability litigation,
we cannot assure you that product liability litigation will not occur in the
future involving our products. Our quality control program is designed to
maintain high standards for the products we produce. Our personnel periodically
inspect our products at both the point-of-sale locations and the manufacturing
facilities to ensure that they conform to our standards. We maintain insurance
relating to personal injury and product liability in amounts that we consider
adequate for the retail food industry. While we have been able to obtain such
insurance in the past, we cannot assure you that we will be able to maintain
these insurance policies in the future at reasonable prices or at all.
Consequently, any successful claim against us in an amount materially exceeding
our coverage or not subject to coverage could have a material adverse effect on
our financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL--OUR SUCCESS IS DEPENDENT ON THE RETENTION OF OUR
EXISTING MANAGEMENT TEAM AND OUR ABILITY TO ATTRACT ADDITIONAL EXPERIENCED
MANAGEMENT.
We believe that our success is largely dependent on the abilities and
experience of our senior management team. The loss of services of one or more of
these senior executives could adversely affect our ability to (1) effectively
manage our overall operations or (2) successfully execute current or future
business strategies, either of which could have a material adverse effect on our
results of operations. In addition, we believe that our continued success will
depend upon our ongoing ability to attract and retain qualified management and
employees. We also intend to hire additional management to operate our Sweet
Factory and Laura Secord businesses. However, we may not be able to hire and
retain such individuals. We do not maintain key man life insurance on any of our
employees.
TRADEMARKS--OUR INABILITY TO ENFORCE OR DEFEND OUR TRADEMARKS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
We believe that our trademarks have significant value and are important to
the marketing of our products. Although we have registered these trademarks in
numerous jurisdictions, we cannot assure you that these trademarks cannot be
circumvented, do not or will not violate the proprietary rights of others, or
would be upheld if challenged. If our trademarks violate the rights of others or
are not upheld, we could be prevented from using them. A negative ruling with
regards to the use of our trademarks or their validity or enforceability, or the
time consumed and the legal costs of defending against such a claim, could have
an adverse effect on our results of operation. In addition, we cannot assure you
that we will have the financial resources necessary to enforce or defend our
trademarks.
Our Sweet Factory subsidiary has an exclusive license from United Sweet
Factory Limited, the owner of the "Sweet Factory" trademark, to operate stores
under the "Sweet Factory" name and design in the United States and Mexico,
although appropriate actions to protect the use of the license by Sweet Factory
in Mexico may not have been taken. United Sweet Factory Limited is not
affiliated with us. Because Sweet Factory currently has no operations, or plans
to operate, in Mexico, we do not believe that the failure to take such actions
will have a material adverse effect on our results of operations. We cannot
assure you that the licensor will continue to fulfill its obligations under the
license agreement. The current license period under the license agreement
expires in the year 2000. However, we have the option to extend the license for
three additional ten year periods by paying a renewal fee of $825,000 for each
such extension. We may not be able to exercise or enforce our rights to extend
the license for any additional periods. The loss of the license could have a
material adverse effect on our results of operations.
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CONTROL BY PRINCIPAL STOCKHOLDERS--THE CONTROL OF THE COMPANY BY CERTAIN
STOCKHOLDERS MAY LEAD TO POTENTIAL CONFLICTS OF INTEREST.
We are subject to potential conflicts of interest arising out of our
relationship with affiliates of The Jordan Company. See "Principal
Stockholders." Affiliates of The Jordan Company own a majority of the issued and
outstanding capital stock of Holdings, which in turn owns all of our issued and
outstanding capital stock. Three of our directors, Messrs. John W. Jordan II,
Thomas H. Quinn and Adam E. Max, are also affiliates of The Jordan Company and
directors of Holdings and each of the guarantor subsidiaries. In addition,
Messrs. Quinn and Max are officers of us and each of the guarantor subsidiaries.
The ability of affiliates of The Jordan Company to control some decisions
concerning our management may present conflicts of interest between the holders
of the notes and affiliates of The Jordan Company. Subject to the rights of the
other holders of Holdings' capital stock, affiliates of The Jordan Company have
the right to elect directors that have a majority of the voting power of our and
Holdings' Board of Directors. As a result, affiliates of The Jordan Company
generally will have the ability to control our business affairs and Holdings'
business affairs and to determine the outcome of any corporate transaction or
other matter requiring stockholder approval. Such matters requiring stockholder
approval include, among others:
- an amendment to our or Holdings' articles of incorporation;
- the authorization of additional shares of our or Holdings' capital stock;
and
- a merger, consolidation or sale of all or substantially all of our or
Holdings' assets or stock.
Affiliates of The Jordan Company can prevent or cause a change of control of
Holdings or us, either of which may adversely affect our results of operations.
In addition, affiliates of TCW Capital, an investment management firm, have
limited rights to take control of our or Holdings' Board of Directors.
The holders of Holdings' senior preferred stock have various dividend and
redemption rights. Holdings' failure to satisfy such rights would result in the
holders of the senior preferred stock acquiring the right to control our and
Holdings' Board of Directors. The acquisition of control of our or Holdings'
Board of Directors by the holders of the senior preferred stock would constitute
a change of control under the indenture. You should read "Risk Factors--Change
of Control Offer" for a discussion of certain consequences of a change of
control.
Although we do not have an explicit policy that addresses potential
conflicts of interest, the indenture does prohibit some transactions between us
and our affiliates. You should read the discussion under the heading
"Description of the Registered Notes--Certain Covenants--Limitation on
Transactions with Affiliates" for further information regarding the indenture's
restrictions on affiliate transactions.
CAPITALIZATION OF HOLDINGS--REQUIRED REDEMPTIONS OF OUR CAPITAL STOCK WILL
REDUCE FUNDS AVAILABLE FOR OUR OPERATIONS.
Holdings is required to redeem its senior preferred stock on August 31, 2001
and its Class A preferred stock and Class B preferred stock on November 1, 2001.
Beginning in January 2000, Holdings may be required to redeem shares of its
Class A Common Stock and Class D Common Stock held by affiliates of TCW Capital
and The Jordan Company. In order for Holdings to make such redemption payments,
Holdings must elect either to sell us or cause us, to the extent permitted by
the indenture and our revolving credit facility, to advance the necessary funds
to Holdings by dividend or otherwise. Such advances, if made, will reduce the
funds available for our operations. You should read "Description of the
Registered Notes--Certain Covenants--Limitation on Restricted Payments" for a
discussion of limitations on our ability to make restricted payments.
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YEAR 2000 COMPLIANCE--YEAR 2000 FAILURES COULD HAVE A MATERIAL ADVERSE IMPACT ON
OUR OPERATIONS.
Many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year and, as a result, they may be unable
to process accurately data before, during or after the year 2000. As a result,
business and governmental entities are at risk for possible miscalculations or
system failure causing disruptions in their operations. This is commonly known
as the year 2000 issue and can arise at any point in our supply, manufacturing,
processing, distribution and financial chains.
We have surveyed substantially all of our internal computer systems and are
in the process of contacting suppliers and consultants to address year 2000
issues for the software and hardware we use. We also are in the process of
upgrading and improving our internal computer systems, which work is expected to
be completed by November 1999. Following the completion of this work and based
on the representations and warranties of our suppliers and consultants, we
expect our internal computer systems and those of our key suppliers to be year
2000 compliant by the end of 1999. We do not believe that the costs associated
with making our internal computer systems year 2000 compliant will be material.
However, if our systems or the systems of other companies on whose services we
depend or with whom our systems interface are not year 2000 compliant on a
timely basis, it could have a material adverse effect on our results of
operation. Nestle has provided us with limited representations and
indemnification as to the year 2000 compliance of the Laura Secord assets that
we have acquired. However, we have not independently confirmed the year 2000
compliance of such assets.
CONSEQUENCES OF FAILURE TO EXCHANGE UNREGISTERED NOTES--THE FAILURE TO EXCHANGE
UNREGISTERED NOTES IN THE EXCHANGE OFFER MAY LEAVE YOU WITH NOTES THAT ARE
MORE DIFFICULT TO SELL AND TRANSFER.
We did not register the unregistered notes under the Securities Act or any
state securities laws, nor do we intend to after the exchange offer. As a
result, the unregistered notes may only be transferred in limited circumstances
under the securities laws. If the holders of the unregistered notes do not
exchange their notes in the exchange offer, they lose their right to have the
unregistered notes registered under the Securities Act, subject to limitations.
A holder of unregistered notes after the exchange offer may be unable to sell
the notes.
ABSENCE OF A PUBLIC MARKET FOR THE REGISTERED NOTES--THE MARKET PRICE AND
LIQUIDITY OF THE REGISTERED NOTES MAY BE ADVERSELY AFFECTED IF AN ACTIVE
PUBLIC MARKET FOR THE REGISTERED NOTES DOES NOT DEVELOP.
While the unregistered notes are presently eligible for trade in the PORTAL
market of the NASD by qualified institutional buyers, there is no existing
market for the registered notes. The initial purchaser of the unregistered notes
has advised us that it currently intends to make a market in the registered
notes following the exchange offer. However, the initial purchaser is not
obligated to do so, and any market-making may be stopped at any time without
notice. We do not intend to apply for a listing of the registered notes on any
securities exchange. We do not know if an active public market for the
registered notes will develop or, if developed, will continue. If an active
public market does not develop or is not maintained, the market price and
liquidity of the registered notes may be adversely affected. We cannot make any
assurances regarding the liquidity of the market for the registered notes, the
ability of holders to sell their registered notes or the price at which holders
may sell their registered notes.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We issued and sold the unregistered notes to the initial purchaser on June
8, 1999 pursuant to the terms and conditions of a purchase agreement dated as of
May 26, 1999. We agreed in the purchase agreement to provide the holders of the
unregistered notes with the same registration rights granted to the holders of
our $130.0 million of 10 1/4% Series A Senior Secured Notes due 2004 that were
issued and sold in unregistered offerings on July 2, 1997 and December 7, 1998
and subsequently exchanged for a like principal amount of our 10 1/4% Series B
Senior Secured Notes due 2004 that were registered under the Securities Act.
There is currently outstanding $130.0 million of registered notes. The
registration rights with respect to the unregistered notes are set forth in a
registration rights agreement dated as of July 2, 1997 between us and the
initial purchasers of the notes issued on July 2, 1997.
We are conducting the exchange offer to satisfy our contractual obligations
under the registration rights agreement. The form and terms of the registered
notes are the same as the form and terms of the unregistered notes, except that
the registered notes will be registered under the Securities Act, and holders of
the registered notes will not be entitled to liquidated damages. The registered
notes and the unregistered notes are guaranteed by our guarantor subsidiaries in
an identical manner.
EXCHANGE OFFER REGISTRATION STATEMENT
The registration rights agreement requires us to:
- file with the SEC by August 7, 1999 a registration statement with respect
to an offer to exchange the unregistered notes for registered notes, which
would have terms substantially identical in all material respects to the
unregistered notes;
- use our best efforts to cause such exchange offer registration statement
to become effective under the Securities Act by October 6, 1999;
- keep the exchange offer registration statement effective until the
consummation of the exchange offer pursuant to its terms; and
- commence the exchange offer and use our best efforts to issue by November
20, 1999 registered notes in exchange for all unregistered notes tendered
prior thereto in the exchange offer.
We have agreed to keep the exchange offer open for not less than 30 days, or
longer if required by applicable law, after the date notice thereof is mailed to
the holders of unregistered notes.
SHELF REGISTRATION STATEMENT
The registration rights agreement requires us to file a shelf registration
statement with respect to the resale of the unregistered notes if:
- applicable interpretations of the SEC's staff would not permit the
completion of the exchange offer;
- some holders of the unregistered notes notify us that they are not
eligible to participate in the exchange of unregistered notes for
registered notes or would not receive freely tradeable registered notes in
exchange for tendered unregistered notes;
- the initial purchaser so requests under some circumstances; or
- the exchange offer is not completed by November 20, 1999.
We have agreed to use our efforts to keep the shelf registration statement
effective until two years after its date of effectiveness.
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LIQUIDATED DAMAGES
The registration rights agreement requires us to pay liquidated damages to
the holders of the unregistered notes if:
- neither the exchange offer registration statement nor the shelf
registration statement has been filed with the SEC by August 7, 1999;
- neither the exchange offer registration statement nor the shelf
registration statement is declared effective by the SEC by October 6,
1999;
- we have not exchanged registered notes for unregistered notes validly
tendered in accordance with the terms of the exchange offer by November
20, 1999; or
- a shelf registration statement is filed and declared effective by the SEC
but thereafter ceases to be effective without being succeeded within 30
days by a subsequent shelf registration statement filed and declared
effective.
Upon the completion of the exchange offer, holders of unregistered notes
will not be entitled to any liquidated damages on the unregistered notes or any
further registration rights, except under limited circumstances. See "Risk
Factors--Consequences of Failure to Exchange Unregistered Notes" and
"Description of the Registered Notes" for further information regarding the
rights of holders of unregistered notes after the exchange offer. The exchange
offer is not extended to holders of unregistered notes in any jurisdiction where
the exchange offer does not comply with the securities or blue sky laws of that
jurisdiction.
The term "holder" as used in this section of the prospectus entitled "The
Exchange Offer" means (1) any person in whose name the unregistered notes are
registered on our books, (2) any other person who has obtained a properly
completed bond power from the registered holder, or (3) any person whose
unregistered notes are held of record by DTC and who wants to deliver such
unregistered notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
We are offering to exchange up to $40.0 million total principal amount of
registered notes for a like total principal amount of unregistered notes. The
unregistered notes must be tendered properly on or before the expiration date of
the exchange offer and not withdrawn. In exchange for unregistered notes
properly tendered and accepted, we will issue a like total principal amount of
up to $40.0 million in registered notes.
The exchange offer is not conditioned upon holders tendering a minimum
principal amount of unregistered notes. As of the date of this prospectus, $40.0
million aggregate principal amount of unregistered notes are outstanding.
Holders of the unregistered notes do not have any appraisal or dissenters'
rights in the exchange offer. If holders do not tender unregistered notes or
tender unregistered notes that we do not accept, their unregistered notes will
remain outstanding. Any unregistered notes will be entitled to the benefits of
the indenture, but will not be entitled to any further registration, except
under limited circumstances. See "Risk Factors--Consequences of Failure to
Exchange Unregistered Notes" for further information regarding the rights of
holders of unregistered notes after the exchange offer.
After the expiration date, we will return to the holder any tendered
unregistered notes that we do not accept for exchange.
Holders exchanging unregistered notes will not have to pay brokerage
commissions or fees or transfer taxes if they follow the instructions in the
letter of transmittal. We will pay the charges and
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expenses, other than taxes described below, in the exchange offer. See "The
Exchange Offer--Fees and Expenses" for further information regarding fees and
expenses.
NEITHER WE NOR OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU TENDER OR NOT
TENDER UNREGISTERED NOTES IN THE EXCHANGE OFFER. IN ADDITION, WE HAVE NOT
AUTHORIZED ANYONE TO MAKE ANY RECOMMENDATION. YOU MUST DECIDE WHETHER TO TENDER
IN THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF UNREGISTERED NOTES TO
TENDER.
As used in the prospectus, the "expiration date" of the exchange offer is
5:00 p.m., New York City time, on November 9, 1999, unless we extend the
exchange offer.
We have the right, in accordance with applicable law, at any time:
- to delay the acceptance of the unregistered notes;
- to terminate the exchange offer if we determine that any of the conditions
to the exchange offer have not occurred or have not been satisfied;
- to extend the expiration date of the exchange offer and keep all
unregistered notes tendered other than those unregistered notes properly
withdrawn; and
- to waive any condition or amend the terms of the exchange offer.
If we materially change the exchange offer, or if we waive a material
condition of the exchange offer, we will promptly distribute a prospectus
supplement to the holders of the unregistered notes disclosing the change or
waiver. We also will extend the exchange offer as required by Rule 14e-1 under
the Securities Exchange Act of 1934.
If we exercise any of the rights listed above, we will promptly give oral or
written notice of the action to the exchange agent and will issue a release to
an appropriate news agency. In the case of an extension, an announcement will be
made no later than 9:00 a.m., New York City time, on the next business day after
the previously scheduled expiration date.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF REGISTERED NOTES
Promptly after the expiration date, we will issue registered notes to the
exchange agent for unregistered notes tendered and accepted and not withdrawn.
The exchange agent might not deliver the registered notes to all tendering
holders at the same time. The timing of delivery depends upon when the exchange
agent receives and processes the required documents.
We will be deemed to have exchanged unregistered notes validly tendered and
not withdrawn when we give oral or written notice to the exchange agent of their
acceptance. The exchange agent is an agent for us for receiving tenders of
unregistered notes, letters of transmittal and related documents. The exchange
agent is also an agent for tendering holders for receiving unregistered notes,
letters of transmittal and related documents and transmitting registered notes
to validly tendering holders. If for any reason, we (1) delay the acceptance or
exchange of any unregistered notes; (2) extend the exchange offer; or (3) are
unable to accept or exchange unregistered notes, then the exchange agent may, on
behalf of us and subject to Rule 14e-1(c) under the Exchange Act, retain
tendered notes. Tendered notes retained by the exchange agent may not be
withdrawn, except according to the withdrawal procedures outlined in the section
entitled "Withdrawal Rights" below.
In tendering unregistered notes, you must warrant in the letter of
transmittal or in an "agent's message," as described below, that:
- you have full power and authority to tender, exchange, sell, assign and
transfer your unregistered notes;
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- we will acquire good, marketable and unencumbered title to the tendered
unregistered notes, free and clear of all liens, restrictions, charges and
other encumbrance; and
- the unregistered notes tendered for exchange are not subject to any
adverse claims or proxies.
You also must warrant and agree that you will, upon request, execute and
deliver any additional documents requested by us or the exchange agent to
complete the exchange, sale, assignment and transfer of the unregistered notes.
PROCEDURES FOR TENDERING UNREGISTERED NOTES
VALID TENDER
You may tender your unregistered notes by book-entry transfer or by other
means. For book-entry transfer, you must deliver to the exchange agent either
(1) a completed and signed letter of transmittal or (2) an agent's message,
meaning a message transmitted to the exchange agent by DTC stating that you
agree to be bound by the terms of the letter of transmittal. You must deliver
your letter of transmittal or the agent's message by mail, facsimile, hand
delivery or overnight carrier to the exchange agent on or before the expiration
date. In addition, to complete a book-entry transfer, you must also either (1)
have DTC transfer the unregistered notes into the exchange agent's account at
DTC using the ATOP procedures for transfer, and obtain a confirmation of such a
transfer, or (2) follow the guaranteed delivery procedures described below under
"--Guaranteed Delivery Procedures."
If you tender fewer than all of your unregistered notes, you should fill in
the amount of notes tendered in the appropriate box on the letter of
transmittal. If you do not indicate the amount tendered in the appropriate box,
we will assume you are tendering all unregistered notes that you hold.
For tendering your unregistered notes other than by book-entry transfer, you
must deliver a completed and signed letter of transmittal to the exchange agent.
Again, you must deliver the letter of transmittal by mail, facsimile, hand
delivery or overnight carrier to the exchange agent on or before the expiration
date. In addition, to complete a valid tender you must either (1) deliver your
unregistered notes to the exchange agent on or before the expiration date, or
(2) follow the guaranteed delivery procedures set forth below under
"--Guaranteed Delivery Procedures."
Delivery of required documents by whatever method you choose is at your sole
risk. Delivery is complete when the exchange agent actually receives the items
to be delivered. Delivery of documents to DTC in accordance with DTC's
procedures does not constitute delivery to the exchange agent. If delivery is by
mail, then registered mail, return receipt requested, properly insured, or an
overnight delivery service is recommended. In all cases, you should allow
sufficient time to ensure timely delivery.
SIGNATURE GUARANTEES
You do not need to endorse certificates for the unregistered notes or
provide signature guarantees on the letter of transmittal, unless (1) someone
other than the registered holder tenders the certificate or (2) you complete the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
in the letter of transmittal. In the case of (1) or (2) above, you must sign
your unregistered notes or provide a properly executed bond power, with the
signature on the bond power and on the letter of transmittal guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution."
An eligible guarantor institution includes: (1) a bank; (2) a broker,
dealer, municipal securities broker or dealer or government securities broker or
dealer; (3) a credit union; (4) a national securities exchange, registered
securities association or clearing agency; or (5) a savings association that is
a participant in a securities transfer association.
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GUARANTEED DELIVERY PROCEDURES
If you want to tender your unregistered notes in the exchange offer and (1)
the certificates for the unregistered notes are not immediately available or all
required documents are unlikely to reach the exchange agent on or before the
expiration date, or (2) a book-entry transfer cannot be completed in time, you
may tender your unregistered notes if you comply with the following guaranteed
delivery procedures:
- the tender is made by or through an eligible guarantor institution;
- you deliver a properly completed and signed notice of guaranteed delivery,
similar to the form provided with the letter of transmittal, to the
exchange agent on or before the expiration date; and
- you deliver the certificates or a confirmation of book-entry transfer and
a properly completed and signed letter of transmittal to the exchange
agent within three New York Stock Exchange trading days after the notice
of guaranteed delivery is executed.
You may deliver the notice of guaranteed delivery by hand, facsimile or mail
to the exchange agent and must include a guarantee by an eligible guarantor
institution in the form described in the notice.
Our acceptance of properly tendered unregistered notes is a binding
agreement between the tendering holder and us upon the terms and subject to the
conditions of the exchange offer.
DETERMINATION OF VALIDITY
We will resolve all questions regarding the form of documents, validity,
eligibility (including time of receipt) and acceptance for exchange of any
tendered unregistered notes. Our resolution of these questions as well as our
interpretation of the terms and conditions of the exchange offer (including the
letter of transmittal) is final and binding on all parties. A tender of
unregistered notes is invalid until all irregularities have been cured or
waived. Neither us, any of our affiliates or assigns, the exchange agent nor any
other person is under any obligation to give notice of any irregularities in
tenders nor will they be liable for failing to give any such notice. We reserve
the absolute right, in our sole and absolute discretion, to reject any tenders
determined to be in improper form or unlawful. We also reserve the absolute
right to waive any of the conditions of the exchange offer or any condition or
irregularity in the tender of unregistered notes by any holder. We need not
waive similar conditions or irregularities in the case of other holders.
If any letter of transmittal, endorsement, bond power, power of attorney, or
any other document required by the letter of transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, that person must
indicate that capacity when signing. In addition, unless waived by us, the
person must submit proper evidence satisfactory to us, in our sole discretion,
of his or her authority to so act.
A beneficial owner of unregistered notes that is held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian should contact that entity promptly if the holder wants to participate
in the exchange offer.
RESALES OF REGISTERED NOTES
We are exchanging unregistered notes for registered notes based upon the
position of the SEC's staff set forth in interpretive letters to third parties
in other similar transactions. We will not seek our own interpretive letter. As
a result, we cannot assure you that the SEC's staff will take the same position
on this exchange offer as it did in interpretive letters to other parties. Based
on the SEC's staff letters to other parties, we believe that holders of
registered notes, other than broker-dealers, can offer the notes for resale,
resell and otherwise transfer the registered notes without delivering a
prospectus
28
<PAGE>
to prospective purchasers. However, prospective holders must acquire the
registered notes in the ordinary course of business and have no intention of
engaging in a distribution of the notes, as a "distribution" is defined by the
Securities Act.
Any holder of unregistered notes who is an "affiliate" of ours or who
intends to distribute registered notes, or any broker-dealer who purchased
unregistered notes from us to resell pursuant to Rule 144A or any other
available exemption under the Securities Act:
- cannot rely on the interpretations of the SEC's staff in the
above-mentioned interpretive letters;
- cannot tender unregistered notes in the exchange offer; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act to transfer the unregistered notes, unless the sale is
exempt.
In addition, if any broker-dealer acquired unregistered notes for its own
account as a result of market-making or other trading activities and exchanges
the unregistered notes for registered notes, the broker-dealer must deliver a
prospectus with any resales of registered notes.
If you want to exchange your unregistered notes for registered notes, you
will be required to affirm that:
- you are not an "affiliate" of the ours;
- you are acquiring the registered notes in the ordinary course of your
business;
- you have no arrangement or understanding with any person to participate in
a "distribution," within the meaning of the Securites Act, of the
registered notes; and
- you are not a broker-dealer, not engaged in, and do not intend to engage
in, a "distribution," within the meaning of the Securities Act, of the
registered notes.
In addition, we may require you to provide information regarding the number
of "beneficial owners," within the meaning of Rule 13d-3 under the Exchange Act,
of the unregistered notes. Each broker-dealer that receives registered notes for
its own account must acknowledge that it acquired the unregistered notes for its
own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of registered
notes. By making this acknowledgment and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" under the
Securities Act. Based on the position of the SEC's staff in certain interpretive
letters, we believe that broker-dealers who acquired unregistered notes for
their own accounts as a result of market-making activities or other trading
activities may fulfill their prospectus delivery requirements with respect to
the registered notes with a prospectus meeting the requirements of the
Securities Act. Accordingly, a broker-dealer may use this prospectus to satisfy
such requirements. We have agreed that a broker-dealer may use this prospectus
for a period ending 180 days after the expiration date or, if earlier, when a
broker-dealer has disposed of all registered notes. See "Plan of Distribution"
for further information. A broker-dealer intending to use this prospectus in the
resale of registered notes must notify us, on or prior to the expiration date,
that it is a participating broker-dealer. This notice may be given in the letter
of transmittal or may be delivered to the exchange agent. Any participating
broker-dealer who is an "affiliate" of ours may not rely on the interpretive
letters of the SEC's staff and must comply with the registration and prospectus
delivery requirements of the Securities Act when reselling its registered notes.
WITHDRAWAL RIGHTS
You can withdraw tenders of unregistered notes at any time on or before the
expiration date.
29
<PAGE>
For a withdrawal to be effective, you must deliver a written, telegraphic,
telex or facsimile transmission of a notice of withdrawal to the exchange agent
on or before the expiration date. The notice of withdrawal must specify the name
of the person tendering the unregistered notes to be withdrawn, the total
principal amount of unregistered notes withdrawn, and the name of the registered
holder of the unregistered notes if different from the person tendering the
unregistered notes. If you delivered unregistered notes to the exchange agent,
you must submit the serial numbers of the unregistered notes to be withdrawn and
the signature on the notice of withdrawal must be guaranteed by an eligible
guarantor institution, except in the case of unregistered notes tendered for the
account of an eligible guarantor institution. If you tendered unregistered notes
as a book-entry transfer, the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of unregistered
notes and you must deliver the notice of withdrawal to the exchange agent by
written, telegraphic, telex or facsimile transmission. You may not rescind
withdrawals of tender. Unregistered notes properly withdrawn may again be
tendered at any time on or before the expiration date.
We will determine all questions regarding the validity, form and eligibility
of withdrawal notices. Our determination will be final and binding on all
parties. Neither us, any of our affiliates or assigns, the exchange agent nor
any other person is under any obligation to give notice of any irregularities in
any notice of withdrawal, nor will they be liable for failing to give any such
notice. Withdrawn unregistered notes will be returned to the holder after
withdrawal.
INTEREST ON THE REGISTERED NOTES
The registered notes will bear interest at 10 1/4% per annum, payable
semi-annually, on January 1 and July 1 of each year, commencing January 1, 2000.
Holders of registered notes will receive interest on January 1, 2000 from the
date of initial issuance of the registered notes, plus an amount equal to the
accrued but unpaid interest on the unregistered notes. If we accept your
unregistered notes for exchange, then you will waive all interest accrued but
unpaid on such unregistered notes.
CONDITIONS TO THE EXCHANGE OFFER
We need not exchange any unregistered notes, may terminate the exchange
offer or may waive any conditions to the exchange offer or amend the exchange
offer, if any of the following conditions have occurred:
- the SEC's staff no longer allows the registered notes to be offered for
resale, resold and otherwise transferred by certain holders without
compliance with the registration and prospectus delivery provisions of the
Securities Act;
- a governmental body passes any law, statute, rule or regulation which, in
our opinion, prohibits or prevents the exchange offer;
- the SEC or any state securities authority issues a stop order suspending
the effectiveness of the registration statement or initiates or threatens
to initiate a proceeding to suspend the effectiveness of the registration
statement; or
- we are unable to obtain any governmental approval that we believe is
necessary to complete the exchange offer.
If we reasonably believe that any of the above conditions has occurred, we
may (1) terminate the exchange offer, whether or not any unregistered notes have
been accepted for exchange, (2) waive any condition to the exchange offer or (3)
amend the terms of the exchange offer in any respect. If our waiver or amendment
materially changes the exchange offer, we will promptly disclose the waiver or
amendment through a prospectus supplement, distributed to the registered holders
of the unregistered
30
<PAGE>
notes. The prospectus supplement also will extend the exchange offer as required
by Rule 14e-1 of the Exchange Act.
EXCHANGE AGENT
We have appointed The Bank of New York as exchange agent for the exchange
offer. Holders should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notice of guaranteed delivery to the exchange agent addressed as
follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY:
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street, 7E
New York, New York 10286 Corporate Trust Services Window
Reorganization Section Ground Level
Attention: Martha James New York, New York 10286
Reorganization Section
Attention: Martha James
</TABLE>
CONFIRM BY TELEPHONE:
(212) 815-6335
FACSIMILE TRANSMISSIONS:
(Eligible Guarantor Institutions Only)
(212) 815-4699
If you deliver letters of transmittal or any other required documents to an
address or facsimile number other than those listed above, your tender is
invalid.
FEES AND EXPENSES
We will pay the exchange agent reasonable and customary fees for its
services and reasonable out-of-pocket expenses. We also will pay brokerage
houses and other custodians, nominees and fiduciaries their reasonable
out-of-pocket expenses for sending copies of this prospectus and related
documents to holders of unregistered notes, and in handling or tendering for
their customers.
We will pay the transfer taxes for the exchange of the unregistered notes in
the exchange offer. If, however, registered notes are delivered to or issued in
the name of a person other than the registered holder, or if a transfer tax is
imposed for any reason other than for the exchange of unregistered notes in the
exchange offer, then the tendering holder will pay the transfer taxes. If a
tendering holder does not submit satisfactory evidence of payment of taxes or
exemption from taxes with the letter of transmittal, the taxes will be billed
directly to the tendering holder.
We will not make any payment to brokers, dealers or other nominees
soliciting acceptances in the exchange offer.
ACCOUNTING TREATMENT
The registered notes will be recorded at the same carrying value as the
unregistered notes. Accordingly, we will not recognize any gain or loss for
accounting purposes. We intend to amortize the expenses of the exchange offer
and issuance of the unregistered notes over the term of the registered notes.
31
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the registered notes, we will receive in exchange unregistered notes
of like principal amount, the terms of which are identical in all material
respects to the registered notes. The unregistered notes surrendered in exchange
for registered notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the registered notes will not result in an increase in
our indebtedness. We have agreed to bear the expenses of the exchange offer.
The net proceeds to us from the sale of the unregistered notes, after
deducting expenses, was $35.5 million. We used the proceeds from the offering of
the unregistered notes, together with existing cash, to fund the Laura Secord
acquisition.
32
<PAGE>
THE ACQUISITION
On June 8, 1999, our subsidiary Archibald Candy (Canada) Corporation
acquired substantially all of the assets of Nestle's Laura Secord retail
business for total consideration of approximately $62.0 million (Cdn.), or
approximately $42.2 million (U.S.), pursuant to an Asset Purchase Agreement
dated as of May 26, 1999 between us and Nestle. The purchase agreement was filed
as an exhibit to our Current Report on Form 8-K that was filed with the SEC on
June 23, 1999 and is incorporated by reference as an exhibit to the registration
statement of which this prospectus is a part. We funded the Laura Secord
acquisition, in part, through the issuance and sale of the unregistered notes.
Laura Secord is the leading retailer of boxed chocolates in Canada, with 175
retail stores and distribution through more than 1,300 third-party retail
outlets in Canada.
The Laura Secord acquisition broadens our geographic and consumer reach and
provides us with an opportunity to better utilize our manufacturing capacity and
leverage our merchandising expertise. Our management believes that it can
improve Laura Secord's store-level performance and plans to implement in our
Laura Secord stores many of the same retail store strategies that improved the
operations of our Fannie May and Fanny Farmer stores. Following a one year
transition period during which Nestle will produce for sale to us substantially
all of the boxed chocolates and other chocolate confectionery items we will sell
in our Laura Secord stores, we expect that our Chicago, Illinois manufacturing
facility will produce all of such items. We believe that we can capture
significant efficiencies by consolidating Laura Secord's chocolate production
with our existing operations. We also have entered into a two-year supply
agreement with an affiliate of Nestle for the supply of ice cream to our Laura
Secord stores.
33
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited consolidated capitalization as
of May 29, 1999 on a historical basis and as adjusted to give effect to the
offering of unregistered notes and the Laura Secord acquisition as if they had
occurred on May 29, 1999. You should read this table together with our financial
statements and the accompanying notes, and the unaudited pro forma condensed
consolidated financial statements, both of which we have included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF MAY 29, 1999
-------------------------------
ACTUAL AS ADJUSTED
------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 23.8(1) $ 17.2
------ ------
------ ------
Long-term debt (including current maturities):
Revolving Credit Facility(2).............................. $ -- $ --
10 1/4% Senior Secured Notes due 2004..................... 130.0 170.0
Capital lease obligations................................. 0.2 0.2
------ ------
Total long-term debt (including current maturities)... $ 130.2 $ 170.2
Shareholder's equity (deficit):
Common Stock, $.01 par value, 25,000 shares authorized,
19,200 shares issued and outstanding.................... $ -- $ --
Additional paid-in capital................................ 18.7 18.7
Retained earnings (accumulated deficit)................... (23.3) (23.3)
------ ------
Total shareholder's equity (deficit).................. (4.6) (4.6)
------ ------
Total capitalization.................................. $ 125.6 $ 165.6
------ ------
------ ------
</TABLE>
- ------------------------
(1) Our business is highly seasonal. During fiscal 1998, our average cash and
cash equivalents balance, pro forma for the Sweet Factory acquisition, was
approximately $13.3 million.
(2) As of May 29, 1999, letters of credit in the amount of $0.5 million were
outstanding under our revolving credit facility and borrowings of $19.5
million were available to us for working capital and general corporate
purposes, subject to the borrowing conditions contained in the revolving
credit agreement. As of the date of this prospectus, we had borrowings equal
to approximately $5.0 million and letters of credit in the amount of $0.7
million outstanding under our revolving credit facility.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements below
are based on our financial statements and the financial statements of Laura
Secord included elsewhere in this prospectus. The unaudited pro forma condensed
consolidated statements of operations for the year ended August 29, 1998 and the
nine-month period ended May 29, 1999 are based on our financial statements as
adjusted to give effect to the offering of the unregistered notes and the Laura
Secord acquisition as if they had occurred on August 31, 1997. Because the Laura
Secord financial statements are for the twelve-month period ended November 28,
1998 and as of and for the nine-month period ended May 1, 1999, the unaudited
pro forma condensed consolidated financial statements herein do not include
Laura Secord's results of operations for any period after May 1, 1999. In
addition, the unaudited pro forma condensed consolidated statements of
operations give effect to the Sweet Factory acquisition and related financing as
if they had occurred on August 31, 1997. During the periods presented, neither
our nor Laura Secord's statements of operations included any amounts related to
discontinued operations. We operate using a fiscal year ending the last Saturday
in August. Prior to the acquisition, Laura Secord operated using a fiscal year
ending December 31. Adjustments for the offering of the unregistered notes and
the Laura Secord acquisition are based upon historical financial information of
us and Laura Secord and certain assumptions that our management believes are
reasonable. The Laura Secord acquisition has been accounted for under the
purchase method of accounting. Under this method, the purchase price has been
allocated to the assets and liabilities acquired based on preliminary estimates
of fair value. The actual fair value may vary from the preliminary estimates.
The pro forma financial data does not necessarily reflect our results of
operations or financial position that actually would have resulted had the
offering of the unregistered notes and the Laura Secord acquisition occurred at
the date indicated or project our results of operations or financial position
for any future date or period.
For purposes of the unaudited pro forma condensed consolidated financial
data below, we have converted the Laura Secord balance sheet as of May 1, 1999
from Canadian dollars to U.S. dollars based on the currency exchange rate in
effect on May 1, 1999, and we have converted the Laura Secord statement of
operations for the twelve months ended November 28, 1998 and for the nine months
ended May 1, 1999 from Canadian dollars to U.S. dollars based on the average
currency exchange rate in effect during such periods.
The unaudited pro forma condensed consolidated financial data below should
be read together with our consolidated financial statements and the financial
statements of Laura Secord, and the accompanying notes, included elsewhere in
this prospectus.
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MAY 29, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
LAURA ADJUSTMENTS PRO FORMA
ARCHIBALD SECORD (SEE NOTE 1) CONSOLIDATED
--------- ------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 23,844 $ 41 $(6,700)(a) $ 17,185
Accounts receivable, net...................................................... 1,727 -- -- 1,727
Inventories................................................................... 27,591 1,389 -- 28,980
Other current assets.......................................................... 2,691 160 -- 2,851
--------- ------ ------------ ------------
Total current assets............................................................ 55,853 1,590 (6,700) 50,743
Property, plant, and equipment, net............................................. 47,211 5,787 -- 52,998
Goodwill, other intangibles, and deferred financing fees, net................... 39,183 -- 39,075(b) 78,258
Other assets.................................................................... 2,848 -- -- 2,848
Investment in joint venture..................................................... -- 1,685 -- 1,685
Deferred income taxes........................................................... 3,673 -- -- 3,673
--------- ------ ------------ ------------
Total assets.................................................................... $ 148,768 $9,062 $32,375 $190,205
--------- ------ ------------ ------------
--------- ------ ------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.............................................................. $ 4,624 $ -- $ -- $ 4,624
Accrued expenses.............................................................. 16,044 937 500(c) 17,481
Current portion of long-term debt and capital lease obligations............... 156 -- -- 156
--------- ------ ------------ ------------
Total current liabilities....................................................... 20,824 937 500 22,261
Due to affiliate................................................................ 604 -- -- 604
Long-term debt, less current portion............................................ 130,000 -- 40,000(d) 170,000
Capital lease obligations, less current portion................................. 84 -- -- 84
Deferred rent................................................................... 1,845 -- -- 1,845
Net assets...................................................................... -- 8,125 (8,125)(e) --
Shareholder's equity (deficit).................................................. (4,589) -- -- (4,589)
--------- ------ ------------ ------------
Total liabilities and shareholder's equity (deficit)............................ $ 148,768 $9,062 $32,375 $190,205
--------- ------ ------------ ------------
--------- ------ ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
36
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED AUGUST 29, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ARCHIBALD AND PRO FORMA
SWEET ADJUSTMENTS SWEET FACTORY LAURA ADJUSTMENTS PRO FORMA
ARCHIBALD FACTORY (SEE NOTE 2) CONSOLIDATED SECORD (SEE NOTE 3) CONSOLIDATED
--------- -------- ------------ ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $126,742 $ 77,659 $ -- $204,401 $53,818 $ -- $258,219
Cost of sales, excluding
depreciation and
amortization................. 43,978 27,425 -- 71,403 25,770 (3,053)(a) 94,120
Selling, general, and
administrative expenses,
excluding depreciation and
amortization................. 63,478 45,538 (2,681)(a) 106,335 23,726 (1,507)(b) 128,554
Depreciation and
amortization................. 6,233 6,752 295(b) 13,280 1,860 2,262(c) 17,402
Management fees and other
fees......................... 514 -- -- 514 -- -- 514
Share of loss from joint
venture...................... -- -- -- -- 285 -- 285
--------- ------- ------------ ------------- ------- ------------ ------------
Operating income (loss)........ 12,539 (2,056) 2,386 12,869 2,177 2,298 17,344
Other (income) and expense:
Interest expense............... 10,346 844 2,298(c) 13,488 586 3,514(d) 17,588
Interest income................ (1,194) ) (31 100(d) (1,125) -- 335(e) (790)
Other income and expense....... (192) -- -- (192) -- -- (192)
--------- ------- ------------ ------------- ------- ------------ ------------
Income (loss) before income
taxes........................ 3,579 (2,869) (12) 698 1,591 (1,551) 738
Provision (benefit) for income
taxes........................ 276 (1,099) 877(e) 54 725 (722) 57
--------- ------- ------------ ------------- ------- ------------ ------------
Net income (loss).............. $ 3,303 $ (1,770) $ (889) $ 644 $ 866 $ (829) $ 681
--------- ------- ------------ ------------- ------- ------------ ------------
--------- ------- ------------ ------------- ------- ------------ ------------
OTHER DATA:
Archibald and Sweet Factory EBITDA................................................................................ $ 26,341
Laura Secord EBITDA............................................................................................... 8,723
------------
EBITDA(1).................... $ 18,964 $ 4,696 $2,681 $ 26,341 $ 4,163 $ 4,560 $ 35,064
--------- ------- ------------ ------------- ------- ------------ ------------
--------- ------- ------------ ------------- ------- ------------ ------------
</TABLE>
- ------------------------------
(1) EBITDA consists of earnings before (i) interest, income taxes, depreciation
and amortization, and (ii) 50% of the interest and depreciation expense
incurred by the combo stores which is reflected in the share of loss from
joint venture, which amount is equal to $126, or approximately $186 (Cdn.).
37
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED MAY 29, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ARCHIBALD AND PRO FORMA
ADJUSTMENTS SWEET FACTORY LAURA ADJUSTMENTS PRO FORMA
ARCHIBALD SWEET FACTORY(1) (SEE NOTE 2) CONSOLIDATED SECORD (SEE NOTE 3) CONSOLIDATED
--------- ---------------- ------------ ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $155,806 $18,791 $ -- $174,597 $41,347 $ -- $215,944
Cost of sales, excluding
depreciation and
amortization................. 56,039 6,773 -- 62,812 18,057 (2,066)(a) 78,803
Selling, general, and
administrative expenses,
excluding depreciation and
amortization................. 72,340 12,138 (1,564)(a) 82,914 18,402 (1,268)(b) 100,048
Depreciation and
amortization................. 8,396 1,754 74(b) 10,224 1,257 1,696(c) 13,177
Management fees and other
fees......................... 393 -- -- 393 -- -- 393
Share of loss from joint
venture...................... -- -- -- -- 132 -- 132
--------- ------- ------ ------------- ------- ------------ ------------
Operating income (loss)........ 18,638 (1,874) 1,490 18,254 3,499 1,638 23,391
Other (income) and expense:
Interest expense............... 9,373 237 611(c) 10,221 285 2,790(d) 13,296
Interest income................ (605) (4) 25(d) (584) -- 251(e) (333)
Other income and expense....... (209) -- -- (209) -- -- (209)
--------- ------- ------ ------------- ------- ------------ ------------
Income (loss) before income
taxes........................ 10,079 (2,107) 854 8,826 3,214 (1,403) 10,637
Provision (benefit) for income
taxes........................ (276) (845) 1,801(e) 680 1,412 (1,273)(f) 819
--------- ------- ------ ------------- ------- ------------ ------------
Net income (loss).............. $ 10,355 $(1,262) $ (947) $ 8,146 $ 1,802 $ (130) $ 9,818
--------- ------- ------ ------------- ------- ------------ ------------
--------- ------- ------ ------------- ------- ------------ ------------
OTHER DATA:
Archibald and Sweet Factory EBITDA................................................................................ $ 28,687
Laura Secord EBITDA............................................................................................... 8,174
------------
EBITDA(2).................... $ 27,243 $ (120) $1,564 $ 28,687 $ 4,840 $ 3,334 $ 36,861
--------- ------- ------ ------------- ------- ------------ ------------
--------- ------- ------ ------------- ------- ------------ ------------
</TABLE>
- ------------------------------
(1) Reflects results for Sweet Factory from August 30, 1998 through December 6,
1998.
(2) EBITDA consists of earnings before (i) interest, income taxes, depreciation
and amortization, and (ii) 50% of the interest and depreciation expense
incurred by the combo stores which is reflected in the share of loss from
joint venture, which amount is equal to $84, or approximately $128 (Cdn.).
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1: UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET ADJUSTMENTS
<TABLE>
<S> <C> <C>
(a) Adjustment to cash and cash equivalents as follows:
Proceeds from issuance of the unregistered notes.............................. $ 40,000
Laura Secord purchase price................................................... (42,200)
Payment of estimated fees and expenses of the offering of the unregistered
notes and the Laura Secord acquisition...................................... (4,500)
---------
$ (6,700)
---------
---------
(b) Adjustments to goodwill, other intangibles, and deferred financing fees as
follows:
Adjustment to goodwill for excess of net assets acquired over purchase
price....................................................................... $ 35,875
Adjustment to deferred financing fees for the financing fees incurred in
connection with the offering of the unregistered notes and the Laura Secord
acquisition................................................................. 3,200
---------
$ 39,075
---------
---------
(c) Adjustments to accrued liabilities for expenses associated with the purchase
of Laura Secord............................................................. $ 500
---------
---------
(d) Adjustment to long-term debt for issuance of the unregistered notes........... $ 40,000
---------
---------
(e) Adjustments to net assets for the elimination of the Laura Secord net
assets...................................................................... $ (8,125)
---------
---------
</TABLE>
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2: UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS ADJUSTMENTS
<TABLE>
<CAPTION>
FISCAL YEAR NINE-MONTH
ENDED PERIOD ENDED
AUGUST 29, 1998 MAY 29, 1999
--------------- -------------
<S> <C> <C> <C>
(a) Adjustments to selling, general, and administrative expenses as follows:
Reduction in salaries and payroll expenses related to the
consolidation of Sweet Factory's operations with Archibald
Candy's..................................................................... $ (1,909) $ (1,114)
Reduction in facility lease expenses due to the elimination of the San Diego
facilities.................................................................. (307) (179)
Reduction in general and administrative expenses due to the consolidation of
the Sweet Factory facilities into Archibald
Candy's..................................................................... (465) (271)
------- -------------
$ (2,681) $ (1,564)
------- -------------
------- -------------
(b) Adjustments to depreciation and amortization expense as follows:
Amortization of deferred financing fees as a result of the Sweet Factory
acquisition................................................................. $ 439 $ 110
Reduction of depreciation expense for purchase accounting adjustment to
property, plant and equipment............................................... (144) (36)
------- -------------
$ 295 $ 74
------- -------------
------- -------------
(c) Adjustments to interest expense as follows:
Interest expense incurred on the additional $30 million of Archibald Candy's
senior secured notes issued on December 7, 1998............................. $ 3,075 $ 769
Elimination of Sweet Factory working capital line interest expense............ (777) (158)
------- -------------
$ 2,298 $ 611
------- -------------
------- -------------
(d) Adjustment to interest income for cash outlay................................. $ 100 $ 25
(e) Adjustment to provision for income taxes as a result of all pro forma
adjustments................................................................. $ 877 $ 1,801
------- -------------
------- -------------
</TABLE>
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3: UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS ADJUSTMENTS
<TABLE>
<CAPTION>
FISCAL YEAR NINE-MONTH
ENDED PERIOD ENDED
AUGUST 29, 1998 MAY 29, 1999
--------------- -------------
<S> <C> <C> <C>
(a) Adjustments to cost of sales as follows:
Elimination of royalty charges from Nestle.................................... $ (1,577) $ (1,151)
Elimination of intercompany charges from Nestle to reflect the co-pack
agreement with Nestle....................................................... (1,476) (915)
------- -------------
$ (3,053) $ (2,066)
------- -------------
------- -------------
(b) Adjustments to selling, general and administrative expenses for the
elimination of Nestle corporate overhead expenses........................... $ (1,507) $ (1,268)
------- -------------
------- -------------
(c) Adjustments to depreciation and amortization as follows:
Amortization of deferred financing fees as a result of the Laura Secord
acquisition................................................................. $ 468 $ 351
Amortization of goodwill that is generated as a result of the Laura Secord
acquisition................................................................. 1,794 1,345
------- -------------
$ 2,262 $ 1,696
------- -------------
------- -------------
(d) Adjustments to interest expense as follows:
Interest expense incurred on the unregistered notes........................... $ 4,100 $ 3,075
Elimination of Nestle intercompany interest expense charges................... (586) (285)
------- -------------
$ 3,514 $ 2,790
------- -------------
------- -------------
(e) Adjustment to interest income for cash outlay................................. $ 335 $ 251
------- -------------
------- -------------
(f) Adjustment to provision for income taxes as a result of all pro forma
adjustments................................................................. $ (722) $ (1,273)
------- -------------
------- -------------
</TABLE>
41
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents certain of our historical financial data. The
selected historical information as of and for each of the five fiscal years in
the period ended August 29, 1998, was derived from our audited financial
statements. You should read the information in this table together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements, including the accompanying notes,
appearing elsewhere in this prospectus. The selected historical financial data
as of and for the nine-month periods ended May 30, 1998 and May 29, 1999 were
derived from our unaudited interim financial statements. In our opinion, such
unaudited interim financial statements contain all adjustments, consisting only
of normal recurring items, necessary to present fairly our financial position
and results of operations as of and for the periods presented.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
FISCAL YEAR ENDED ENDED
--------------------------------------------------------------- --------------------
AUGUST 31, AUGUST 26, AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1994 1995(1) 1996(1) 1997(1) 1998(1) 1998 1999(2)
----------- ----------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Company-operated retail(3).... $ 91,408 $ 90,077 $ 88,938 $ 89,276 $ 91,488 $ 79,125 $ 116,947
Third-party retail(4)......... 13,027 12,954 14,924 17,074 18,230 16,243 22,536
Non-retail(5)................. 11,297 12,524 13,486 15,583 17,024 16,418 16,323
----------- ----------- ----------- ----------- ----------- --------- ---------
Net sales................... $ 115,732 $ 115,555 $ 117,348 $ 121,933 $ 126,742 $ 111,786 $ 155,806
----------- ----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- ----------- --------- ---------
Gross profit.................... $ 72,298 $ 75,309 $ 76,338 $ 79,649 $ 82,764 $ 72,724 $ 99,767
Operating income (loss)......... (5,850) 3,290 7,945 10,801 12,539 17,733 18,638
Interest expense................ 8,913 9,237 9,455 9,235 10,346 7,780 9,373
Other income and expense........ 207 275 444 411 1,386 (1,068) (814)
Income tax (benefit)............ (358) (68) 349 250 276 209 (276)
Net income (loss)(6)............ (16,440) (5,604) (1,415) (1,171) 3,303 10,812 10,355
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 26, AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1994 1995(1) 1996(1) 1997(1) 1998(1) 1998 1999(2)
----------- ----------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 1,359 $ 482 $ 380 $ 15,801 $ 13,081 $ 29,924 $ 23,844
Working capital (deficiency).... (5,549) (3,641) (4,349) 23,475 26,988 35,842 35,029
Total assets.................... 88,548 83,098 78,668 95,660 98,089 109,053 148,768
Total long-term debt............ 73,883 73,676 72,721 100,521 100,145 100,190 130,240
Shareholder's equity
(deficit)..................... (8,429) (14,033) (15,448) (16,619) (14,944) (5,807) (4,589)
</TABLE>
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
FISCAL YEAR ENDED ENDED
--------------------------------------------------------------- --------------------
AUGUST 31, AUGUST 26, AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1994 1995(1) 1996(1) 1997(1) 1998(1) 1998 1999(2)
----------- ----------- ----------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(7)....................... 8,239 13,527 14,731 16,868 18,964 22,761 27,243
Cash provided by (used in):
Operating activities.......... (1,571) 4,551 4,117 3,919 4,206 18,325 18,089
Investing activities.......... (3,601) (1,958) (1,121) (3,688) (4,709) (3,370) (32,956)
Financing activities.......... 5,701 (3,470) (3,098) 15,190 (2,217) (832) 25,630
Depreciation and amortization... 13,216 9,999 6,807 5,932 6,233 4,833 8,396
Capital expenditures............ 3,655 2,325 2,280 3,688 4,574 3,370 4,954
Net sales growth................ 2.8% (0.2)% 1.6% 3.9% 3.9% 4.5% 39.4%
Gross margin.................... 62.5% 65.2% 65.1% 65.3% 65.3% 65.1% 64.0%
EBITDA margin(8)................ 7.1% 11.7% 12.6% 13.8% 15.0% 20.4% 17.5%
Ratio of earnings to fixed
charges(9).................... -- -- -- -- 1.2 2.0 1.7
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
FISCAL YEAR ENDED ENDED
--------------------------------------------------------------- --------------------
AUGUST 31, AUGUST 26, AUGUST 31, AUGUST 30, AUGUST 29, MAY 30, MAY 29,
1994 1995(1) 1996(1) 1997(1) 1998(1) 1998 1999(2)
----------- ----------- ----------- ----------- ----------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Number of Company-operated
stores at period end(10):
Fannie May/Fanny Farmer
stores...................... 400 372 340 322 317 319 307
Sweet Factory stores.......... -- -- -- -- -- -- 253
----------- ----------- ----------- ----------- ----------- --------- ---------
Total number of stores...... 400 372 340 322 317 319 560
----------- ----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- ----------- --------- ---------
Increase in same store
sales(11)..................... 4.5% 3.4% 2.6% 5.2% 4.2% 4.7% 0.5%
</TABLE>
- ------------------------------
(1) In 1995, we changed our 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 fiscal 1998 each had 52 weeks (364 days).
(2) Includes information for Sweet Factory for the period after December 6,
1998.
(3) Company-operated retail includes sale of products through our Fannie May
and Fanny Farmer stores and, for the period after December 6, 1998, our
Sweet Factory stores.
(4) Third-party retail includes sale of Fannie May and Fanny Farmer products
through grocery stores, drug stores and other independent retailers that
purchase our branded products at wholesale pricing for resale to the
consumer.
(5) Non-retail includes sale of Fannie May and Fanny Farmer products through
our quantity order, mail order and fundraising programs.
(6) Our 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. Our net loss for fiscal 1994 also includes a loss
of $0.7 million relating to the discontinued Fanny Farmer Homestead product
line. Our 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.
(7) EBITDA for any period presented above is defined as earnings before
interest, income taxes, depreciation and amortization. EBITDA is included
because management believes that certain investors may find it useful for
analyzing operating performance, leverage and liquidity. EBITDA should not
be construed as a measure that is superior to, or a substitute for,
operating income or net cash flow provided by operating activities, or as
an indicator of liquidity, which are determined in accordance with
generally accepted accounting principles. Other companies may not calculate
EBITDA in a similar manner and, for that reason, our measure of EBITDA may
not be comparable to that of other companies. EBITDA as reported herein for
fiscal 1994 excludes the loss relating to the discontinued Fanny Farmer
Homestead product line. In fiscal 1994, the Fanny Farmer Homestead product
line accounted for $0.9 million of third-party retail sales.
(8) EBITDA margin is EBITDA divided by net sales.
(9) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income 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 us 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.
(10) The term "stores" includes retail stores and kiosks, but not carts.
(11) Same store sales are defined as the aggregate sales from stores open for
the entire periods being compared. Increases or decreases reflect changes
from the immediately prior comparable period.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED
HISTORICAL FINANCIAL DATA" AND THE OTHER FINANCIAL INFORMATION AND DATA
APPEARING ELSEWHERE HEREIN. UNLESS OTHERWISE INDICATED, THE FOLLOWING DISCUSSION
RELATES TO THE COMPANY ON A HISTORICAL BASIS, WITHOUT GIVING EFFECT TO THE SWEET
FACTORY AND LAURA SECORD ACQUISITIONS AND RELATED FINANCINGS. UNLESS OTHERWISE
INDICATED, ALL REFERENCES TO STORES INCLUDE RETAIL STORES AND KIOSKS, BUT NOT
CARTS, AND ARE AS OF MAY 29, 1999.
OVERVIEW
We are a manufacturer and marketer of quality boxed chocolates and other
confectionery items. We manufacture a variety of candies and operate
confectionery retail chains under the Fannie May, Fanny Farmer, Sweet Factory
and Laura Secord brand names. We operate 735 Company-operated retail stores in
40 states and Canada: 233 Fannie May stores, 74 Fanny Farmer stores, 253 Sweet
Factory stores and 175 Laura Secord stores. In addition, we also sell our Fannie
May, Fanny Farmer and Laura Secord branded products in approximately 9,300
third-party grocery stores, drug stores, department stores and independent
retail accounts. We also sell our Fannie May and Fanny Farmer branded products
through a variety of non-retail programs, including our quantity order, mail
order and fundraising programs.
Historically, Company-operated retail has represented the most significant
distribution channel for our products, accounting for $91.5 million, or 72.2%,
of net sales in fiscal 1998. Our third-party retail and non-retail businesses
collectively accounted for $35.3 million, or 27.8%, of net sales in fiscal 1998.
We recently have turned our focus to growing sales and earnings by (1) building
on our Fannie May and Fanny Farmer brand names by increasing points of
availability for our products, (2) integrating the Sweet Factory and Laura
Secord brand names and stores with our existing operations and (3) acquiring
additional confectionery brands or complementary products and services.
Our costs of sales include costs associated with our manufactured products
and costs associated with product purchased from third parties and resold by us.
The principal elements of our manufactured product costs are raw materials,
labor and manufacturing overhead. Raw materials consist primarily of chocolate,
nutmeats, sweeteners and 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, benefits and incentives based on achieving operating
efficiencies. Manufacturing overhead generally includes employee fringe
benefits, utilities, rents and manufacturing supplies. Historically, we
generally have been able to raise prices of our Fannie May and Fanny Farmer
products equal to or in excess of any increases in cost of sales; however, there
can be no assurance that we will be able to continue to do so in the future.
Selling, general and administrative costs include, but are not limited to:
(1) Company-operated retail store operating costs, such as wages, rent and
utilities, (2) expenses associated with third-party retail and non-retail sales,
which include, among other things, catalog expenses and direct wages and (3)
general overhead expenses, which consist primarily of non-allocable wages,
professional fees and administrative and management overhead.
RESULTS OF OPERATIONS
The following table and discussion summarize our percentage of net sales,
pounds of product sold and average selling price, according to distribution
channel, and the number of our Company-operated
44
<PAGE>
stores, in each case, for the periods indicated, exclusive of the operation of
our Sweet Factory and Laura Secord subsidiaries.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
AUGUST 31, AUGUST 30, AUGUST 29,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
PERCENTAGE OF 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
----------- ----------- -----------
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 PER POUND:
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 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 (1) closing unprofitable stores and (2) expanding
channels of distribution other than Company-operated retail. From the end of
fiscal 1996 to the end of 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 in fiscal 1998. As a percentage of net sales, third-party retail sales
increased from 12.7% to 14.4% over the same period. These increases reflect, in
part, 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. We recently launched the sale of Fannie May products in department stores,
specialty shops and card and gift stores, and expect third-party retail sales to
continue to grow as a percentage of 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 net sales, non-retail sales increased
from 11.5% to 13.4% over the same period. These increases, which resulted
primarily from growth in net sales through our fundraising program and improved
product mix and merchandising, reflect the results of management's strategy to
expand non-retail sales.
NINE-MONTH PERIOD ENDED MAY 29, 1999 COMPARED TO NINE-MONTH PERIOD ENDED MAY 30,
1998
The discussion below with respect to the nine-month period ended May 29,
1999 includes information for our Sweet Factory subsidiary for the period after
December 6, 1998.
NET SALES. Consolidated net sales for the nine months ended May 29, 1999
were $155.8 million, an increase of $44.0 million, or 39.4%, from $111.8 million
for the nine months ended May 30, 1998. The growth in sales was primarily the
result of increased Company-operated retail sales resulting from
45
<PAGE>
the Sweet Factory acquisition, which accounted for $37.5 million, or 85.3%, of
the increase in net sales. Consolidated Company-operated retail net sales were
$116.9 million for the nine months ended May 29, 1999, an increase of $37.8
million, or 47.8%, from $79.1 million for the nine months ended May 30, 1998.
The Sweet Factory acquisition accounted for $37.5 million, or 99.3%, of the
increase. Net sales, without giving effect to the Sweet Factory acquisition, for
the nine months ended May 29, 1999 were $118.3 million, an increase of $6.5
million, or 5.8%, from $111.8 million for the nine months ended May 30, 1998.
Company-operated retail net sales, without giving effect to the Sweet Factory
acquisition, were $79.4 million for the nine months ended May 29, 1999, an
increase of $0.3 million, or 0.3%, from $79.1 million for the nine months ended
May 30, 1998. There were 307 Company-operated Fannie May and Fanny Farmer retail
stores at May 29, 1999 compared to 319 stores at May 30, 1998. For the nine
months ended May 29, 1999, Fannie May and Fanny Farmer third-party retail sales
were $22.5 million, an increase of $6.3 million, or 38.7%, from $16.2 million
for the nine months ended May 30, 1998. This increase reflects the continued
results of management's strategy to expand third-party retail sales into new
markets. For the nine months ended May 29, 1999 and May 30, 1998, non-retail
sales were $16.3 million and $16.4 million, respectively.
GROSS PROFIT. Consolidated gross profit for the nine months ended May 29,
1999 was $99.8 million, an increase of $27.0 million, or 37.2%, from $72.7
million for the nine months ended May 30, 1998. The Sweet Factory acquisition
accounted for $24.2 million, or 89.6%, of the increase. Consolidated gross
profit as a percentage of net sales decreased to 64.0% for the nine months ended
May 29, 1999 from 65.1% for the nine months ended May 30, 1998. Gross profit,
without giving effect to the Sweet Factory acquisition, for the nine months
ended May 29, 1999 was $75.5 million, an increase of $2.8 million, or 3.9%, from
$72.7 million for the nine months ended May 30, 1998. Gross profit as a
percentage of net sales, without giving effect to the Sweet Factory acquisition,
decreased to 63.9% for the nine months ended May 29, 1999 from 65.1% for the
nine months ended May 30, 1998 due to the shift in mix towards lower gross
margin sales.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated SG&A expenses for the
nine months ended May 29, 1999 were $72.3 million, an increase of $22.6 million,
or 45.4%, from $49.8 million for the nine months ended May 30, 1998. The Sweet
Factory acquisition accounted for $21.4 million, or 94.9%, of the increase. As a
percentage of total net sales, SG&A expenses increased to 46.4% for the nine
months ended May 29, 1999 from 44.5% for the nine months ended May 30, 1998.
SG&A expenses, without giving effect to the Sweet Factory acquisition, for the
nine months ended May 29, 1999, were $50.9 million, an increase of $1.2 million,
or 2.3%, from $49.8 million for the nine months ended May 30, 1998. This
increase in SG&A expenses was primarily due to the growth in our third-party
retail channel. SG&A expenses as a percentage of net sales, without giving
effect to the Sweet Factory acquisition, decreased to 43.1% for the nine months
ended May 29, 1999 from 44.5% for the nine months ended May 30, 1998.
EBITDA. Consolidated EBITDA was $27.2 million for the nine months ended May
29, 1999, an increase of $4.5 million, or 19.7%, from $22.8 million for the nine
months ended May 30, 1998. The Sweet Factory acquisition accounted for $2.8
million, or 63.0%, of the increase. As a percentage of total net sales,
consolidated EBITDA was 17.5% for the nine months ended May 29, 1999 as compared
to 20.4% for the nine months ended May 30, 1998. EBITDA, without giving effect
to the Sweet Factory acquisition, was $24.4 million for the nine months ended
May 29, 1999, an increase of $1.7 million, or 7.3%, from $22.8 million for the
nine months ended May 30, 1998. EBITDA as a percentage of total net sales,
without giving effect to the Sweet Factory acquisition, was 20.7% for the nine
months ended May 29, 1999 as compared to 20.4% for the nine months ended May 30,
1998.
OPERATING INCOME (LOSS). Consolidated operating income was $18.6 million
for the nine months ended May 29, 1999, an increase of $0.9 million, or 5.1%,
from operating income of $17.7 million for the nine months ended May 30, 1998.
The Sweet Factory acquisition accounted for an operating loss of
46
<PAGE>
$0.5 million. Operating income, without giving effect to the Sweet Factory
acquisition, was $19.2 million for the nine months ended May 29, 1999, an
increase of $1.4 million, or 8.1%, from income of $17.7 million for the nine
months ended May 30, 1998. The growth resulted from the increase in EBITDA
partially offset by higher depreciation and amortization expense.
FISCAL YEAR ENDED AUGUST 29, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 30, 1997
NET SALES. 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, partially offset by a 0.1 million
decrease in Company-operated retail pounds sold resulting from the operation of
five fewer stores. 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
operation of five fewer 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 net sales partially offset by an
increase in manufactured and purchased product costs. Gross profit as a
percentage of 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 net sales, SG&A decreased to 50.1% in fiscal 1998 from 51.2% in fiscal 1997
as we were able to leverage our costs against higher 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 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
primarily reflects an increase in EBITDA and EBITDA Margin.
FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
NET SALES. 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, with a decrease in
Company-operated retail pounds sold offset by an increase in pounds sold through
third-party retail and non-retail channels. Company-operated retail sales were
$89.3 million in fiscal 1997, an increase of $0.3 million, or 0.4%, from $88.9
million in fiscal 1996. This increase 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
47
<PAGE>
fiscal 1996. This increase reflected the continued results of management's
strategy to expand third-party retail sales into new markets, including
providing Fanny Farmer branded products to mass merchandisers and developing
Fannie May product line extensions. Non-retail sales were $15.6 million in
fiscal 1997, an increase of $2.1 million, or 15.5%, from $13.5 million in fiscal
1996.
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 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 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 net sales, SG&A decreased to 51.2% in fiscal 1997
from 52.1% in fiscal 1996, as we were able to leverage our costs against higher
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 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. The
increase in operating income was primarily a result of higher EBITDA of $2.1
million and a reduction of depreciation and amortization expense of $0.9
million.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements have arisen principally from various capital
expenditures, seasonal and general working capital requirements and debt service
obligations. We have satisfied these requirements during the past three fiscal
years primarily with (1) long-term and seasonal borrowings, (2) the proceeds of
the offerings of our senior secured notes, of which $170.0 million is currently
outstanding, and (3) cash generated by operating activities. During fiscal 1996,
1997 and 1998, the net cash generated by our operating activities was $4.1
million, $3.9 million and $4.2 million, respectively.
On July 2, 1997, we entered into a revolving credit agreement. On July 30,
1999, we amended our revolving credit agreement and caused our Canadian
subsidiary, Archibald Candy (Canada) Corporation, to enter into an additional
related revolving credit agreement with a Canadian affiliate of the agent under
our original credit agreement. The two credit agreements work together to
provide for revolving loans to us and Archibald Candy (Canada) Corporation in an
aggregate principal amount at any time not to exceed the lesser of (1) $25.0
million and (2) a borrowing base comprised primarily of a percentage of eligible
accounts receivable, eligible inventory and some of our owned real properties.
Archibald Candy (Canada) Corporation may separately borrow up to an aggregate
principal amount not to exceed the lesser of (a) $5.0 million and (b) a
borrowing base comprised primarily of a percentage of our eligible accounts
receivable, eligible inventory and some of our owned real properties, provided
that the aggregate amount of revolving loans under the two credit agreements
together may not exceed $25.0 million. For fiscal 1998, there were no borrowings
under our revolving credit facility, although letters of credit in the amount of
$0.5 million were issued under this facility. As of May 29, 1999, our cash
balance was $23.8 million. As of the date of this prospectus, we have borrowings
of approximately $5.0 million and letters of credit in the amount of $0.7
million outstanding
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<PAGE>
under our original revolving credit agreement and Archibald Candy (Canada)
Corporation has no borrowings or letters of credit outstanding under its
revolving credit agreement.
Inventories historically have represented our most significant working
capital requirement and inventory levels fluctuate significantly during the
year. Our ratio of inventories to net sales is typically highest during the
fourth fiscal quarter when we experience lower seasonal demand for our products
and begin to build inventories for our key sales periods. See "--Quarterly
Results and Seasonality." We do not expect our recent acquisitions of Sweet
Factory and Laura Secord to materially change this seasonal trend. Receivables
have not been a material component of our working capital because sales through
our Company-operated stores are made on a cash or credit card basis. As we
continue to pursue a strategy to develop our 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,
we expect our working capital needs relating to receivables and inventory to
increase.
Our 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 our management information systems. Capital expenditures for
fiscal 1999, excluding capital expenditures described in the paragraph below,
related primarily to (1) the remodeling of existing Fannie May, Fanny Farmer and
Sweet Factory stores and (2) improvements in our management information systems.
We spent approximately $8.4 million for such capital expenditures in fiscal
1999, of which approximately $4.5 million was for maintenance capital
expenditures.
In addition, we spent approximately $5.7 million in fiscal 1999 for various
cost savings initiatives undertaken in connection with the consolidation of
Sweet Factory's operations with our existing operations. Such expenditures
included, among other things, severance payments to certain employees of Sweet
Factory and expenditures to close Sweet Factory's facilities in San Diego,
California and expand our facilities in Chicago, Illinois to integrate Sweet
Factory's operations with our current operations. Also, in order to extend our
license of the Sweet Factory trademark for the ten-year period beyond the year
2000, we will have to pay an $825,000 renewal fee.
Based upon our current level of operations and anticipated growth, our
management believes that available cash flow, together with cash on our balance
sheet and available borrowings under our revolving credit facility, will be
adequate to meet our anticipated future requirements for capital expenditures,
working capital and debt service obligations. Our revolving credit facility
expires on April 15, 2001. For the period after April 15, 2001, we will need to
extend or renew our revolving credit facility or obtain alternative financing to
meet our seasonal working capital needs and other requirements.
In addition, Holdings has certain dividend and redemption obligations for
which we 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 addition, beginning in January 2000, some holders of
Holdings' Class A Common Stock and Class D
49
<PAGE>
Common Stock, which include affiliates of TCW capital and The Jordan Company,
have the right to require Holdings to either initiate a sale of us or redeem
their shares of Common Stock.
In order for Holdings to make such redemption payments, Holdings must cause
us, to the extent permitted by the indenture and our revolving credit facility,
to advance the necessary funds to Holdings by dividend or otherwise. Such
advances, if paid, will reduce the funds available for our operations. To the
extent that such funds are not available, whether due to the restrictions set
forth in the indenture or our 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 our Boards of Directors.
Instruments governing our indebtedness, including the indenture and our and
Archibald Candy (Canada) Corporation's revolving credit agreements contain
financial and other covenants that restrict, among other things, our 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 our assets, consummate certain
other asset sales and enter into certain transactions with affiliates. Our
revolving credit facility prohibits, except in limited circumstances, us from
making dividend payments or other distributions on our outstanding shares of
capital stock if either (1) some defaults under our revolving credit facility
have occurred and are continuing at the date of declaration, payment or making
thereof or would result therefrom or (2) the indenture or the notes issued
thereunder prohibit such distributions. The indenture provides that, except in
limited circumstances, we will not, and will not permit any of our subsidiaries
to, make dividend payments or other distributions on our 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, we would comply with interest
coverage ratios set forth in the indenture 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 from the sale of
securities. In addition, our revolving credit facility requires us to comply
with specified financial ratios, including minimum fixed charge coverage and
maximum leverage ratios. The indenture prohibits the incurrence of indebtedness
unless, among other things, we comply with minimum interest coverage ratios set
forth in the indenture. Such limitations, together with our highly leveraged
nature, could limit corporate and operating activities, including our 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 our
operating profit. In addition, store operating costs, including most of our
retail store leases which require us to pay additional rent based on a
percentage of sales as well as taxes, insurance and maintenance expenses, are
subject to inflation. Although our recent results 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 our operating results.
QUARTERLY RESULTS AND SEASONALITY
Our sales and earnings are highly seasonal. Historically, our second and
third fiscal quarters have generated the highest sales and profits due to
increased consumer demand during the Christmas, Valentine's Day and Easter
holiday seasons. Our sales generally have been lowest during the fourth fiscal
quarter, reflecting reduced demand for our products during the summer months and
resulting in an EBITDA loss in this period. We expect Laura Secord's sales to
exhibit a similar seasonality. In light of the seasonality of our business,
results for any interim period are not necessarily indicative of the results
that may be realized for the full year. Our working capital requirements also
fluctuate
50
<PAGE>
throughout the year based on our inventories in anticipation of sales. Such
inventory requirements generally are highest during the first four months of
each fiscal year as we increases our raw material and other inventories to
accommodate anticipated product sales for the Christmas, Valentine's Day and
Easter holiday seasons.
The following table summarizes our net sales and EBITDA, exclusive of our
Sweet Factory and Laura Secord operations, by quarter for fiscal 1998 and the
first three quarters of fiscal 1999.
<TABLE>
<CAPTION>
FIRST SECOND FOURTH FIRST SECOND
QUARTER QUARTER THIRD QUARTER QUARTER QUARTER THIRD
ENDED ENDED QUARTER ENDED ENDED ENDED QUARTER
NOV. 29, FEB. 28, ENDED MAY AUG. 29, NOV. 28, FEB. 27, ENDED MAY
1997 1998 30, 1998 1998 1998 1999 29, 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 27,173 $ 58,397 $ 26,216 $ 14,956 $ 29,648 $ 61,602 $ 27,010
EBITDA............................... 1,057 19,588 2,116 (3,797) 1,465 20,402 2,554
</TABLE>
During the fiscal year ended August 29, 1998, Sweet Factory had net sales of
$77.7 million, of which net sales by quarter were approximately 22%, 29%, 23%
and 26%, respectively. During the twelve-month period ended November 28, 1998,
Laura Secord had net sales of $56.0 million.
IMPACT OF THE YEAR 2000 ISSUE
Many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year and, as a result, they may be unable
to process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or system failure causing disruptions in their operations. This
is commonly known as the Year 2000 issue and can arise at any point in our
supply, manufacturing, processing, distribution and financial chains.
We have surveyed substantially all of our internal computer systems and are
in the process of contacting suppliers and consultants to address year 2000
issues for the software and hardware that we use. We also are in the process of
upgrading and improving our internal computer systems, which work is expected to
be completed by November 1999. Following the completion of this work and based
on the representations and warranties of our suppliers and consultants, we
expect our internal computer systems and those of our key suppliers to be year
2000 compliant by the end of 1999. We do not believe that the costs associated
with making our internal computer systems year 2000 compliant will be material.
However, if our systems or the systems of other companies on whose services we
depend or with whom our systems interface are not year 2000 compliant on a
timely basis, it could have a material adverse effect on our results of
operation and financial condition. Nestle has provided us with limited
representations and indemnification as to the year 2000 compliance of the Laura
Secord assets that we have acquired. However, we have not independently
confirmed the year 2000 compliance of such assets.
51
<PAGE>
BUSINESS
THE COMPANY
We are a manufacturer and marketer of quality boxed chocolates and other
confectionery items. Founded in 1921, we manufacture a variety of candies and
operate confectionery retail chains under the Fannie May, Fanny Farmer, Sweet
Factory and Laura Secord brand names. As of May 29, 1999, we operated 735 retail
stores in 40 states and Canada: 233 Fannie May stores, 74 Fanny Farmer stores,
253 Sweet Factory stores, and 175 Laura Secord stores. In addition, we sell our
Fannie May, Fanny Farmer and Laura Secord branded products in approximately
9,300 third-party retail outlets. We also sell our Fannie May and Fanny Farmer
branded products through our quantity order, mail order and fundraising
programs. We believe that consumers widely recognize our products for their
quality, freshness and value, and that the Fannie May, Fanny Farmer, Sweet
Factory and Laura Secord brand names are among the strongest in the
confectionery industry and offer significant opportunities for growth.
CONFECTIONERY INDUSTRY OVERVIEW
The U.S. confectionery industry had 1997 retail sales of approximately $23
billion. The U.S. confectionery industry is characterized by moderate long-term
growth in consumer demand, with the per capita consumption of candy increasing
from approximately 18 pounds in 1987 to over 27 pounds in 1997. The U.S.
confectionery market is comprised of two broad sectors: non-chocolates and
chocolates, which represent 53.9% and 46.1% of the confectionery market,
respectively. Non-chocolate products include a wide range of confectionery
items, including jelly beans, gummi bears, hard candies and licorice. From 1993
to 1997, sales volume in the U.S. non-chocolate and chocolate sectors grew at
the rates of 18.9% and 6.4%, respectively. Within the U.S. chocolate sector,
total sales of boxed chocolates were approximately $1.6 billion in 1997. Our
management believes that the Canadian confectionery industry had 1997 retail
sales of approximately $1.2 billion.
BUSINESS STRATEGY
Our business strategy is to grow our 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. We acquired the Fanny Farmer
brand in September 1992 to complement our existing Fannie May brand. Our
acquisition of Sweet Factory in December 1999 provided us with a leading name in
non-chocolate, bulk candy retail. Our acquisition of Laura Secord in June 1999
provided us with the leading retailer of boxed chocolates in Canada. We expect
to continue to grow our brands with a strategy that includes the following key
elements:
CONTINUE TO IMPROVE COMPANY-OPERATED STORES. Our retail store strategy
consists of two main components: (1) continuing to improve same store sales by
enhancing merchandising, customer service and product selection and (2) reducing
store operating costs, primarily by selectively closing unprofitable stores. Our
Fannie May and Fanny Farmer stores had average annual sales of approximately
$286,000 in fiscal 1998 and achieved average annual same store sales growth of
4.0% during the past five years. Our Sweet Factory stores had average annual
sales of approximately $304,000 for the twelve month period ended December 31,
1998. Historically, Sweet Factory has experienced an increase in same store
sales, although, since 1997, same store sales have declined. Our Laura Secord
stores had average annual sales of approximately $286,000 over the same period.
Laura Secord experienced negative same store sales results in the first and
second quarters of 1999. We believe there are opportunities to improve the
performance of our Sweet Factory stores and Laura Secord stores by implementing
many of the same retail store strategies that improved the operations of our
Fannie May and Fanny Farmer stores.
52
<PAGE>
INCREASE PRODUCT AVAILABILITY THROUGH COMPANY-OPERATED STORES AND
THIRD-PARTY RETAIL PROGRAMS. Our strategy of increasing product availability is
based on cross-marketing Fannie May and Sweet Factory product offerings in our
Company-operated stores as well as increasing sales of all of our brands through
third-party retail channels.
- COMPANY-OPERATED STORES. We believe that our recent acquisition of Sweet
Factory provides us with an effective opportunity to sell our Fannie May
boxed chocolates to a broader consumer market. Prior to the acquisition,
Sweet Factory's stores had limited boxed chocolate offerings. Since the
acquisition, we have begun selling some of our Fannie May boxed chocolates
in our Sweet Factory stores. We also intend to distribute some Sweet
Factory products through our Fannie May and Fanny Farmer stores.
- THIRD-PARTY RETAIL PROGRAMS. We continue to pursue several third-party
retail programs designed to make our Fannie May and Fanny Farmer brands
more readily available to customers in new and existing markets. We have
implemented a two-tiered distribution and pricing strategy to capitalize
on our strong Fannie May and Fanny Farmer brand names. Our strategy is to
position our third-party retail programs under the Fannie May brand at a
higher retail price point for the specialty retail market while offering
our Fanny Farmer brand at a lower retail price point more appropriate for
the mass market. As a result of this strategy, we have increased sales
through our Fannie May and Fanny Farmer third-party retail programs from
$13.0 million in fiscal 1994 to $18.2 million in fiscal 1998. Our strategy
of increasing product availability through third-party retail programs
includes the following key elements:
- expanding our Fannie May third-party retail programs which (1) service
approximately 1,200 grocery, drug and variety stores in the greater
Chicago metropolitan area, on a year-round basis, and (2) target
department stores, specialty shops and card and gift stores nationwide,
particularly during the Christmas, Valentine's Day and Easter seasons;
- expanding our Fanny Farmer third-party retail program which sells to the
mass market during the peak holiday seasons through approximately 5,000
grocery stores, drug stores and mass merchandisers nationwide;
- distributing certain Sweet Factory products through selected third-party
retailers who currently carry our Fannie May or Fanny Farmer branded
products; and
- continuing to expand Laura Secord's distribution in Canada through agency
accounts and sales to the combo stores.
GROW NON-RETAIL SALES. We have developed several non-retail sales channels
for our Fannie May and Fanny Farmer brands, including our:
- quantity order program, through which we market our products to
approximately 43,000 organizations for corporate gift giving or member
purchases;
- mail order program, through which customers can order products over the
internet at our 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
- fundraising program, through which we sell products to schools and
non-profit organizations nationwide for resale to their supporters.
We believe that these non-retail sales channels provide potential future
sales growth for all of our brands without the overhead generally associated
with maintaining a retail store presence. We intend to make certain Sweet
Factory products available through our quantity order, mail order and
fundraising programs. We also intend to explore developing non-retail sales
programs to increase the sale of Laura Secord products in Canada.
53
<PAGE>
PURSUE STRATEGIC ACQUISITIONS. We intend to continue to pursue selective
acquisitions that complement or provide further opportunities to use our brands,
manufacturing resources and/or distribution systems.
PRODUCTS
We manufacture over three-quarters of the products that we sell under our
Fannie May and Fanny Farmer brands and maintain proprietary specifications for a
significant amount of the confectionery products, such as seasonal novelties,
that we purchase from other sources for resale. Our manufactured products
include more than 125 items, including our best selling Pixie, Mint Meltaway and
Trinidad lines. Products sourced from vendors for resale under our Fannie May
and Fanny Farmer brands include assorted nuts, hard candy, novelties, ice cream
and an extensive line of gift items. We believe that the superior quality and
freshness of our products differentiates us from many other confectionery
manufacturers. We rely on proven recipes, many dating back to the 1920s, for our
traditional chocolates. Because we rely on freshness rather than preservatives
to ensure a high-quality product, it is our policy to destroy products not sold
within specified periods.
Our Sweet Factory stores sell 150 to 200 different candies in a self-serve,
pick and mix bulk format. With the exception of novelty, gift, count goods and
pre-packaged items, most of Sweet Factory's products are sold for a single price
per pound. For the twelve-month period ended August 29, 1998, bulk products
represented 79.3% of Sweet Factory's retail sales. The majority of bulk products
are non-chocolate items such as gourmet jelly beans, gummi bears, hard candies
and licorice. Our Sweet Factory stores also sell nationally branded count goods,
gifts and novelty items. Chocolate items comprise approximately 16% of Sweet
Factory's product mix, of which boxed chocolates represent a negligible share.
We purchase substantially all of the products that we sell in our Sweet Factory
stores from independent distributors and manufacturers that deliver the products
directly to Sweet Factory's stores. We believe that our Sweet Factory stores
will provide us with an effective distribution platform for our Fannie May boxed
chocolates and that the sale of Fannie May products in these stores will
increase both revenues in Sweet Factory's stores and our output of manufactured
products.
Our Laura Secord stores sell approximately 375 different candies, including
a variety of popular boxed chocolates and individual chocolate pieces, fudge,
ice cream, nuts, dietetic candy and novelty and other items.
- For the year ended December 31, 1998, chocolate items accounted for
approximately 72% of Laura Secord's net sales. We entered into a co-pack
agreement with Nestle on June 8, 1999 pursuant to which Nestle has agreed
to produce for sale to us for a one-year period substantially all of the
boxed chocolates and other chocolate confectionery items that we will sell
in our Laura Secord stores. During this period, we intend to transition
Laura Secord's chocolate production to our Chicago, Illinois manufacturing
facility. We believe that we can capture significant efficiencies by
consolidating Laura Secord's chocolate production with our existing
manufacturing operations.
- For the year ended December 31, 1998, premium scooped ice cream accounted
for approximately 21% of Laura Secord's net sales. Our management believes
that ice cream, due to its impulse nature and positioning at the perimeter
of Laura Secord stores, acts as an important consumer pull for Laura
Secord stores. We entered into a two year supply agreement with an
affiliate of Nestle on June 8, 1999 pursuant to which such affiliate will
supply all of the ice cream requirements of our Laura Secord stores. We
have the right under the supply agreement to extend the term for two
additional two-year periods.
- For the year ended December 31, 1998, novelty items made primarily for the
Easter, Christmas and Valentine's Day holiday seasons accounted for
approximately 7% of Laura Secord's net sales. Laura Secord sells more than
150 varieties of novelty and other items.
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<PAGE>
OPERATIONS
MANUFACTURING AND PRODUCTION. All of our manufacturing operations are
located in our headquarters facility in Chicago, Illinois. Our headquarters
facility includes space for manufacturing, cold and dry storage and office and
administrative functions. As part of the cost savings initiatives we have
undertaken following the acquisition of Sweet Factory, we closed on March 31,
1999 Sweet Factory's office, manufacturing and distribution facilities in San
Diego, California and consolidated such operations into our Chicago, Illinois
headquarters facility.
The manufacturing process at our headquarters facility is split functionally
into cooking, enrobing and packaging. Each area is managed by one department
head who in turn reports to the plant manager. Additional departmental detail is
shown below.
- COOKING. There are separate cooking areas in the plant for our 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 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 plant are
hand-packed into boxes for sale through our Company-operated retail or
other distribution channels. We utilize 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
our Company-operated stores so that customers can select their own
assortments.
Our plant currently operates on a seasonal basis with the busiest
seven-month period commencing after Labor Day and running through Easter. After
Easter, we reduce 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 to our stores, we maintain 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 our products. Employees generally
fill orders daily to allow weekly deliveries to each of our Company-operated
Fannie May and Fanny Farmer retail locations and on an "as needed" basis to
others. Our fleet of 24 trucks services all of our Fannie May and Fanny Farmer
stores, with the exception of our Florida, Minnesota and North Dakota store
locations. Our trucks are refrigerated in order to provide appropriate shipping
conditions for pan candy, pre-boxed chocolates and necessary shop supplies.
Independent distributors, parcel services and selected common carriers and
freight forwarding companies supply all of our other sales channels and stores,
including all of our Sweet Factory and Laura Secord stores.
SUPPLIERS AND PURCHASING. Our primary raw materials include chocolate
coatings, nutmeats, natural sweeteners, such as corn syrup and sugar, and dairy
products, including sweetened-condensed milk, high-butterfat cream and butter.
Except as set forth below, we have long-standing relationships with our
suppliers for each of these products to ensure quality, consistency and cost
control. Written specifications are provided to our suppliers and certificates
of analysis must accompany incoming shipments. Peter's Chocolate Company, a
division of Nestle Company, Inc., has been our primary
55
<PAGE>
chocolate coating supplier for over 50 years and accounted for approximately
one-half of our chocolate purchases in fiscal 1998 for our Fannie May and Fanny
Farmer branded products. Merckens Chocolate Company, a division of
Archer-Daniels-Midland Company, also has been one of our leading suppliers of
chocolate coating for over 20 years, and accounted for approximately one-third
of our chocolate purchases in fiscal 1998 for our Fannie May and Fanny Farmer
branded products. We believe that we are one of the leading bulk customers, by
volume, of each of Peter's and Merckens. We currently have short term, less than
one year, supply agreements with each of Peter's and Merckens. We recently
entered into a two year supply agreement with Blommer Chocolate Company, a
company with whom we have not had a prior business relationship. In fiscal 1999,
we expect to purchase approximately 50%, 40% and 10% of our chocolate coatings
from Blommer, Merckens and Peter's, respectively. All chocolate coatings
prepared for us are proprietary and are produced according to our recipes.
MARKETING AND SALES
We sell our candy products through three channels: (1) Company-operated
retail, (2) third-party retail and (3) non-retail.
COMPANY-OPERATED RETAIL. As of May 29, 1999, we operated 233 Fannie May
stores, 74 Fanny Farmer stores, 253 Sweet Factory stores, and 175 Laura Second
stores. These stores were located in 40 states, the District of Columbia, Puerto
Rico, and 9 provinces of Canada as follows:
<TABLE>
<CAPTION>
FANNIE FANNY SWEET LAURA TOTAL
STATE/PROVINCE MAY FARMER FACTORY SECORD STORES
- --------------------------------------------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Illinois..................................... 159 -- 6 -- 165
Ontario...................................... -- -- -- 88 88
California................................... -- -- 69 -- 69
Quebec....................................... -- -- -- 52 52
New York..................................... -- 18 15 -- 33
Florida...................................... 10 2 17 -- 29
Indiana...................................... 24 -- 3 -- 27
Minnesota.................................... 3 23 1 -- 27
Michigan..................................... 8 9 6 -- 23
Washington................................... -- -- 16 -- 16
Ohio......................................... -- 3 10 -- 13
Texas........................................ -- -- 13 -- 13
Alberta...................................... -- -- -- 12 12
Massachusetts................................ -- 5 7 -- 12
Pennsylvania................................. 6 -- 6 -- 12
Wisconsin.................................... 6 6 -- -- 12
Missouri..................................... 7 -- 2 -- 9
New Jersey................................... 1 -- 8 -- 9
Arizona...................................... -- -- 8 -- 8
Nevada....................................... -- -- 8 -- 8
Virginia..................................... 4 -- 4 -- 8
Maryland..................................... 2 -- 5 -- 7
Manitoba..................................... -- -- -- 6 6
British Columbia............................. -- -- -- 5 5
Colorado..................................... -- -- 5 -- 5
Georgia...................................... -- -- 5 -- 5
Hawaii....................................... -- -- 5 -- 5
Iowa......................................... 2 3 -- -- 5
Oregon....................................... -- -- 5 -- 5
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
FANNIE FANNY SWEET LAURA TOTAL
STATE/PROVINCE MAY FARMER FACTORY SECORD STORES
- --------------------------------------------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Connecticut.................................. -- -- 4 -- 4
District of Columbia......................... 1 -- 3 -- 4
New Brunswick................................ -- -- -- 4 4
Nova Scotia.................................. -- -- -- 4 4
Louisiana.................................... -- -- 3 -- 3
New Hampshire................................ -- 2 1 -- 3
Saskatchewan................................. -- -- -- 3 3
Tennessee.................................... -- -- 3 -- 3
Kansas....................................... -- -- 2 -- 2
Kentucky..................................... -- -- 2 -- 2
Mississippi.................................. -- -- 2 -- 2
New Mexico................................... -- -- 2 -- 2
Rhode Island................................. -- 2 -- -- 2
Alabama...................................... -- -- 1 -- 1
Delaware..................................... -- -- 1 -- 1
Nebraska..................................... -- -- 1 -- 1
Newfoundland................................. -- -- -- 1 1
North Carolina............................... -- -- 1 -- 1
North Dakota................................. -- 1 -- -- 1
Puerto Rico.................................. -- -- 1 -- 1
South Carolina............................... -- -- 1 -- 1
Utah......................................... -- -- 1 -- 1
--
--- --- --- ---
Total...................................... 233 74 253 175 735
--
--
--- --- --- ---
--- --- --- ---
</TABLE>
In fiscal 1998, sales through our Fannie May and Fanny Farmer stores
accounted for $91.5 million, or 72.2%, of our net sales. While our Fannie May,
Fanny Farmer and Sweet Factory stores co-exist in certain states, such stores
generally do not compete in the same local markets. Fannie May stores typically
are found in strip centers and shopping malls or as street-front units and
stand-alone roadside sites. Fanny Farmer and Sweet Factory stores typically are
located in shopping malls. In addition, Sweet Factory also has opened stores in
airports, railroad stations, specialty centers and selected street locations and
developed kiosks in malls, sports venues and other public areas.
Our Fannie May and Fanny Farmer stores had average annual sales of
approximately $286,000 in fiscal 1998 and achieved average annual same store
sales growth of 4.0% during the past five fiscal years. Our Sweet Factory stores
had average annual sales of approximately $304,000 for the twelve-month period
ended December 31, 1998. Historically, Sweet Factory has experienced an increase
in same store sales, although, since 1997, same store sales have declined. Our
Laura Secord stores had average annual sales of approximately $286,000 over the
same period. Laura Secord experienced negative same store sales in the first and
second quarters of 1999. We believe there are opportunities to improve the
performance of our recently acquired Sweet Factory and Laura Secord stores by
implementing many of the same retail store strategies that improved the
operations of our Fannie May and Fanny Farmer stores. In addition, we believe
that the acquisition of Sweet Factory provides us with an opportunity to
increase product availability nationwide by cross-marketing Fannie May and Sweet
Factory product offerings in Company-operated stores. We anticipate that the
sale of our Fannie May products in our Sweet Factory stores will increase both
revenues in Sweet Factory's stores and our output of manufactured products.
Prior to the acquisition, the Sweet Factory stores had limited boxed chocolate
offerings. Since the acquisition, we have begun selling some of our Fannie May
boxed chocolates in our Sweet Factory stores. We also intend to distribute
certain non-chocolate Sweet Factory products through our Fannie May and Fanny
Farmer stores.
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<PAGE>
We own 33 Fannie May stores and lease the remainder of our stores. These
owned stores typically are in stand-alone roadside structures and tend to be
among our highest grossing sales locations. Our leased stores are in the
following locations: 479 in shopping malls, 103 in strip centers, 55 in street-
front units and 65 in other locations, including stadiums and airports. Lease
terms and rates vary by location with the typical lease providing an average
seven year term with a minimum base rent plus additional rent based on a
percentage of sales and common area charges. Historically, we have been able to
renew our store leases upon expiration.
The size of our Fannie May, Fanny Farmer and Sweet Factory stores, including
both leased and Company-owned stores, excluding carts and kiosks, generally
ranges from 600 square feet mall locations to 2,900 square feet stand-alone
roadside locations, with an average store size of approximately 825 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. Fannie May and Fanny Farmer customers
are served primarily by store staff, although many of the larger Fannie May and
Fanny Farmer stores also have a self-service section with prepacked boxes. Sweet
Factory's stores are primarily self-serve. We control each store's design,
signage and layout to maintain consistency among all Fannie May, Fanny Farmer
and Sweet Factory stores.
Our Laura Secord Company-operated retail stores consist of both classic
stores and combo stores. Classic stores are traditional Laura Secord stores that
offer Laura Secord chocolates, premium scooped ice cream and other novelty
products. A typical layout for a classic store consists of a central island
containing individual chocolates, novelties, an ice cream scooping area and cash
registers surrounded by wall displays of packaged chocolates and novelties. As
of December 31, 1998, Laura Secord operated 160 classic stores averaging
approximately 765 square feet in size. These stores had average annual sales of
approximately $286,000 in 1998.
Combo stores are co-branded Laura Secord and Hallmark retail stores that
sell Laura Secord products and gifts together with Hallmark greeting cards and
gifts in a single, integrated unit. The Laura Secord portion of the store
resembles a classic store in that it includes packaged chocolate displays as
well as an individual chocolate and ice cream scooping counter area. The
Hallmark portion of the floor space is primarily comprised of display racks of
Hallmark greeting cards. The combo stores are operated as a joint venture
between Laura Secord and an affiliate of Hallmark. Laura Secord sells its
products to the combo stores at wholesale prices and accounts for its interest
in the joint venture using equity accounting principles. Laura Secord is
responsible for the management of the stores and receives a management fee for
such services equal to 4% of net sales. Profits are split evenly between Laura
Secord and Hallmark, and each party receives a manufacturer's margin on the
products purchased by the joint venture. As of December 31, 1998, Laura Secord
operated 18 combo stores averaging approximately 3,400 square feet in size.
These stores had average annual sales of approximately $462,000 in 1998.
Since fiscal 1993, we have opened 41 new Fannie May and Fanny Farmer stores
and closed 157 Fannie May and Fanny Farmer stores, most of which were
unprofitable. The majority of the closed stores had been acquired by us in
fiscal 1992 as part of our 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 in our Fannie May and Fanny Farmer stores increased 4.5%, 3.4%, 2.6%, 5.2%
and 4.2% in fiscal 1994, 1995, 1996, 1997 and
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<PAGE>
1998, respectively. Company-operated Fannie May and Fanny Farmer store openings
and closings for fiscal 1994, 1995, 1996, 1997 and 1998 are set forth below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------
AUGUST 31, 1994 AUGUST 26, 1995 AUGUST 31, 1996 AUGUST 30, 1997 AUGUST 29, 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
OPENINGS:
Fannie May..................... 8 7 4 4 9
Fanny Farmer................... 4 5 0 0 0
-- -- -- -- --
Total........................ 12 12 4 4 9
-- -- -- -- --
-- -- -- -- --
CLOSINGS:
Fannie May..................... 23 10 7 6 1
Fanny Farmer................... 22 30 29 16 13
-- -- -- -- --
Total........................ 45 40 36 22 14
-- -- -- -- --
-- -- -- -- --
</TABLE>
Our management plans to continue its emphasis on improving store mix rather
than store expansion for the near future, and, over the next four fiscal years,
intends to open approximately 40 new stores, including approximately 20 Sweet
Factory stores, 10 Fannie May stores and 10 Laura Secord stores, and close
approximately 40 additional unprofitable stores, including approximately 20
Sweet Factory stores and 1 Laura Secord store.
THIRD-PARTY RETAIL. Through our third-party retail channel, we market our
Fannie May and Fanny Farmer branded products to grocery stores, drug stores,
card and gift stores, department stores and other variety stores through our
frozen fresh, specialty market and mass market programs. We also market our
Laura Secord branded products through approximately 1,300 drug and department
stores located throughout Canada. These programs are designed to make our Fannie
May, Fanny Farmer and Laura Secord branded products more readily available to
consumers in new and existing markets. Within the mid-priced segment of the
boxed chocolate market, our management has implemented a two-tiered distribution
and pricing strategy to differentiate our Fannie May and Fanny Farmer brand
names. We utilize the Fannie May brand for our higher price point frozen fresh
and specialty markets programs and have positioned the Fanny Farmer brand at a
lower price point for the mass market.
Under the frozen fresh program, we distribute Fannie May and Fanny Farmer
branded frozen products to retailers who then maintain the products in freezer
display cases for sale to their customers. We 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 our best-selling assortments through independent retailers on a
year-round basis. We have 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 our frozen fresh sales. These
accounts generally purchase Fannie May branded products from us 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 our net sales.
In fiscal 1996, we 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, we have 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 our net
sales.
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<PAGE>
In fiscal 1997, we announced the roll-out of our specialty markets program
through which we market products 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 chocolates
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. Pursuant to an agreement with Hallmark Cards, Inc.,
we recently began selling Fannie May boxed chocolates through many of Hallmark's
approximately 5,000 Gold Crown stores during the holiday seasons. For fiscal
1998, specialty markets program sales accounted for $0.5 million, or 0.4% of our
net sales.
We intend to strengthen our third-party retail product line by making
certain of Sweet Factory's products available through selected third-party
retailers who currently carry our Fannie May or Fanny Farmer branded products.
We also intend to continue to expand Laura Secord's third-party retail sales
through agency accounts and sales to the combo stores.
NON-RETAIL. Our non-retail channel consists of sales of our Fannie May and
Fanny Farmer branded products through our 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, we are responsible for all of the
administrative details and timely delivery of product. Historically, we have
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. Our 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. We also have targeted fundraising organizations, including over 90,000
schools throughout the United States, for our product offerings. For fiscal
1998, quantity order and fundraising sales accounted for $10.6 million, or 8.4%,
of our net sales.
In addition, we sell our Fannie May and Fanny Farmer branded products
through a mail order program through which customers can order products over the
internet at our 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. We send Fannie May mail order catalogs to established
and prospective customers during key selling seasons. Mail order catalogs also
are made available to the general public through our 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 our net sales. We believe that
this growth is the result of improved product selection and catalog presentation
as well as more effective database management. We intend to strengthen our
non-retail product line by making some of Sweet Factory's non-chocolate products
available through our quantity order, mail order and fundraising programs. We
also intend to explore developing non-retail sales programs to increase the sale
of Laura Secord products in Canada.
COMPETITION
We compete with numerous local and national businesses that manufacture,
distribute or retail boxed chocolates and other confectionery products. We also
compete 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 our products.
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<PAGE>
Our Fannie May and Fanny Farmer products generally compete in the quality
boxed chocolate market, which our management believes can be divided into
premium, mid-priced and low-priced segments. The low-priced segment in the
United States, 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.
We believe that our Fannie May and Fanny Farmer products compete primarily in
the mid-priced segment though we also compete against Russell Stover Candies and
other lower-priced suppliers in certain distribution channels.
The mid-priced boxed chocolate segment in the United States is generally
comprised of those chocolates which retail for between $10.00 and $18.00. The
competition for our Fannie May and Fanny Farmer branded products in the
mid-priced segment consists primarily of local confectionery companies against
whom we compete through Company-operated stores on the basis of price and
quality. We believe that See's Candies, a subsidiary of Berkshire Hathaway Inc.,
is the largest participant in the mid-priced segment.
The premium boxed chocolate segment in the United States generally is
comprised of chocolates retailing in excess of $18.00. The leading participant
in this segment is Godiva Chocolatier, Inc. Other brands in this market include
Perugina, Tobler and Lindt. Most of these chocolates are imported from abroad
and, despite their high prices, our management does not believe that such brands
provide the same freshness as our chocolates. We compete in the premium segment
on the basis of quality and packaging primarily through third-party retail sales
of our Fannie May branded products in department stores.
There are only a few national or regional confectionery retailers that
directly compete with our Sweet Factory stores in the bulk candy retail market.
The largest of these competitors are Mr. Bulky, Candy Express, FAO Schweetz and
Sweets From Heaven. Sweet Factory also competes with other confectionery
retailers, including grocery stores, drug stores and toy stores.
The competition for our Laura Secord branded boxed chocolates consists
primarily of (1) Purdy's, a private, family-owned Canadian chocolate retailer,
which has an estimated 50 stores located primarily in the provinces of British
Columbia and Alberta, and (2) Godiva which has an estimated six stores in
Canada. In the scooped ice cream segment, our management believes that Laura
Secord competes primarily with Baskin Robbins, a scooped ice cream store chain
with approximately 270 franchised locations throughout Canada, and numerous
independent retailers.
EMPLOYEES
As of May 29, 1999, we employed approximately 3,329 people, of which 1,287
worked in Fannie May stores, 340 worked in Fanny Farmer stores, 1,017 worked in
Sweet Factory stores, and the remainder worked primarily in our Chicago,
Illinois headquarters facility and our Bensalem, Pennsylvania warehouse and
distribution facility. Of the total number of employees, 611 were salaried.
Typically, the number of employees increases by approximately 1,000, many of
whom work part-time in our Company-operated retail stores, during periods of
high seasonal retail demand in our second and third fiscal quarters. As of May
29, 1999, over one-half of the hourly store personnel were employed on a
part-time basis. As of May 29, 1999, approximately 800 of our employees were
members of one of the various labor unions that represent our employees. We
currently are subject to seven collective bargaining agreements, all of which
expire on or before March 31, 2003. None of our Sweet Factory or Laura Secord
retail store employees are represented by labor unions. Our management generally
considers our employee relations to be good. See "Risk Factors--Dependence on
Key Personnel" and "--Labor Relations."
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<PAGE>
INTELLECTUAL PROPERTY
We own numerous trademarks. The names Fannie May, Fanny Farmer and Laura
Secord and product names, including Pixie and Trinidad, are registered
trademarks of ours. Our trademarks are material to the sale of our 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.
Our Sweet Factory subsidiary has an exclusive license from United Sweet
Factory Limited, the owner of the "Sweet Factory" trademark, to operate stores
under the "Sweet Factory" name and design in the United States and Mexico.
Although the current license period under the license agreement with United
Sweet Factory Limited expires in the year 2000, Sweet Factory has the option to
extend the license for an additional ten year period by paying a renewal fee of
$825,000. Sweet Factory has the option to extend the license for two additional
ten-year periods to the year 2030 by paying a renewal fee of $825,000 for each
such additional extension. See "Risk Factors--Trademarks."
PROPERTIES
As of May 29, 1999, on a pro forma basis we operated 233 Fannie May stores,
74 Fanny Farmer stores, 253 Sweet Factory stores and 175 Laura Secord stores. Of
the 233 Fannie May stores, 33 are owned by us and 200 are leased by us. We lease
all of our Fanny Farmer, Sweet Factory and Laura Secord stores. Within four
years following May 29, 1999, approximately 58% of our retail store leases are
due to expire. We believe that we will be able to renew expiring leases at
reasonable rates in the future, but we cannot assure you that we will be able to
do so. See "Risk Factors--Dependence on Real Estate Leases; Continuing
Obligations on Leases."
In addition to our Company-operated stores, we have three other principal
properties: (1) an approximately 320,000 square foot manufacturing, storage and
headquarters facility that we own in Chicago, Illinois; (2) an approximately
112,000 square foot warehouse and distribution facility that we lease in
Chicago, Illinois; and (3) an approximately 17,000 square foot warehouse and
distribution facility that we own in Bensalem, Pennsylvania. At our Chicago,
Illinois 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 our Chicago warehouse
and distribution facility expires in June 2000. Our management believes that
substantially all of our property and equipment is in good condition and that we
have sufficient capacity to meet our current manufacturing and distribution
requirements, as well as our anticipated Laura Secord production requirements
following the expiration of the one-year term of our co-pack agreement with
Nestle.
LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation incidental to our
business. We are not a party to any pending or threatened legal proceeding which
our management believes would have a material adverse effect on our results of
operations or financial condition.
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MANAGEMENT
DIRECTORS AND MANAGEMENT EMPLOYEES
The following table and summary below set forth certain information with
respect to our directors and management employees as of the date of this
prospectus.
<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.......... 40 President and Chief Operating Officer*
Donna M. Snopek.......... 40 Vice President--Finance and Accounting and Secretary*
David B. Williams........ 51 Vice President--General Manager of Boxed Chocolate Brands
Alan W. Petrik........... 46 Vice President--Business Systems
Ricky L. Lelli........... 47 Vice President--Operations
Joseph Chipollini........ 48 Vice President--Retail Operations
Nicholas Podoba.......... 53 Vice President--Human Resources
John W. Jordan II........ 51 Director*
Adam E. Max.............. 40 Director, Vice President, Assistant Treasurer and Assistant Secretary*
Jeffrey Rosen............ 50 Director*
Brant Binder............. 33 Director*
</TABLE>
- ------------------------
* Reflects positions held with both us and Holdings.
MR. QUINN has served as our Chairman of the Board and Chief Executive
Officer since our 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 The Jordan
Company. 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 our President and Chief Operating Officer since
1996. Mr. Shepherd joined us 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 17 years of general management, sales and marketing experience
in the confectionery industry. Prior to joining us, 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 our Vice President of Finance and Accounting since
1996 and as our Secretary since 1995. Ms. Snopek joined us in 1993 as
Controller. Ms. Snopek has over 19 years experience in various finance and
accounting positions. Prior to joining us, Ms. Snopek worked for the NutraSweet
Company, where she served as Planning and Analysis Director.
MR. WILLIAMS was hired in April 1999 as our Vice President--General Manager
of Boxed Chocolate Brands. Mr. Williams has over 29 years of experience in the
food and beverage industry with The Quaker Oats Company. Mr. Williams served as
Vice President and Chief Customer Officer, Gatorade, U.S. for The Quaker Oats
Company from 1993 until joining us.
MR. PETRIK has served as our Vice President of Business Systems since 1997.
Mr. Petrik has been with us for 19 years and has held various senior management
positions with us, including Vice President of Manufacturing and Vice President
of Operations.
MR. LELLI has served as our Vice President of Operations since 1997. Mr.
Lelli joined us in 1994 as Director of Manufacturing. Mr. Lelli has over 23
years of experience in the food processing industry. Prior to joining us, Mr.
Lelli worked for five years at The Masterson Company, a confectionery company,
where he served as Vice President of Manufacturing.
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MR. CHIPOLLINI has served as our Vice President of Retail Operations since
April 1998. Mr. Chipollini joined us in April 1995 as East Coast Regional
Manager. Prior to joining us, Mr. Chipollini worked for four years at Crystal
Brands, where he served as a District Manager.
MR. PODOBA has served as our Vice President of Human Resources since he
joined us in October 1998. Prior to joining us, Mr. Podoba worked for seven
years at Northwestern Memorial Faculty Foundation, where he served as Director
of Human Resources.
MR. JORDAN has served as one of our directors since our acquisition by
Holdings in 1991. Mr. Jordan is a managing director of The Jordan Company, 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 The Jordan Company, as well as other
privately-held companies.
MR. MAX has served as one of our directors since our acquisition by Holdings
in 1991. Mr. Max is a managing director of The Jordan Company, which he joined
in 1986. Mr. Max is also a director of Rockshox, Inc.
MR. ROSEN has served as one of our directors since 1997. Mr. Rosen is a
partner in the law firm of O'Melveny & Meyers LLP, counsel for TCW Capital.
MR. BINDER has served as one of our directors since September 1998. Mr.
Binder is a Vice President of TCW Capital.
SHAREHOLDERS AGREEMENT
In connection with the formation of Holdings and its acquisition of us in
1991, we, Holdings, affiliates of The Jordan Company and TCW Capital, Jackson
National Life Insurance Company and certain individuals listed on the signature
pages thereto as members of The Jordan Group entered into a shareholders
agreement dated as of October 30, 1991, as amended by the First Amendment
thereto dated as of July 2, 1997, which contains provisions relating to our
governance and the governance of Holdings. These provisions provide for, among
other things, the election to each of our and Holdings' Boards of Directors of
three directors nominated by affiliates of The Jordan Company and two directors
nominated by affiliates of TCW Capital. Messrs. Jordan, Quinn and Max are the
directors nominated by the affiliates of The Jordan Company and Messrs. Rosen
and Binder are the directors nominated by the affiliates of TCW Capital. See
"Principal Stockholders" and "Certain Transactions-- Shareholders Agreement."
BOARD OF DIRECTORS--INDEMNIFICATION AND COMPENSATION
INDEMNIFICATION. Our By-Laws authorize us to indemnify our present and
former directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding upon receipt of
an undertaking by or on behalf of such individuals to repay such amounts if so
required.
INDEMNIFICATION AGREEMENTS. We have entered into indemnification agreements
with each of our directors. The indemnification agreements provide that, except
in limited circumstances, we will indemnify our directors against liabilities,
including settlements, and expenses actually and reasonably incurred by them in
connection with any threatened or pending legal action, proceeding or
investigation to which any of them is, or is threatened to be, made a party by
reason of their status as our director, officer or agent, or serving at our
request of any other capacity for or on our behalf of us; provided that:
(1) such director acted in good faith and in a manner not opposed to our
best interest;
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(2) with respect to any criminal proceedings, such director had no
reasonable cause to believe his or her conduct was unlawful;
(3) such director is not finally adjudged to be liable for negligence or
misconduct in the performance of his or her duty to us, unless the court
views in light of the circumstances that the director is nevertheless
entitled to indemnification; and
(4) the indemnification does not relate to any liability arising under
Section 16(b) of the Exchange Act or the rules or regulations promulgated
thereunder.
With respect to any action brought by us or in our right, directors also may
be indemnified, to the extent not prohibited by applicable laws or as determined
by a court of competent jurisdiction, against costs and expenses actually and
reasonably incurred by them in connection with such action if they acted in good
faith and in our best interest.
Insofar as indemnification of liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
our By-Laws, the indemnification agreements or otherwise, such indemnification
may be unenforceable as being against public policy.
DIRECTOR COMPENSATION. We pay each of our directors a quarterly fee of
$2,500. In fiscal 1998, we also paid Mr. Quinn a $52,000 consulting fee. See
"Certain Transactions--Director's Consulting Fee and TCW Affiliates' Expense
Reimbursement." We also reimburse directors for their travel and other expenses
incurred in connection with attending meetings of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid or accrued by us during each of the three most recent fiscal years to our
chief executive officer and each of our executive officers whose total annual
salary and bonus for each of such fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING SARS
(#)
ANNUAL COMPENSATION -----------------
--------------------------------- OTHER ANNUAL LONG-TERM
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR ($) ($) ($) AWARDS
- --------------------------------------------------- --------- ---------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Thomas H. Quinn.................................... 1998 -- -- $ 52,000(2) --
Chairman of the Board and 1997 -- -- 52,000(2) --
Chief Executive Officer 1996 -- -- 52,000(2) --
Ted A. Shepherd.................................... 1998 $ 235,000 $ 200,000 -- 9.75(4)
President and Chief Operating 1997 221,583 311,000 -- --
Officer(3) 1996 200,163 101,491 -- 7.00(4)
Donna M. Snopek.................................... 1998 121,167 67,500 -- 1.00
Vice President--Finance and Accounting 1997 110,167 103,575 -- --
and Secretary(5) 1996 93,500 24,310 -- 3.00
</TABLE>
- ------------------------
(1) In April 1999, we hired Mr. David Williams to serve as our Vice President
and General Manager of Boxed Chocolate Brands. His annual salary is $207,000
and he has been granted five stock appreciation rights pursuant to Holdings'
SAR Plan.
(2) Reflects a consulting fee we paid Mr. Quinn in each of fiscal 1998, 1997 and
1996 in lieu of salary. See "Certain Transactions--Director's Consulting Fee
and TCW Affiliates' Expense Reimbursement."
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<PAGE>
(3) Reflects positions held by Mr. Shepherd since March 1996. During fiscal
1996, Mr. Shepherd served as our Vice President of Sales and Marketing.
(4) Holdings subsequently has converted all of Mr. Shepherd's 19.75 SARs into
19.75 shares of Holdings' Class A Common Stock. See "--Holdings' 1998 Stock
Bonus Plan."
(5) Reflects position held by Ms. Snopek since September 1996. During fiscal
1996, Ms. Snopek served as our Secretary and Vice President--Controller.
HOLDINGS' STOCK APPRECIATION RIGHTS PLAN
The Fannie May Holdings, Inc. Stock Appreciation Rights Plan was adopted by
the Board of Directors of Holdings in October, 1991 to afford selected employees
of Holdings and its subsidiaries, including us, 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 4.9%, of Holdings
Common Stock, on a fully diluted basis. As of the date of this prospectus, 35
SARs were outstanding under the SAR Plan, with 23 SARs issued to our current
employees and the balance held by former employees.
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 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 some 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:
- certain public offerings of Holdings Common Stock;
- 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;
- the sale of all or substantially all of the assets of Holdings; or
- 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 (1) "Cause," as defined in the SAR Plan, at any time or (2)
any other reason except death or disability within a prescribed period, known as
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 or upon the death or disability of a holder at any time, 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 exceeds the dollar amount of all debt and preferred stock obligations
of Holdings. The value of Holdings is to be determined by reference to certain
book values and earnings measures established by the SAR Plan. At Holdings'
option, the repurchase amounts may be paid by a note payable over three years.
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<PAGE>
SAR GRANTS IN FISCAL 1998
The following table sets forth information with respect to SARs granted
during fiscal 1998 by Holdings to our executive officers.
<TABLE>
<CAPTION>
SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------
NUMBER OF % OF TOTAL SARS
SHARES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME SARS GRANTED FISCAL YEAR(1) ($/SH) DATE(2) PRESENT VALUE(3)
- ----------------------------------- ------------ --------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Ted A. Shepherd.................... 9.75 61.9% $0 -- $0
Donna M. Snopek.................... 1.00 6.3% 0 -- 0
</TABLE>
- ------------------------
(1) A total of 15.75 SARs were granted to employees in fiscal 1998 pursuant to
the SAR Plan. Five SARs were granted to Mr. Williams in April, 1999.
(2) SARs issued pursuant to the SAR Plan have no expiration date. However, all
or a part of an SAR is automatically terminated under certain circumstances
in connection with an employee's termination of employment with us.
(3) Based on the formulation specified in the SAR agreements of the respective
executive officers. The actual value of an SAR is subject to and not
determinable until the occurrence of either (a) a Cash Out Event or (b) in
some circumstances, the call or put election of Holdings or the holder,
respectively, following the termination of the holder's employment with us.
AGGREGATED SAR EXERCISES IN FISCAL YEAR 1998 AND 1998 FISCAL YEAR-END SAR VALUES
The following table sets forth information with respect to SAR exercises
during fiscal 1998 by our executive officers and the number of shares of
Holdings Common Stock underlying SARs held by each of our executive officers and
the value of such executive officers' exercisable and unexercisable SARs on
August 29, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SARS AT FISCAL IN-THE-MONEY SARS AT
SHARES ACQUIRED YEAR-END, FISCAL YEAR-END,
ON EXERCISE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#)(1) VALUE REALIZED ($) (#) (#)(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, however, as of September 30,
1998, Holdings issued 19.75 shares of its Class A Common Stock to Mr.
Shepherd pursuant to Holdings' 1998 Stock Bonus Plan in consideration for
the cancellation of Mr. Shepherd's 19.75 SARs. See "--Holdings 1998 Stock
Bonus Plan."
(2) Based on the formulation specified in the SAR agreements of the respective
executive officers. 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
some circumstances, the call or put election of Holdings or the holder,
respectively, following the termination of the holder's employment with us.
HOLDINGS' 1998 STOCK BONUS PLAN
The Fannie May Holdings, Inc. 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
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<PAGE>
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. 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. As of the date of this prospectus, Holdings has
issued 19.75 shares in aggregate of its 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. As of
September 30, 1998, Holdings issued 19.75 shares of its Class A Common Stock to
Mr. Shepherd, pursuant to the 1998 Stock Bonus Plan, in consideration for the
cancellation of Mr. Shepherd's 19.75 SARs.
BENEFIT PLANS
We sponsor two noncontributory defined benefit pension plans, one for
eligible collective bargaining employees and one for eligible non-collective
bargaining employees. Our employees are generally eligible to become
participants in the applicable pension plan upon attaining age 21 and completing
a 12-month period of service to us in which the employee works a minimum of one
thousand hours. 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. We make 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 pension
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 (1) his accrued annual benefit,
if any, as of August 31, 1992 and (2) one-half of one percent of the
"compensation," as defined in the pension plans, 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 twelve 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 our executive officers under the
pension plans upon retirement at normal retirement age, assuming continuous
service and constant salary to normal retirement date, is approximately $46,334,
in aggregate.
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<PAGE>
CAPITALIZATION OF HOLDINGS
GENERAL
Holdings, which owns all of our issued and outstanding capital stock, has
four classes of outstanding common stock and three series of outstanding
preferred stock.
COMMON STOCK
Holdings has the following four classes of authorized common stock: Class A
Common Stock, Class B Common Stock, Class C Common Stock and Class D Common
Stock.
Upon a liquidation or dissolution of Holdings, all classes of Holdings
Common Stock will rank PARI PASSU in terms of distribution preferences. In the
event of an initial public offering of common stock by Holdings, all outstanding
shares of Class B Common Stock, Class C Common Stock and Class D Common Stock
automatically will be converted into an equal number of shares of Class A Common
Stock.
With respect to voting rights, the Class B Common Stock is non-voting,
except as provided by law, while each of the other classes of common stock has
one vote per share for the election of directors and all other corporate
matters, except as follows:
- the holders of Class C Common Stock, as a class, subject to the rights of
holders of Senior Preferred Stock and Class D Common Stock described
below, may elect a director with 51% of the voting power of the Board of
Directors;
- upon the occurrence of some triggering events, unless the holders of
Senior Preferred Stock have elected a director who is entitled to exercise
51% of the voting power of the Board of Directors because of a failure to
make a dividend payment or a mandatory redemption payment, whether or not
such payment is legally permissible, due on the Senior Preferred Stock,
the holders of the 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; and
- some events, such as amendments to the Certificate of Incorporation or
By-laws which adversely affect holders' rights and certain merger and
consolidation transactions, require the approval of a majority of holders
of each class voting separately as a class.
Affiliates of The Jordan Company hold Class A Common Stock and all of the
Class C Common Stock and affiliates of TCW Capital hold Class A Common Stock and
all of the Class D Common Stock. Mr. Shepherd also holds shares of Class A
Common Stock. No Class B Common Stock is currently outstanding. See "Principal
Stockholders."
The shareholders agreement contains certain provisions relating to our
governance and the governance of Holdings and restrictions on, and rights in the
event of, the transfer of Holdings' Common Stock. See "Certain
Transactions--Shareholders Agreement."
PREFERRED STOCK
Holdings has the following three series of preferred stock: Senior Preferred
Stock, Junior Class A PIK Preferred Stock and Junior Class B PIK Preferred
Stock.
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<PAGE>
The Senior Preferred Stock, which was issued in 1991 in the original face
amount of $10.0 million to our former shareholders in connection with Holdings'
acquisition of us, has the following rights and preferences:
- cumulative dividends at the annual rate of 5%, or $500.00 per share, are
payable on the last business day of August in each year, provided that, at
the option of Holdings, 50% of any dividend may be payable in kind, with
in kind shares valued at $10,000 per share;
- upon liquidation or dissolution, the Senior Preferred Stock has
preference, valued at $10,000 per share, over all classes of Holdings
Common Stock and the Class A Preferred Stock and Class B Preferred Stock;
- shares are subject to optional redemption at any time at our option at a
price of $10,000 per share plus accrued and unpaid dividends;
- shares are subject to mandatory redemption at a price of $10,000 per share
plus accrued and unpaid dividends on August 31, 2001; and
- no voting rights are provided, except that: (1) upon a default of a
dividend or redemption payment due to the holders of Senior Preferred
Stock, such holders, voting as a class, may elect a director with 51% of
the voting power of Holdings' Board of Directors; and (2) consent of each
of the holders of Senior Preferred Stock is required for the issuance of
any equity security which is PARI PASSU or senior to the Senior Preferred
Stock and for any Certificate of Incorporation or By-law amendment which
may adversely affect the interest of such holders.
As of May 29, 1999, the redemption value of the Senior Preferred Stock was
approximately $12.1 million and, 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.
In the event the holders of the Senior Preferred Stock are entitled to elect
a director with 51% of the voting power of our and Holdings' Board of Directors,
affiliates of The Jordan Company and TCW Capital would fail to control Holdings
and us, and such event would constitute a change in control under the indenture,
which could have a material adverse effect on us. See "Risk Factors--Change of
Control Offer."
The Class A Preferred Stock and Class B Preferred Stock, which were issued
in 1991 in the original face amounts of $7.0 million and $700,000, respectively,
in connection with Holdings' acquisition of us, are entitled to cumulative
dividends at the annual rate of 8% and generally possess similar rights,
including the following:
- each pays a dividend of $2,000 per share, payable at Holdings' option
either in cash or in kind, wholly or in part, with in kind shares valued
at $25,000 per share, on November 1 of each year for the Class A Preferred
Stock and November 1 of each year for the Class B Preferred Stock;
- upon liquidation or dissolution, the Class A Preferred Stock is junior to
the Senior Preferred Stock, the Class B Preferred Stock is junior to both
the Senior Preferred Stock and the Class A Preferred Stock and all classes
of Holdings Common Stock are junior to the Class A Preferred Stock and
Class B Preferred Stock;
- shares are subject to mandatory redemption on November 1, 2001 at a price
of $25,000 per share plus accrued and unpaid dividends for the Class A
Preferred Stock, provided that no shares of Senior Preferred Stock are
outstanding, and November 1, 2001 for the Class B Preferred Stock,
provided that all shares of the Senior Preferred Stock and Class A
Preferred Stock have theretofore been redeemed in full for cash; and
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<PAGE>
- the securities purchase agreement provides for the mandatory redemption of
the Class A Preferred Stock upon the happening of certain events,
including certain equity sales, asset sales, recapitalizations,
liquidations and change of control events.
Neither the holders of Class A Preferred Stock or Class B Preferred Stock
possess any voting rights, except that consent of a majority of the holders of
Class A Preferred Stock and Class B Preferred Stock, each voting separately as a
class, is required for the issuance of any equity security that is PARI PASSU or
senior to such shares and for any amendment to the Certificate of Incorporation
or By-laws which may adversely affect the interest of such holders. As of May
29, 1999, the redemption value of the Class A Preferred Stock and Class B
Preferred Stock was approximately $12.6 million and approximately $1.3 million,
respectively, and, assuming that Holdings exercises its option to pay all
dividends in kind, the redemption value of the Class A Preferred Stock on
November 1, 2001 will be approximately $15.1 million and the redemption value of
the Class B Preferred Stock on November 1, 2001 will be approximately $1.5
million. See "--Securities Purchase Agreement" and "Principal Stockholders."
SECURITIES PURCHASE AGREEMENT
In connection with Holdings' acquisition of us in 1991, we, Holdings,
affiliates of The Jordan Company and TCW Capital and Jackson National Life
Insurance Company entered into a securities purchase agreement dated as of
October 30, 1991 pursuant to which Holdings issued subordinated notes, the Class
A Preferred Stock and the Class A, B and D Common Stock.
The securities purchase agreement provides, among other things, that we and
Holdings are subject to certain covenants, including the following: (1) so long
as at least 92 shares of Class A Preferred Stock are outstanding, we and
Holdings are restricted in our ability to pay some dividends or from making some
other restricted payments, incurring additional indebtedness or liens on our
assets, or making some investments and must comply with some financial ratios
and (2) so long as at least 92 shares of Class A Preferred Stock or 333 shares
of Common Stock purchased pursuant to the securities purchase agreement are
outstanding, we and Holdings are restricted from entering into some transactions
with affiliates and some mergers or consolidations with other entities or from
transferring or leasing a substantial portion of our assets or issuing
additional capital stock except for dividends in kind.
The securities purchase agreement also provides that certain holders of
Class A Common Stock and Class D Common Stock of Holdings, which include both
affiliates of The Jordan Company and TCW Capital, have the right to require
Holdings to either initiate a sale of us or to redeem their shares of Holdings
Common Stock, at any time, or from time to time, after the earlier of any of the
following, each a "purchase event":
- January 1, 2000;
- the consummation of some exit events, such as a sale of a significant
portion of our assets, some recapitalizations of Holdings, some issuances
of equity securities of Holdings or the liquidation, dissolution or change
of control of Holdings; or
- the first date as of which all shares of Class A Preferred Stock have been
redeemed.
If Holdings elects to redeem such Holdings Common Stock, the redemption
price depends on the event giving rise to the redemption. The redemption price
for Holdings Common Stock issued under the securities purchase agreement is the
greater of (1) fair market value or (2) an amount intended to yield a preferred
return equal to an annual 16% internal rate of return, calculated semi-annually,
on the holder's original investment in the subordinated notes, Class A Preferred
Stock and Holdings Common Stock. In the case of exit events involving a sale of
assets or issuance of equity securities, the fair market value is based upon the
proceeds received from such transactions. If Holdings elects to sell
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<PAGE>
us, Holdings has up to one year to arrange such sale. If Holdings elects not to
initiate a sale of us or does not conclude a sale within one year, fair market
value is determined by an independent appraisal process.
The securities purchase agreement further provides that (1) upon a sale of
equity securities, 50% of the net proceeds must be applied to the redemption of
the Senior Preferred Stock and then to the redemption of Class A Preferred Stock
and (2) upon the occurrence of an exit event, other than a sale of equity
securities, Holdings must redeem all outstanding shares of Class A Preferred
Stock.
We cannot assure you that, if a purchase event occurs, Holdings will be able
to sell us or have sufficient funds to satisfy its obligations to redeem the
applicable shares of Holdings Common Stock or with respect to any redemption
upon an exit event, that such redemptions would be permitted under the
indenture, our revolving credit facility or any successor financings. A failure
to satisfy such obligations could result in the occurrence of a triggering event
which would entitle affiliates of TCW Capital to elect a director with 51% of
the voting power of our and Holdings' Board of Directors.
The definition of "triggering events" in the securities purchase agreement
includes:
- the failure by Holdings to either effect a sale of us or redeem some
shares of Class A Common Stock and Class D Common Stock held by both
affiliates of The Jordan Company and TCW Capital in accordance with the
terms of the securities purchase agreement;
- the failure by Holdings to redeem on November 1, 2001 the Class A
Preferred Stock held by both affiliates of The Jordan Company and TCW
Capital; and
- the failure by Holdings to redeem the Class A Preferred Stock upon some
events, such as some equity sales, asset sales, recapitalizations,
liquidations and change of control events.
Affiliates of TCW Capital hold approximately 64.3% of the Class A Preferred
Stock and approximately 81.8% of Holdings Common Stock possessing the right to
either initiate a sale of us or a redemption of their Holdings Common Stock
described above, with the balance held by affiliates of The Jordan Company.
Accordingly, affiliates of TCW Capital can assert that a triggering event has
occurred upon the occurrence of any one of the events described above until such
triggering event is resolved and thus assume control of 51% of the voting power
of our and Holdings' Board of Directors, provided that the holders of the Senior
Preferred Stock have not exercised their right to control 51% of the voting
power of the Board of Directors of Holdings. See "--Preferred Stock" and
"Principal Stockholders."
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<PAGE>
PRINCIPAL STOCKHOLDERS
Holdings owns all of our 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 May 29, 1999 by (1) each person who is
known by us to beneficially own more than 5% of the outstanding shares of any
class of Holdings' voting securities; (2) each of our directors and executive
officers who own shares of Holdings' equity securities; and (3) all or our
directors and executive officers, as a group, who own shares of Holdings' equity
securities.
<TABLE>
<CAPTION>
PERCENTAGE OF ALL
NUMBER OF PERCENTAGE OUTSTANDING VOTING
NAME(1) TITLE OF CLASS(2) SHARES OF CLASS COMMON STOCK
- --------------------------------------------- -------------------- ------------ ----------- ---------------------
<S> <C> <C> <C> <C>
TCW Capital(3)............................... Class A Common 339.741000 47.5% 33.3%
Jordan Industries, Inc.(4)................... Class A Common 151.128000 21.1 14.8
JZ Equity Partners PLC(5).................... Class A Common 100.752000 14.1 9.9
WCT Investment Pte Ltd.(6)................... Class A Common 82.573000 11.5 8.1
Mezzanine Capital(7)......................... Class A Common 21.069000 2.9 2.1
Leucadia Investors, Inc.(8).................. Class C Common 65.788625 22.3 6.5
John W. Jordan II(9)......................... Class A Common 151.128000 21.1 14.8
Class C Common 43.945960 14.9 4.3
Thomas H. Quinn(10).......................... Class A Common 151.128000 21.1 14.8
Class C Common 31.582500 10.7 3.1
Adam E. Max(11).............................. Class C Common 26.315450 8.9 2.6
Ted A. Shepherd(12).......................... Class A Common 19.750000 2.8 1.9
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 170.878000 23.9 16.8
Class C Common 101.843910 34.6 10.0
</TABLE>
- ------------------------
(1) For purposes herein, (a) affiliates of TCW Capital consist of the
following: TCW Capital, WCT Investment Pte Ltd., Mezzanine Capital and TCW
Special Placements Fund III; and (b) affiliates of The Jordan Company
include, 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; provided, that although an affiliate of The Jordan Company
provides financial advisory services to JZ Equity Partners PLC, it is not
otherwise affiliated with The Jordan Company.
(2) As of May 29, 1999, there were outstanding (a) 715.0130 shares of Holdings'
Class A Common Stock, (b) no shares of Holdings' Class B Common Stock, (c)
294.737 shares of Holdings' Class C Common Stock and (d) 10 shares of
Holdings' Class D Common Stock, aggregating to 1,019.75 outstanding shares
of Holdings Common Stock. Holdings' Class B Common Stock is non-voting,
except as provided by law and in some other limited circumstances. Each of
the other classes of Holdings' Common Stock has one vote per share for the
election of directors and all other corporate matters, except as follows:
(i) the holders of Holdings' Class C Common Stock, as a class, subject to
the rights of holders of Holdings' Senior Preferred Stock and Class D
Common Stock described below, may elect a director who is entitled to
exercise 51% of the voting power of the Board of Directors of Holdings;
(ii) upon the occurrence of some triggering events, including a failure by
Holdings to redeem its Junior Class A PIK Preferred Stock on November 1,
2001, the holders of Holdings' Class D Common Stock, voting separately as a
class, have the right to elect an additional director and such director
shall have 51% of the voting power of the Board of Directors of Holdings,
unless due to a failure by Holdings to make a dividend payment or a
mandatory redemption payment with respect to its Senior Preferred Stock,
whether or not such payment is legally permissible, the holders of
Holdings' Senior Preferred Stock have elected a
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<PAGE>
director who is entitled to exercise 51% of the voting power of the Board
of Directors of Holdings; and (iii) some events, such as amendments to
Holdings' certificate of incorporation or by-laws which adversely affect
the rights of holders and some 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.
See "Certain Transactions-- Shareholders Agreement." As of May 29, 1999,
there also were outstanding (A) 1,206.118388 shares of Holdings' Senior
Preferred Stock, all of which is owned by our former owners through the
Denton Thorne Trust A, the Denton Thorne Trust B and the Denton Thorne
Trust C, (B) 502.4682 shares of Holdings' Junior Class A PIK Preferred
Stock, approximately 36% of which is owned by affiliates of The Jordan
Company and approximately 64% of which is owned by affiliates of TCW
Capital, and (C) 50.2467 shares of Holdings' Junior Class B PIK Preferred
Stock, approximately 80% of which is owned by affiliates of The Jordan
Company. 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: (a) 311.408 shares are held in the name of TCW Special
Placements Fund III; (b) 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 (c) 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 May 29, 1999, affiliates of TCW
Capital owned 44.5% of the outstanding voting Holdings' Common Stock. As of
May 29, 1999, affiliates of TCW Capital 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 May 29, 1999, Jordan Industries, Inc. and other affiliates of The
Jordan Company 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 May 29, 1999, JZ Equity Partners PLC, formerly known as MCIT
(Existing Pool) Limited, also owned 71.7811 shares of Holdings' Junior
Class A PIK Preferred Stock. The principal address of JZ Equity Partners
PLC is c/o The Jordan Company LLC, 767 Fifth Avenue, New York, New York
10153.
(6) As of May 29, 1999, WCT Investment Pte Ltd. also owned 57.0563 shares of
Holdings' Junior Class A PIK Preferred Stock. In connection with its
acquisition in 1992 from 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 some actions by Holdings. The
principal address of
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<PAGE>
WCT 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 May 29, 1999,
Mezzanine Capital also owned 15.1118 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 May 29, 1999, Leucadia Investors, Inc. also owned 12.5616 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., of which Mr. Jordan is Chairman of
the Board and Chief Executive Officer, 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., of which Mr. Quinn is the
President, Chief Operating Officer and a director. Mr. Quinn's address is
c/o Archibald Candy Corporation, 1137 West Jackson Boulevard, Chicago,
Illinois 60607.
(11) As of May 29, 1999, Mr. Max also owned 5.0247 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.
(12) Mr. Shepherd and Holdings entered into an Executive Subscription Agreement
dated as of September 30, 1998 pursuant to which Holdings converted Mr.
Shepherd's 19.75 SARs into the same number of shares of Holdings' Class A
Common Stock. Mr. Shepherd's address is c/o Archibald Candy Corporation,
1137 West Jackson Boulevard, Chicago, Illinois 60607.
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<PAGE>
CERTAIN TRANSACTIONS
MANAGEMENT CONSULTING AGREEMENT
On July 2, 1997, Holdings entered into a five year management consulting
agreement with TJC Management Corp., 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. We believe that
the terms of the management consulting agreement are comparable to the terms
that we would obtain from disinterested third parties for comparable services.
For its investment banking services rendered to Holdings in connection with the
Laura Secord acquisition and related financing, Holdings paid TJC Management
Corp. $850,000 pursuant to the management consulting agreement.
TAX SHARING AND MANAGEMENT CONSULTING AGREEMENT
On July 2, 1997, we entered into a tax sharing and management consulting
agreement with Holdings, pursuant to which we agreed to pay or distribute to
Holdings:
- so long as Holdings files consolidated income tax returns that include us,
payments for our share of income taxes, assuming that we are a stand-alone
entity and without giving effect to any consolidated net operating loss
carry forwards of Holdings accumulated through August 30, 1997;
- 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;
- investment banking fees incurred by Holdings on our behalf with TJC
Management Corp. in connection with (1) any future recapitalizations,
acquisitions or any similar transaction, which fee shall not exceed 2% of
the transaction value, and (2) any financing transactions, which fee shall
not exceed 1% of the transaction value;
- amounts sufficient for Holdings to pay fees, expenses and indemnities to
directors of Holdings in accordance with its bylaws and indemnification
agreements; and
- payments to or on behalf of Holdings in respect of franchise or similar
taxes and governmental charges incurred by it relating to our business,
operations or finances.
We believe that the terms of the management services provided under the tax
sharing and management consulting agreement are comparable to the terms that we
would obtain from disinterested third parties for comparable services. In fiscal
1998, we (a) accrued a $1,628,000 distribution payable to Holdings for our share
of income taxes and (b) paid $412,000 in management consulting fees, in each
case pursuant to the tax sharing and management consulting agreement.
For investment banking fees incurred by Holdings on our behalf in connection
with the Laura Secord acquisition and related financing, we paid Holdings
$850,000 pursuant to the tax sharing and management consulting agreement.
Holdings paid these fees to TJC Management Corp. under the management consulting
agreement.
PREFERRED STOCK
As of May 29, 1999, affiliates of TCW Capital owned approximately 64% of the
Class A Preferred Stock and affiliates of The Jordan Company 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.
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DIRECTOR'S CONSULTING FEE AND TCW AFFILIATES' EXPENSE REIMBURSEMENT
In each of fiscal 1996, 1997 and 1998, we paid Mr. Quinn a consulting fee
equal to $52,000 in lieu of a salary in exchange for services rendered to us.
Mr. Quinn consulted with us with respect to our financial and business affairs,
our relationships with our lenders and stockholders, and the operation and
expansion of our business. Such fee is expected to continue in the future and is
subject to reasonable increases. Pursuant to the tax sharing and management
consulting agreement, affiliates of TCW Capital who are members of our Board of
Directors will receive $48,000 in the aggregate per year as reimbursement of
expenses incurred in performing financial and management consulting services
thereunder, including, but not limited to, any travel expenses. See "--Tax
Sharing and Management Agreement."
SHAREHOLDERS AGREEMENT
In connection with the formation of Holdings and its acquisition of us in
1991, affiliates of The Jordan Company and TCW Capital and other initial
investors entered into the shareholders agreement, which contains some
provisions relating to the governance of us 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 limited exceptions,
(1) the composition of our and Holdings' Board of Directors shall be identical
and (2) the number of directors on our and Holdings' Board shall be five, with
affiliates of The Jordan Company nominating three directors and affiliates of
TCW Capital nominating two directors. The shareholders agreement also provides
that upon the occurrence of some triggering events, unless affiliates of TCW
Capital 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:
- enter into any transaction of merger, consolidation or amalgamation, or
liquidate, wind up or dissolve itself;
- 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;
- 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
- issue certain equity securities or redeem equity shares.
The shareholders agreement further provides that without the approval of a
director nominated by affiliates of TCW Capital, neither Holdings nor any of its
subsidiaries shall (1) make any amendment to Holdings' certificate of
incorporation or by-laws or (2) 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 tag-along rights and preemptive
rights.
In connection with its acquisition in 1992 from 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
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some 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. Pursuant to
this 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.
PROVISION OF SERVICES TO THE COMPANY
Jordan Industries, Inc. owns 80% of PAMCO Printed Labels, which supplied
approximately $600,000 of labels to us in fiscal 1998. For fiscal 1999, we
expect to purchase a comparable amount of labels from PAMCO. Mr. Quinn, our
Chairman of the Board and Chief Executive Officer, is the President, Chief
Operating Officer and a director of Jordan Industries, Inc. Mr. Jordan, one of
our directors, is Chairman of the Board and Chief Executive Officer of Jordan
Industries, Inc. We believe that the pricing and services provided by PAMCO are
comparable to those that we would obtain from disinterested third parties for
comparable services.
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DESCRIPTION OF THE REVOLVING CREDIT FACILITY
The following summary of our revolving credit facility does not purport to
be complete and is qualified in its entirety by reference to the definitive
revolving credit facility loan documents, which are available from us upon
request.
On July 2, 1997, we entered into a revolving credit agreement with The First
National Bank of Chicago, as agent. On July 30, 1999, we amended our revolving
credit agreement and caused our Canadian subsidiary, Archibald Candy (Canada)
Corporation, to enter into an additional related revolving credit agreement with
First Chicago NBD Bank, Canada, a Canadian affiliate of The First National Bank
of Chicago. The two credit agreements work together to provide revolving loans
to us and Archibald Candy (Canada) Corporation in an aggregate principal amount
at any time not to exceed the lesser of (1) $25.0 million and (2) a borrowing
base comprised primarily of a percentage of eligible accounts receivable,
eligible inventory and some of our owned real properties. Archibald Candy
(Canada) Corporation may separately borrow up to an aggregate principal amount
not to exceed the lesser of (a) $5.0 million and (b) a borrowing base comprised
primarily of a percentage of our eligible accounts receivable, eligible
inventory and some of our owned real properties, provided that the aggregate
amount of revolving loans under the two credit agreements together may not
exceed $25.0 million. Borrowings under our revolving credit facility are
available for general corporate purposes, including letters of credit, subject
to the borrowing conditions contained therein. Our revolving credit facility is
secured by first priority liens on our and the guarantor subsidiaries' accounts
receivable, raw materials and finished good inventories and our owned store
locations, and the proceeds therefrom. Under the terms of our revolving credit
agreements, each of our material subsidiaries will guarantee our and Archibald
Candy (Canada) Corporation's obligations. As of the date of this prospectus, we
have approximately $5.0 million in borrowings and $0.7 million of letters of
credit outstanding under our agreement with The First National Bank of Chicago
and no borrowings or letters of credit outstanding under our agreement with
First Chicago NBD Bank, Canada. Our revolving credit facility expires on April
15, 2001.
The revolving credit agreements include covenants that restrict, among other
things:
- investment, loans, advances, dividends and other restricted payments;
- prepayment of other indebtedness, including the notes;
- the incurrence or existence of additional indebtedness;
- the granting of liens, other than liens created pursuant to the revolving
credit agreement, the indenture and some permitted liens;
- mergers, consolidations and sales of all or a substantial part of our
business or property;
- the sale of assets; and
- some transactions with affiliates.
The revolving credit agreements also require us to comply with financial
ratios, including minimum fixed charge coverage and maximum leverage ratios.
The revolving credit agreements contain customary representations and
warranties, including representations and warranties as to:
- our and our subsidiaries' good standing;
- our and our subsidiaries' solvency;
- our and our subsidiaries' authority to enter into the revolving credit
facility documents;
- the accuracy of our financial statements;
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- our and our subsidiaries' payment of taxes;
- our and our subsidiaries' disclosure of environmental matters and existing
and pending litigation involving us and our subsidiaries;
- our and our subsidiaries' ownership of assets and properties; and
- the disclosure of our and our subsidiaries' contingent obligations.
The revolving credit agreements also contain customary events of default,
including:
- the failure to make payments when due;
- the breach of covenants;
- the breach of representations and warranties;
- defaults as to other indebtedness;
- involuntary bankruptcy, voluntary bankruptcy, dissolution;
- a material adverse change; or
- a change of control.
The revolving credit agreement with The First National Bank of Chicago
provides that borrowings thereunder will accrue interest at a variable rate
equal to the "Alternate Base Rate," as defined in such revolving credit
agreement, plus 1.25% or a fixed rate equal to the "Eurodollar Rate," as defined
in such revolving credit agreement, plus 2.50%. The Alternate Base Rate
generally is defined as the greater of (1) the corporate base rate of interest
announced by the agent from time to time and (2) the Federal Funds Effective
Rate plus 0.5%. Interest rates may be adjusted downward, depending upon our
leverage ratio as defined therein.
The revolving credit agreement with First Chicago NBD Bank, Canada, provides
that borrowings thereunder will be in the form of advances which accrue interest
at a variable rate equal to the "Canadian Prime Rate," as defined in such
revolving credit agreement, or in the form of bankers acceptances which are
purchased by the lender at a discount rate equal to the lesser of (1) the rate
per annum that appears on the Reuters Screen CDOR Page on the purchase date,
plus 10 basis points, or (2) the discount rate at which the lender would
purchase, on the purchase date, its own bankers acceptance having a face amount
and maturity the same as the bankers acceptance to be purchased under such
revolving credit agreement. For borrowings by Archibald Candy (Canada)
Corporation in the form of advances, we have agreed to pay to the lenders under
our revolving credit agreement a fee equal to the amount of such borrowings
multiplied by an interest rate equal to between 1.25% and 0.50%, depending on
our leverage ratio from time to time. Based on our current leverage ratio, an
interest rate equal to 1.25% would be applicable for any such calculation. For
borrowings by Archibald Candy (Canada) Corporation in the form of bankers
acceptances, we have agreed to pay to the lenders under our revolving credit
agreement a fee equal to the amount of such bankers acceptances multiplied by an
interest rate equal to between 2.5% and 1.75%, depending on our leverage ratio.
Based on our current leverage ratio, an interest rate equal to 2.5% would be
applicable for any such calculation. For both types of such borrowings, we have
agreed to such fee pursuant to a participation agreement among us, Archibald
Candy (Canada) Corporation and the lenders and agents under the two revolving
credit agreements.
We are required to pay some fees in connection with our revolving credit
facility.
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DESCRIPTION OF THE REGISTERED NOTES
GENERAL
The unregistered notes were, and the registered notes will be, issued
pursuant to an indenture dated as of July 2, 1997 among us and The Bank of New
York, as trustee, as amended by the First Supplemental Indenture dated as of
December 7, 1998 among us, our guarantor subsidiaries and the trustee, and the
Second Supplemental Indenture dated as of June 8, 1999 among us, our guarantor
subsidiaries and the trustee. The terms of the notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939. You can find the definitions of some terms used in the
following summary of the indenture under the sub-heading "Certain Definitions."
The terms of the registered notes are the same as the terms of the
unregistered notes, except that (1) we registered the registered notes under the
Securities Act, and, unlike the unregistered notes, their transfer is not
restricted and (2) holders of the registered notes are not entitled to certain
rights under the registration rights agreement.
All series of notes issued under the indenture, including without limitation
any notes that remain outstanding after the completion of the exchange offer,
together with the registered notes issued in connection with such exchange
offer, will be treated as a single class of securities under the indenture.
BECAUSE THIS SECTION OF THE PROSPECTUS MERELY SUMMARIZES THE TERMS OF THE
REGISTERED NOTES, YOU SHOULD READ THE INDENTURE AND THE RELEVANT PORTIONS OF THE
TRUST INDENTURE ACT OF 1939 FOR MORE COMPLETE INFORMATION REGARDING THE TERMS OF
THE REGISTERED NOTES, INCLUDING THE DEFINITION OF CERTAIN TERMS USED IN THIS
SECTION. COPIES OF THE INDENTURE AND REGISTRATION RIGHTS AGREEMENT CAN BE
OBTAINED BY FOLLOWING THE INSTRUCTIONS CONTAINED IN THIS PROSPECTUS UNDER THE
HEADINGS "WHERE YOU CAN FIND MORE INFORMATION" AND "INFORMATION INCORPORATED BY
REFERENCE."
RANKING AND SECURITY
The notes are senior secured obligations of us and rank senior in right of
payment to all subordinated Indebtedness of us and PARI PASSU in right of
payment with all senior Indebtedness. As of May 29, 1999, on a pro forma basis
after giving effect to the Laura Secord acquisition and the related financing,
we would not have had any secured indebtedness outstanding, other than the
notes, $0.3 million of capital lease obligations and $0.5 million of letters of
credit issued for our account under our revolving credit agreement. The notes
are subordinate to any other senior secured indebtedness incurred by us and our
subsidiaries to the extent of the assets securing such other senior secured
indebtedness, including indebtedness under our revolving credit facility.
The notes are guaranteed by all of our subsidiaries other than our
Unrestricted Subsidiaries. The notes are secured by liens on our and our
Restricted Subsidiaries' equipment, fixtures and general intangibles, our
ownership interest in our Restricted Subsidiaries and mortgages on some of our
owned real property, as more fully described under the sub-heading "Collateral."
PRINCIPAL, MATURITY AND INTEREST
The registered notes will be limited in aggregate principal amount to $40.0
million. The registered notes will be issued in registered form, without
coupons, in denominations of $1,000 and integral multiples thereof. The
registered notes will mature on July 1, 2004.
The registered notes will bear interest at 10 1/4% per annum from July 1,
1999. Interest on the registered notes will be payable semi-annually on January
1 and July 1 of each year, commencing January 1, 2000. We will make each
interest payment to holders of record on the immediately preceding December 15
and June 15.
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Interest on the registered notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from July 1,
1999. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder of notes has given wire transfer instructions to us, we will
make all principal, premium and interest payments on those notes in accordance
with those instructions. All other payments on notes will be made at our office
or agency within the City and State of New York unless we elect to make interest
payments by check mailed to the holders of the notes at their addresses set
forth in the register of holders of notes. Until otherwise designated by us, our
office or agency will be the office of the trustee maintained for such purpose.
If a payment date is a Legal Holiday, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest will accrue for
the intervening period.
COLLATERAL
Subject to exceptions, the notes and Guarantees will be secured by:
(1) security interests in some of the equipment, fixtures and general
intangibles, including trademarks, of us, the Guarantors and each future
Restricted Subsidiary of us or any Subsidiary;
(2) mortgages on our Chicago, Illinois headquarters facility and Bensalem,
Pennsylvania warehouse and distribution facility; and
(3) all of the Capital Stock of the Guarantors and each future Restricted
Subsidiary of us or any Subsidiary.
All of our and the Guarantors' assets described above are collectively referred
to herein as the "Collateral." The notes are not secured by any other property,
including any receivables, raw materials or finished goods inventories or
Company-owned retail locations.
We and the Guarantors have entered into security agreements, mortgages,
deeds of trust and other collateral assignment agreements (collectively, the
"Collateral Agreements") that provide for the grant of a security interest in or
pledge of the Collateral to the trustee, as collateral agent (in such capacity,
the "Collateral Agent"), for the benefit of the holders of the notes. Such
pledges and security interests will secure the payment and performance when due
of all of the Obligations of us and the Guarantors under the indenture, the
notes, the Guarantees and the Collateral Agreements.
Subject to the terms and conditions in the indenture and the Collateral
Agreements, we will be entitled to receive all cash dividends, interest and
other payments made upon or with respect to the Capital Stock of any Subsidiary
pledged by us, and to exercise any voting, other consensual rights and other
rights pertaining to Capital Stock pledged by us, unless an Event of Default has
occurred and is continuing.
Upon the occurrence and during the continuance of an Event of Default:
(1) all rights of us to exercise voting, other consensual rights and other
rights with respect to pledged Capital Stock, will cease upon notice from
the Collateral Agent, and all these rights will become vested in the
Collateral Agent, which to the extent permitted by law, will have the
sole right to exercise these rights; and
(2) all rights of us to receive all cash dividends, interest and other
payments made upon or with respect to the Collateral will, upon notice
from the Collateral Agent, cease and such cash dividends, interest and
other payments will be paid to the Collateral Agent.
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All funds distributed under the Collateral Agreements and received by the
Collateral Agent for the benefit of the holders of the notes will be retained
and/or distributed by the Collateral Agent in accordance with the provisions of
the indenture.
The Collateral Agent will determine the circumstances and manner in which
the Collateral will be disposed of, including the determination of whether to
foreclose on the Collateral following an Event of Default. Holders of the notes
may not enforce the Collateral Agreements. Subject to limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
Collateral Agent in its exercise of any trust or power under the Collateral
Agreements. Upon the full and final payment and performance of all Obligations
of us under the indenture and the notes, the Collateral Agreements will
terminate and the pledged Collateral will be released. Upon the sale of pledged
Collateral, the Collateral Agent will simultaneously release the Liens in favor
of the Collateral Agent in the assets sold if the Net Proceeds from the sale are
or will be applied in accordance with the terms of the covenant described under
the sub-heading "Limitation on Asset Sales" and the Collateral Agent has
received all documentation required by the Trust Indenture Act.
If there is a default under the notes, the proceeds from the sale of the
Collateral may not be sufficient to satisfy our Obligations under the notes. The
amount to be received upon such a sale would be dependent upon numerous factors
including the condition, age and useful life of the Collateral at the time of
such sale, the timing and the manner of the sale, and whether the Collateral
were being sold as part of an ongoing business. The book value of the Collateral
should not be relied upon as a measure of realizable value. By its nature, the
Collateral will be illiquid and may have no readily ascertainable market value.
Accordingly, there can be no assurance that the Collateral can be sold in a
short period of time. To the extent that third parties enjoy Permitted Liens,
such third parties may have rights and remedies with respect to the property
subject to such Lien that, if exercised, could adversely affect the value of the
Collateral. In addition, the ability of the holders to realize upon any of the
Collateral may be subject to bankruptcy law limitations in the event of a
bankruptcy.
GUARANTORS
The repayment of the notes will be unconditionally guaranteed, jointly and
severally, by each existing and future Restricted Subsidiary of us or any
Subsidiary.
The obligations of each Guarantor will be limited to the maximum amount as
will not result in the obligations of such Guarantor under the Guarantee
constituting a fraudulent conveyance or fraudulent transfer under Federal or
state law, after giving effect to all other contingent and fixed liabilities of
such Guarantor and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Guarantee. See "Risk Factors--Fraudulent Conveyance
Matters."
REDEMPTION
AT THE OPTION OF THE COMPANY. Except as set forth below, we may not redeem
the notes prior to July 1, 2001. After July 1, 2001 we may redeem all or some of
the notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices, expressed as percentages of principal amount, set forth below plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the 12-month period beginning on July 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------ -----------
<S> <C>
2001.................................................................... 105.125%
2002.................................................................... 102.563
2003 and thereafter..................................................... 100.000
</TABLE>
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During the period before July 1, 2000, we may on one or more occasions
redeem up to one-third of the aggregate principal amount of the notes issued
under the indenture, at a redemption price of 110.250% of the principal amount
thereof, plus accrued and unpaid interest through the redemption date, with the
net cash proceeds of one or more Public Equity Offerings; PROVIDED, that:
(1) at least two-thirds of the aggregate principal amount of notes remain
outstanding immediately after giving effect to each such redemption; and
(2) such redemption will occur within 90 days of the date of closing of the
Public Equity Offering.
If less than all of the notes are to be redeemed at any time, selection of
notes for redemption will be made by the trustee in compliance with the
requirements of the principal national securities exchange on which the notes
are listed, or, if the notes are not so listed, on a PRO RATA basis, by lot or
by such method as the trustee deems to be fair and appropriate; PROVIDED, that
notes of $1,000 or less may not be redeemed in part. Notice of redemption will
be mailed by first-class mail at least 30 but not more than 60 days before the
redemption date to each holder of notes to be redeemed at such holder's
registered address. If any note is to be redeemed in part, the notice of
redemption that relates to such note will state the portion of the principal
amount thereof to be redeemed. A new note in principal amount equal to the
unredeemed portion of the original note will be issued in the name of the holder
thereof upon cancellation of the original note. On and after the redemption
date, interest will cease to accrue on the notes or such portions called for
redemption.
MANDATORY. The notes will not be entitled to any mandatory redemption or
sinking fund.
REPURCHASE UPON CHANGE OF CONTROL
If a Change of Control occurs, we will be required to offer to repurchase
all the notes then outstanding (the "Change of Control Offer") at a purchase
price equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment").
Within 10 days following any Change of Control, we must mail a notice to
each holder of notes stating:
(1) that all notes tendered will be accepted for payment;
(2) the purchase price and the purchase date for the notes, which will be no
earlier than 30 days nor later than 40 days from the date the notice is
mailed (the "Change of Control Payment Date");
(3) that any note not tendered will continue to accrue interest;
(4) that, unless we default in the payment of the Change of Control Payment,
all notes accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest after the Change of Control Payment Date;
(5) that any holder electing to have notes purchased pursuant to a Change of
Control Offer will be required to surrender the notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the notes
completed, to the paying agent with respect to the notes (the "Paying
Agent") at the address specified in the notice prior to the close of
business on the third business day preceding the Change of Control
Payment Date;
(6) that the holder will be entitled to withdraw such election if the Paying
Agent receives, not later than the close of business on the second
business day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such notes
purchased; and
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(7) that a holder whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion of
the notes surrendered, which unpurchased portion must be equal to $1,000
in principal amount or an integral multiple thereof.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the notes in
connection with a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the indenture, we will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
"Change of Control" provisions of the indenture by virtue thereof.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment the notes or portions thereof tendered pursuant to
the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with an Officer's Certificate stating that the notes or portions
thereof tendered to us are accepted for payment.
The Paying Agent will promptly mail to each holder of notes so accepted
payment in an amount equal to the purchase price for such notes, and the trustee
will authenticate and mail to each holder a new note equal in principal amount
to any unpurchased portion of the notes surrendered, PROVIDED, that each such
new note will be in principal amount of $1,000 or an integral multiple thereof.
We will announce the result of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the indenture
does not contain provisions that permit the holders of the notes to require that
we repurchase or redeem the notes in the event of a takeover, recapitalization
or similar restructuring.
We cannot assure you that sufficient funds to make required repurchases will
be available at the time of any Change of Control Offer. Further, our revolving
credit facility will prohibit the repurchase of any notes as a result of a
Change of Control. Therefore, upon the occurrence of a Change of Control, we
will either have to obtain the consent of the lenders under our revolving credit
facility to such repurchase or repay or refinance the indebtedness under such
facility. A failure to secure the lenders' consent or repay or refinance the
indebtedness under our revolving credit facility will result in a default
thereunder and an acceleration of all obligations under our revolving credit
facility. Any future credit agreements or other agreements relating to
financings may contain restrictions similar to those contained in our revolving
credit facility.
"CHANGE OF CONTROL" means:
(1) the sale, assignment, lease, transfer or conveyance, in one transaction
or a series of transactions, of all or substantially all of our assets to
any Person or group, as such term is used in Section 13(d)(3) of the
Exchange Act;
(2) the liquidation or dissolution of us or the adoption of a plan by our
shareholders relating to the dissolution or liquidation of us;
(3) the acquisition by any Person or group, as such term is used in Section
13(d)(3) of the Exchange Act, other than affiliates of The Jordan Company
and TCW Capital, of beneficial ownership, directly or indirectly, of
Voting Stock of us or Holdings having the right to elect
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directors having a majority of the voting power of our or Holdings' Board
of Directors, respectively, by way of purchase, merger or consolidation
or otherwise; or
(4) any Person or group, as such term is used in Section 13(d)(3) of the
Exchange Act, other than the affiliates of The Jordan Company and TCW
Capital, exercising the right to elect director(s) having (or existing
directors, acquiring the right to have) a majority of the voting power of
our or Holdings' Board of Directors.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. We will not, and will not permit any of
our Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution on account of any
Equity Interests of us or any of our Subsidiaries, other than dividends
or distributions payable in Equity Interests (other than Disqualified
Stock) of us or dividends or distributions payable to us or any Wholly
Owned Subsidiary;
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interest of us or any Subsidiary or other Affiliate of us;
(3) make any principal payment on, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness of us or any Guarantor that
is subordinated in right of payment to the notes or such Subsidiary's
Guarantees thereof, as the case may be, prior to any scheduled principal
payment, sinking fund payment or other payment at the stated maturity
thereof;
(4) make any Restricted Investment; or
(5) make any other payment to or on behalf of Holdings
(all such payments and other actions set forth in clauses (1) through (5) above
being collectively referred to as "Restricted Payments"), unless, at the time of
such Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof; and
(b) immediately after such Restricted Payment and after giving effect
thereto on a pro forma basis, we could incur at least $1.00 of additional
Indebtedness under the Interest Coverage Ratio test set forth in the
covenant described under the sub-heading "--Limitation on Incurrence of
Indebtedness"; and
(c) such Restricted Payment (the value of any such payment, if other than
cash, being determined in good faith by the Board of Directors and
evidenced by a resolution set forth in an Officers' Certificate delivered
to the trustee), together with the aggregate of all other Restricted
Payments made after the date of the indenture (including Restricted
Payments permitted by clauses (1) and (2) of the next following paragraph
and excluding Restricted Payments permitted by the other clauses
therein), is less than the sum of:
(i) 50% of the Adjusted Consolidated Net Income of us for the period,
taken as one accounting period, from the beginning of the first
quarter commencing immediately after the Issue Date to the end of
our most recently ended full fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Adjusted Consolidated Net Income for such
period is a deficit, 100% of such deficit); plus
(ii) $2 million; plus
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(iii) 100% of the aggregate net cash proceeds received by us from the
issuance or sale, other than to a Subsidiary, of Equity Interests
of us, other than Disqualified Stock, after the date of the
indenture and on or prior to the time of such Restricted Payment;
plus
(iv) 100% of the aggregate net cash proceeds received by us from the
issuance or sale, other than to a Subsidiary, of any convertible or
exchangeable debt security of us that has been converted or
exchanged into Equity Interests of us, other than Disqualified
Stock, pursuant to the terms thereof after the date of the
indenture and on or prior to the time of such Restricted Payment,
including any additional net cash proceeds received by us upon such
conversion or exchange.
Notwithstanding the foregoing, the indenture does not prohibit as Restricted
Payments:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would not have been
prohibited by the provisions of the indenture;
(2) the redemption, purchase, retirement or other acquisition of any Equity
Interests of us in exchange for, or out of the proceeds of, the
substantially concurrent sale, other than to a Subsidiary of us, of other
Equity Interests of us, other than Disqualified Stock;
(3) the redemption, repurchase or payoff of any Indebtedness with proceeds
of any Refinancing Indebtedness permitted to be incurred pursuant to the
provision described under the sub-heading "--Limitation on Incurrence of
Indebtedness";
(4) the payment of dividends to Holdings for purposes of the repurchase,
redemption, retirement or acquisition of Equity Interests of Holdings
from executives, management or employees of us or Holdings pursuant to
the Plan as in existence on the Issue Date;
(5) payments by us to Holdings under the tax sharing and management
consulting agreement;
(6) payments of the Preferred Stock, other than to pay dividends or redeem
shares of preferred stock owned by affiliates of The Jordan Company on
the Issue Date; PROVIDED, that no such payments will be made with
proceeds from our revolving credit facility; and
(7) payments in connection with the application of the net proceeds of the
offering of the notes as described under "Use of Proceeds";
PROVIDED, that with respect to clauses (1) through (6), other than payments with
respect to taxes under the tax sharing and management consulting agreement, at
such time there will have been no default in payment when due of interest on the
notes or any default of the types described in clause (2) or (3) under the
sub-heading "Events of Default and Remedies."
LIMITATION ON INCURRENCE OF INDEBTEDNESS. We will not, and will not permit
any of our Restricted Subsidiaries to, directly or indirectly:
(1) create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable, contingently or otherwise, (collectively, "incur"),
with respect to any Indebtedness, including Acquired Debt; or
(2) issue any Disqualified Stock; PROVIDED, that we may incur Indebtedness
or issue shares of Disqualified Stock and a Restricted Subsidiary may
incur Acquired Debt if:
(a) no Default or Event of Default will have occurred and be continuing
at the time of, or would occur after giving effect on a PRO FORMA
basis to such incurrence or issuance;
(b) the Interest Coverage Ratio for our most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such
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additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least equal to the ratio set forth below
opposite the period in which such incurrence or issuance occurs,
determined on a PRO FORMA basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had
been incurred, or the Disqualified Stock has been issued, as the case
may be, at the beginning of such four-quarter period:
<TABLE>
<CAPTION>
PERIOD ENDING RATIO
- ----------------------------------------------------------------------------- -----
<S> <C>
February 28, 1999............................................................ 2.00x
Thereafter................................................................... 2.25x
</TABLE>
and
(c) in the case of Indebtedness, (i) the Weighted Average Life to
Maturity of such Indebtedness is greater than the remaining Weighted
Average Life to Maturity of the notes and (ii) such Indebtedness has
a final scheduled maturity that exceeds the final stated maturity of
the notes.
The foregoing limitations will not prohibit the incurrence of:
(1) Indebtedness pursuant to our revolving credit facility and repayment
obligations as of May 29, 1999 in respect of letters of credit, PROVIDED,
HOWEVER, that the aggregate principal amount of such Indebtedness so
incurred on any date will not exceed $20.0 million;
(2) performance bonds, surety bonds, insurance obligations or bonds and
other similar bonds or obligations incurred in the ordinary course of
business;
(3) Hedging Obligations incurred to fix the interest rate on any variable
rate Indebtedness otherwise permitted by the indenture;
(4) Indebtedness arising out of sale and leaseback transactions, capital
lease obligations or Purchase Money Obligations in an aggregate amount
not to exceed $1.5 million at any one time;
(5) Indebtedness owed by us to any Wholly Owned Subsidiary or by any Wholly
Owned Subsidiary to us or any other Wholly Owned Subsidiary;
(6) Indebtedness outstanding on the Issue Date, including the notes;
(7) other Permitted Indebtedness;
(8) Indebtedness issued in exchange for, or the proceeds of which are
contemporaneously used to extend, refinance, renew, replace, or refund
(collectively, "Refinance") Indebtedness referred to in clauses (1), (4),
(6) and (9) and outstanding Indebtedness incurred pursuant to the debt
incurrence tests set forth in the immediately preceding paragraph (the
"Refinancing Indebtedness"), PROVIDED, that:
(a) the principal amount of such Refinancing Indebtedness does not exceed
the principal amount of Indebtedness so Refinanced;
(b) the Refinancing Indebtedness has a final scheduled maturity that
exceeds the final stated maturity, and a Weighted Average Life to
Maturity that is equal to or greater than the Weighted Average Life
to Maturity, of the Indebtedness being Refinanced; and
(c) the Refinancing Indebtedness ranks, in right of payment, no more
favorable to the notes as the Indebtedness being Refinanced;
(9) Indebtedness of us arising out of our issuance and sale of the
unregistered notes;
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(10) additional Indebtedness of us in an aggregate principal amount up to
$5.0 million; and
(11) additional Indebtedness of us in an aggregate principal amount up to
$5.0 million; PROVIDED, that such Indebtedness is subordinated in right
of payment to the notes and has a final scheduled maturity that exceeds
the final stated maturity, and a Weighted Average Life to Maturity that
is equal to or greater than the Weighted Average Life to Maturity, of the
notes.
LIMITATION ON ASSET SALES. We will not, and will not permit any Restricted
Subsidiary to, make any Asset Sale unless:
(1) we or such Restricted Subsidiary receives consideration at the time of
such Asset Sale at least equal to the fair market value of the assets
subject to such Asset Sale;
(2) at least 85% of the consideration for such Asset Sale is in the form of
cash, Cash Equivalents or liabilities of us or any Restricted Subsidiary,
other than liabilities that are, by their terms, subordinated to the
notes or any Guarantee thereof, that are assumed by the transferee of
such assets; PROVIDED, that following such Asset Sale there is no further
recourse to us and our Restricted Subsidiaries with respect to such
assets; and
(3) within 12 months of such Asset Sale, the Net Proceeds thereof are:
(a) invested in assets related to the business of us or our Restricted
Subsidiaries as conducted on the date of the indenture;
(b) used to permanently reduce any Indebtedness which ranks PARI PASSU
with the notes (provided in the case of a revolver or similar
arrangement that makes credit available, such commitment is also
permanently reduced); or
(c) to the extent not used as provided in clause (a) or (b), applied to
make an offer to purchase notes as described below (an "Excess
Proceeds Offer");
PROVIDED, that if the amount of Net Proceeds from any Asset Sale not invested
pursuant to clause (a) or used to repay Indebtedness pursuant to clause (b)
above is less than $2 million, we will not be required to make an offer pursuant
to clause (c).
Any Net Proceeds not invested or applied as set forth in the preceding
clauses (a) or (b) will constitute "Excess Proceeds." If we elect, or become
obligated to make an Excess Proceeds Offer, we will offer to purchase notes
having an aggregate principal amount equal to the Excess Proceeds (the "Purchase
Amount"), at a purchase price equal to 100% of the aggregate principal amount
thereof, plus accrued and unpaid interest, to the purchase date. We must
commence such Excess Proceeds Offer not later than 30 days after the expiration
of the 12-month period following the Asset Sale that produced Excess Proceeds.
If the aggregate purchase price for the notes tendered pursuant to the Excess
Proceeds Offer is less than the Excess Proceeds, we and our Restricted
Subsidiaries may use the portion of the Excess Proceeds remaining after payment
of such purchase price for general corporate purposes.
The indenture provides that the Excess Proceeds Offer will remain open for a
period of 20 business days and no longer, unless a longer period is required by
law (the "Excess Proceeds Offer Period"). Promptly after the termination of the
Excess Proceeds Offer Period (the "Excess Proceeds Payment Date"), we will
purchase and mail or deliver payment for the Purchase Amount for the notes or
portions thereof tendered, pro rata or by such other method as may be required
by law, or, if less than the Purchase Amount has been tendered, all notes
tendered pursuant to the Excess Proceeds Offer. The principal amount of notes to
be purchased pursuant to an Excess Proceeds Offer may be reduced by the
principal amount of notes acquired by us through purchase or redemption, other
than pursuant to a Change of Control Offer, subsequent to the date of the Asset
Sale and surrendered to the trustee for cancellation.
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Any Excess Proceeds Offer will be conducted in compliance with applicable
regulations under the Federal securities law, including Exchange Act Rule 14e-1.
To the extent that the provisions of any securities laws or regulations conflict
with the "Asset Sale" provisions of the indenture, we will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the "Asset Sale" provisions of the indenture by
virtue thereof.
We cannot assure you that sufficient funds will be available at the time of
any Excess Proceeds Offer to make required repurchases.
LIMITATION ON LIENS. The indenture provides that we will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset, including, without limitation,
all real, tangible or intangible property, of us or any Restricted Subsidiary
now owned or hereafter acquired, or on any income or profits therefrom, or
assign, or convey any right to receive income therefrom, except:
(1) Liens on (a) accounts receivable and inventory and the proceeds thereof,
and certain rights relating thereto, and (b) real property of us not
constituting Collateral under the indenture securing Indebtedness
permitted to be incurred pursuant to clauses (1) or (9) under the
sub-heading "--Limitation on Incurrence of Indebtedness" or any
Indebtedness used to Refinance such Indebtedness;
(2) Purchase Money Liens securing Indebtedness incurred pursuant to clause
(4) under the subheading "--Limitation on Incurrence of Indebtedness";
and
(3) Permitted Liens.
LIMITATION ON RESTRICTIONS ON SUBSIDIARY DIVIDENDS. We will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions to us or any of our
Restricted Subsidiaries (a) on such Restricted Subsidiary's Capital Stock
or (b) with respect to any other interest or participation in, or
measured by, such Restricted Subsidiary's profits; or
(2) pay any indebtedness owed to us or any of our Subsidiaries;
(3) make loans or advances to us or any of our Restricted Subsidiaries; or
(4) transfer any of its assets to us or any of our Restricted Subsidiaries;
except for such encumbrances or restrictions existing under or by reason of:
(1) the indenture, the notes and the Collateral Agreements;
(2) applicable law;
(3) any Acquired Debt, which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the
Person, or the property or assets of the Person, so acquired; and
(4) permitted Refinancing Indebtedness; PROVIDED, however, that such
restrictions contained in any agreement governing such Refinancing
Indebtedness are no more restrictive than those contained in any
agreements governing the Indebtedness being refinanced.
MERGER, CONSOLIDATION OR SALE OF ASSETS. We may not consolidate or merge
with or into, whether or not we are the surviving corporation, or sell, assign,
transfer, lease, convey or otherwise dispose of all
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or substantially all of its properties or assets, determined on a consolidated
basis for us and our Restricted Subsidiaries, in one or more related
transactions to, any other Person unless:
(1) we are the surviving Person or the person formed by or surviving any
such consolidation or mergers, if other than us, or to which such sale,
assignment, transfer, lease, conveyance or other disposition has been
made is a corporation organized and existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger, if
other than us, or the Person to which such sale, assignment, transfer,
lease, conveyance or other disposition has been made assumes all the
obligations of us, pursuant to a supplemental indenture and Collateral
Agreements in a form reasonably satisfactory to the trustee and the
Collateral Agent, under the notes, the indenture, the Collateral
Agreements and the registration rights agreement;
(3) immediately before, and after giving effect on a PRO FORMA basis to,
such transaction, no Default or Event of Default exists or would occur;
and
(4) we, or any Person formed by or surviving any such consolidation or
merger, or to which such sale, assignment, transfer, lease, conveyance or
other disposition has been made:
(a) has a Consolidated Net Worth, immediately after the transaction but
prior to any purchase accounting adjustments resulting from the
transaction, equal to or greater than the Consolidated Net Worth of
us immediately preceding the transaction; and
(b) is permitted, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, to incur at least
$1.00 of additional Indebtedness pursuant to the Interest Coverage
Ratio test set forth in the covenant described under the sub-heading
"--Limitation on Incurrence of Indebtedness."
In the event of any transaction, other than a lease, complying with the
conditions listed in the immediately preceding paragraph in which we are not the
surviving Person, the surviving Person or transferee will succeed to, and be
substituted for, and may exercise every right and power of, us, and we will be
discharged from our Obligations under the indenture, the notes, the Collateral
Agreements and the registration rights agreement.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. We will not, and will not
permit any of our Restricted Subsidiaries to, directly or indirectly, sell,
lease, transfer or otherwise dispose of any properties or assets to, or purchase
any properties or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), except for:
(1) Affiliate Transactions, which together with all related Affiliate
Transactions, have an aggregate value of not more than $1 million;
PROVIDED, that such transactions are conducted in good faith and on terms
that are no less favorable to us or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction at
such time on an arm's-length basis with a Person that is not an Affiliate
of us or such Restricted Subsidiary;
(2) Affiliate Transactions, which together with all related Affiliate
Transactions have an aggregate value of not more than $2 million;
PROVIDED, that a majority of the disinterested members of our Board of
Directors determine that such transactions are conducted in good faith
and on terms that are no less favorable to us or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that is
not an Affiliate of ours or such Restricted Subsidiary; and
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(3) Affiliate Transactions for which we deliver to the trustee an opinion as
to the fairness to us or such Restricted Subsidiary from a financial
point of view issued by an investment banking firm of national standing;
PROVIDED, that the following will not be deemed to be Affiliate Transactions:
(1) employment or consulting agreements entered into by us or any Restricted
Subsidiary in the ordinary course of business with the approval of the
independent members of our Board of Directors;
(2) transactions between or among us and/or our Wholly Owned Subsidiaries or
Guarantors;
(3) transactions permitted by the provisions of the indenture described
above under "--Limitations on Restricted Payments"; and
(4) reasonable and customary directors' fees for independent members of our
Board of Directors.
RESTRICTIONS ON SALE AND ISSUANCE OF SUBSIDIARY STOCK. We will not sell,
and will not permit any of our Restricted Subsidiaries to issue or sell, any
shares of Capital Stock of any Restricted Subsidiary to any Person other than us
or a Wholly Owned Subsidiary of us; PROVIDED, that we and our Restricted
Subsidiaries may sell all of the Capital Stock of a Restricted Subsidiary owned
by us and our Restricted Subsidiaries if the Net Proceeds from such Asset Sale
are used in accordance with the terms of the covenant described under the
sub-heading "--Limitation on Asset Sales."
LINE OF BUSINESS. We will not, and will not permit any Subsidiary to,
directly or indirectly engage in any business other than:
(1) the business described in this Prospectus;
(2) the manufacture, distribution and retailing of confectionery items; and
(3) any business that in the reasonable, good faith judgment of our Board of
Directors is directly related to such business.
GUARANTORS. So long as any notes remain outstanding, any Restricted
Subsidiary will:
(1) execute and deliver to the trustee a supplemental indenture in form
reasonably satisfactory to the trustee pursuant to which such Restricted
Subsidiary will unconditionally guarantee all of our obligations under
the notes and the indenture on the terms set forth in the indenture; and
(2) deliver to the trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary.
Thereafter, such Restricted Subsidiary will be a Guarantor for all purposes of
the indenture.
If all of the Capital Stock of any Guarantor is sold to a Person, other than
us or any of our Restricted Subsidiaries, and the Net Proceeds from such Asset
Sale are used in accordance with the terms of the covenant described under the
sub-heading "--Limitation on Asset Sales," then such Guarantor will be released
and discharged from all of its obligations under its Guarantee of the notes and
the indenture.
REPORTS. Whether or not required by the rules and regulations of the
Commission, so long as any notes are outstanding, we will furnish to the holders
of notes:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if we
were required to file such Forms, including for each a "Management's
Discussion and Analysis of Financial Condition and
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Results of Operations" and, with respect to the annual financial
statements only, a report thereon by our independent auditors; and
(2) all reports that would be required to be filed with the Commission on
Form 8-K if we were required to file such reports. From and after the
time we file a registration statement with the Commission with respect to
the notes, we will file such information with the Commission, provided
the Commission will accept such filing.
EVENTS OF DEFAULT AND REMEDIES
Each of the following will constitute an Event of Default under the
indenture:
(1) default for 30 days in the payment when due of interest on the notes;
(2) default in payment of principal or premium, if any, on the notes when
due at maturity, upon redemption, by acceleration or otherwise;
(3) default in the performance or breach of the provisions under the
sub-heading "--Merger, Consolidation or Sale of Assets," and
"--Repurchase Upon Change of Control";
(4) failure by us or any Guarantor for 30 days after notice to comply with
certain other covenants and agreements in the indenture, the notes or the
Collateral Agreements;
(5) default under, after giving effect to any applicable grace periods or
any extension of any maturity date, any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by us or any Guarantor, or
the payment of which is guaranteed by us or any Guarantor, whether such
Indebtedness or guarantee now exists or is created after the date of the
indenture, if:
(a) either (i) such default results from the failure to pay principal of
such Indebtedness or (ii) as a result of such default the maturity of
such Indebtedness has been accelerated; and
(b) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness with respect to which
such a payment default, after the expiration of any applicable grace
period or any extension of the maturity date, has occurred, or the
maturity of which has been so accelerated, exceeds $5 million in the
aggregate;
(6) failure by us or any Guarantor to pay final judgments, other than any
judgment as to which a reputable insurance company has accepted full
liability, aggregating in excess of $7.5 million which judgments are not
stayed within 60 days after their entry;
(7) breach by us or any Guarantor of any material representation or warranty
set forth in the Collateral Agreements, which breach is not cured by us
or such Guarantor or waived within 30 days after notice to comply with
such breach of a material representation or warranty;
(8) repudiation by us or any of the Guarantors of the obligations under the
indenture, the notes, the Collateral Agreements or the Guarantees or we
or any Guarantor takes any action that causes, or asserts, or fails to
take any action that it knows, or has been notified by the trustee, is
necessary to prevent, the unenforceability of the indenture, the notes,
the Collateral Agreements or the Guarantees against us or any of the
Guarantors or is necessary to maintain the priority and perfection of the
Liens of the Collateral Agreements; and
(9) certain events of bankruptcy or insolvency with respect to us or any of
the Guarantors.
If any Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the then unregistered notes may declare
by written notice all the notes to be due
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and payable immediately. In the case of an Event of Default arising from events
of bankruptcy or insolvency, all unregistered notes will become due and payable
without further action or notice. Holders of the notes may not enforce the
indenture or the notes except as provided in the indenture. Subject to
limitations, holders of a majority in principal amount of the then outstanding
notes may direct the trustee in its exercise of any trust or power.
The holders of a majority in aggregate principal amount of the notes then
outstanding, by written notice to the trustee, may on behalf of the holders of
all of the notes:
(1) waive any existing Default or Event of Default and its consequences
under the indenture, except a continuing Default or Event of Default in
the payment of interest on, or the principal of, the notes or a Default
or an Event of Default with respect to any covenant or provision which
cannot be modified or amended without the consent of the holder of each
outstanding note affected; and/or
(2) rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree if all existing Events of Default,
except nonpayment of principal or interest that has become due solely
because of the acceleration, have been cured or waived.
Upon becoming aware of any Default or Event of Default, we are required to
deliver to the trustee a statement specifying such Default or Event of Default
and what action we are taking or propose to take with respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of us or any
Guarantor, as such, will have any liability for any obligations of us under the
notes, the indenture, the Collateral Agreements or the registration rights
agreement or for any claim based on, in respect of, or by reason of, such
obligations of their creation. Each holder of the notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the Federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
DEFEASANCE AND DISCHARGE OF THE INDENTURE AND THE NOTES
Upon irrevocable deposit with the trustee, in trust, of money and/or U.S.
government obligations that will provide money in an amount sufficient in the
opinion of a nationally recognized accounting firm to pay, on the due dates
thereof, the principal of, premium, if any, and each installment of interest on
the notes, we will be discharged from any and all obligations in respect of the
notes, other than the obligation to duly and punctually pay the principal of,
premium, if any, and interest on, the notes in accordance with the terms of the
notes and the indenture. The trust may only be established if, among other
things:
(1) we have delivered to the trustee an opinion of independent counsel to
the effect that the holders of the notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount,
in the same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred;
(2) no Event of Default or event that with the passing of time or the giving
of notice, or both, will constitute an Event of Default will have
occurred or be continuing; and
(3) customary conditions precedent are satisfied.
We may satisfy and discharge our obligations and the Guarantors' obligations
under the indenture to holders of the notes by delivering to the trustee for
cancellation all unregistered notes or by
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depositing with the trustee or the Paying Agent, if applicable, after the notes
have become due and payable, cash sufficient to pay at the stated maturity all
of the notes and paying all other sums payable under the indenture by us.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
holder to pay any taxes and fees required by law or permitted by the indenture.
We are not required to transfer or exchange any note selected for redemption. In
addition, the Company is not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
PAYMENTS FOR CONSENT
Neither we nor any of our Subsidiaries will, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any holder of any notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the indenture or the
notes unless such consideration is offered to be paid or agreed to be paid to
all holders of the notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement, which solicitation documents must be mailed to all holders of notes a
reasonable length of time prior to the expiration of the solicitation.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the two succeeding paragraphs, the indenture and the
notes may be amended or supplemented with the consent of the holders of at least
a majority in principal amount of the notes then outstanding. Any existing
Default or Event of Default or compliance with any provision of the indenture,
the notes or the Collateral Agreements may be waived with the consent of the
holders of a majority in principal amount of the then outstanding notes.
Without the consent of each holder affected, an amendment or waiver may not
with respect to any notes held by a non-consenting holder of notes:
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of, or the premium on, or change the fixed maturity
of, any note;
(3) alter the provisions with respect to the redemption of the notes;
(4) alter the price at which repurchases of the notes may be made pursuant
to an Excess Proceeds Offer or Change of Control Offer;
(5) reduce the rate of or change the time for payment of interest on any
note;
(6) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the notes;
(7) make any note payable in money other than that stated in the notes;
(8) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of notes to receive payments of
principal of, or interest on, the notes;
(9) waive a redemption payment with respect to any note;
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(10) make any change in the provisions of any of the Guarantees that
adversely affects the rights of any holder of notes;
(11) adversely affect the contractual ranking of the notes or Guarantees; or
(12) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes:
(1) we and the trustee may amend or supplement the indenture or the notes to
cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of our obligations to holders of the notes
or a Guarantor's obligation under a Guarantee in the case of a merger or
consolidation;
(4) to make any change that would provide any additional rights or benefits
to the holders of the notes or that does not adversely affect the legal
rights under the indenture of any such holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of ours, the indenture limits its right to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The trustee will
be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
exceptions. The indenture provides that in case an Event of Default occurs and
is continuing, the trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the trustee will be under no obligation to exercise
any of its rights or powers under the indenture at the request of any holder of
notes, unless such holder will have offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to us at 1137 West Jackson Boulevard, Chicago,
Illinois 60607, Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are some of the defined terms used in the Indenture.
Reference is made to the Indenture for a full definition of all such terms, as
well as any other capitalized terms used in this section for which no definition
is provided.
"ACQUIRED DEBT" means, with respect to the Company or a Restricted
Subsidiary, Indebtedness of any other Person existing at the time such other
Person merged with or into the Company or a Restricted Subsidiary or became a
Restricted Subsidiary, other than Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into the Company or a
Restricted Subsidiary or becoming a Restricted Subsidiary.
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"ADJUSTED CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the Consolidated Net Income of such Person plus amortization (including
amortization of goodwill, deferred costs and other intangibles) of such Person
for such period to the extent such amortization was deducted in computing
Consolidated Net Income.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, will mean:
(1) the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
(2) in the case of a corporation, beneficial ownership of 10% or more of any
class of Capital Stock of such Person; and
(3) in the case of an individual (a) members of such Person's immediate
family (as defined in Instruction 2 of Item 404(a) of Regulation S-K
under the Securities Act) and (b) trusts, any trustee or beneficiaries of
which are such Person or members of such Person's immediate family.
Notwithstanding the preceding, neither the Initial Purchaser nor any of
its Affiliates will be deemed to be Affiliates of the Company.
"ASSET SALE" means any direct or indirect:
(1) sale, assignment, transfer, lease, conveyance, or other disposition
(including, without limitation, by way of merger or consolidation)
(collectively, a "transfer"), other than in the ordinary course of
business, of any assets of the Company or its Restricted Subsidiaries; or
(2) issuance or sale of any Capital Stock of any Subsidiary (in each case,
other than to the Company or a Wholly Owned Subsidiary).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means:
(1) with respect to any Person that is a corporation, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock; and
(2) with respect to any other Person, any and all partnership interests,
membership interests or other indicia of ownership of such Person.
"CASH EQUIVALENT" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America
is pledged in support thereof);
(2) time deposits and certificates of deposit and commercial paper issued by
the parent corporation of any domestic commercial bank of recognized
standing having capital and surplus in excess of $500,000,000 and
commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition; and
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(3) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (1) and (2) above.
"CONSOLIDATED EBITDA" means, with respect to any Person (the referent
Person) for any period:
(1) consolidated income (loss) from operations of such Person for such
period, determined in accordance with GAAP; plus
(2) (to the extent such amounts are deducted in calculating such income
(loss) from operations of such Person for such period, and without
duplication) amortization, depreciation and other non-cash charges
(including, without limitation, amortization of goodwill, deferred
financing fees and other intangibles but excluding non-cash charges
incurred after the date of the Indenture that require an accrual of or a
reserve for cash charges for any future period, except for accrued and
unpaid management fee charges under the Tax Sharing and Management
Agreement and normally recurring accruals such as reserves against
accounts receivable);
PROVIDED, that:
(a) the income from operations of any Person that is not a Wholly Owned
Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of
dividends or distributions paid during such period to the referent
Person or a Wholly Owned Subsidiary of the referent Person;
(b) the income from operations of any Person acquired in a pooling of
interests transaction for any period prior to the date of such
acquisition will be excluded; and
(c) the income from operations of any Subsidiary will not be included to
the extent that declarations of dividends or similar distributions by
that Subsidiary are not at the time permitted, directly or
indirectly, by operation of the terms of its organization documents
or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its
owners.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the consolidated interest expense of such Person for such period,
whether paid or accrued (including amortization of original issue discount,
non-cash interest payment, and the interest component of Capital Lease
Obligations), to the extent such expense was deducted in computing Consolidated
Net Income of such Person for such period.
"CONSOLIDATED NET INCOME" means, with respect to any Person (the referent
Person) for any period, the aggregate of the Net Income of such Person and its
consolidated subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; provided, however that:
(1) the Net Income of any Person that is not a Wholly Owned Subsidiary or
that is accounted for by the equity method of accounting will be included
only to the extent of the amount of dividends or distributions paid
during such period to the referent Person or a Wholly Owned Subsidiary of
the referent Person;
(2) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded; and
(3) the Net Income of any Subsidiary will not be included to the extent that
declarations of dividends or similar distributions by that Subsidiary are
not at the time permitted, directly or indirectly, by operation of the
terms of its organization documents or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its owners.
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"CONSOLIDATED NET WORTH" means, with respect to any Person, the total
shareholders' equity of such Person determined on a consolidated basis in
accordance with GAAP, adjusted to exclude (to the extent included in calculating
such equity):
(1) the amount of any such shareholders' equity attributable to Disqualified
Stock or treasury stock of such Person and its consolidated subsidiaries;
(2) all upward revaluations and other write-ups in the book value of any
asset of such Person or a consolidated subsidiary of such Person
subsequent to the Issue Date; and
(3) all investments in subsidiaries of such Person that are not Restricted
Subsidiaries and in Persons that are not subsidiaries of such Person.
"DEFAULT" means any event that is, or after notice or the passage of time or
both would be, an Event of Default.
"DISQUALIFIED STOCK" means any Equity Interest that:
(1) either by its terms or the terms of any security into which it is
convertible or for which it is exchangeable or otherwise, is or upon the
happening of an event or the passage of time would be, required to be
redeemed or repurchased (in whole or in part) prior to the final stated
maturity of the Notes or is redeemable (in whole or in part) at the
option of the holder thereof at any time prior to such final stated
maturity; or
(2) is convertible into or exchangeable at the option of the issuer thereof
or any other Person for debt securities or Disqualified Stock.
"EQUITY INTERESTS" means Capital Stock or warrants, options or other rights
to acquire Capital Stock (but excluding any debt security that is convertible
into, or exchangeable for, Capital Stock).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
and in the rules and regulations of the Commission, that are in effect on the
Issue Date.
"GUARANTEE" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner of all or any part of any Indebtedness, including
letters of credit and reimbursement agreements in respect thereof.
"INDEBTEDNESS" of any Person means (without duplication):
(1) all liabilities and obligations, contingent or otherwise, of such
Person:
(a) in respect of borrowed money, whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a
portion thereof;
(b) evidenced by bonds, debentures, notes or other similar instruments;
(c) representing the deferred purchase price of property or services,
other than trade payables on customary terms incurred in the ordinary
course of business which are not more than 90 days past due;
(d) created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person,
even though the rights and remedies of the seller or lender under
such agreement in the event of default are limited to repossession or
sale of such property;
(e) as lessee under capitalized leases;
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(f) under bankers' acceptance and letter of credit facilities;
(g) to purchase, redeem, retire, defease or otherwise acquire for value
any Disqualified Stock; or
(h) in respect of Hedging Obligations;
(2) all liabilities and obligations of others of the type described in
clause (1) that are Guaranteed by such Person; and
(3) all liabilities and obligations of others of the type described in
clause (1) that are secured by, or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be
secured by, any Lien on property owned by such Person, including accounts
and contract rights, even though such Person has not assumed or become
liable for the payment of such Indebtedness; PROVIDED, that the amount of
such Indebtedness will (to the extent such Person has not assumed or
become liable for the payment of such Indebtedness) be the lesser of (i)
the fair market value of such property at the time of determination and
(ii) the amount of such Indebtedness.
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"INTEREST COVERAGE RATIO" means, for any period, the ratio of:
(1) Consolidated EBITDA of the Company for such period; over
(2) Consolidated Interest Expense of the Company for such period.
In calculating Interest Coverage Ratio for any period, pro forma effect will
be given to:
(a) the incurrence, assumption, guarantee, repayment, repurchase,
redemption or retirement by the Company or any of its Subsidiaries of
any Indebtedness subsequent to the commencement of the period for
which the Interest Coverage Ratio is being calculated, as if the same
had occurred at the beginning of the applicable period; and
(b) the occurrence of any Asset Sale during such period by reducing
Consolidated EBITDA for such period by an amount equal to the
Consolidated EBITDA (if positive) directly attributable to the assets
sold and by reducing Consolidated Interest Expense by an amount equal
to the Consolidated Interest Expense directly attributable to any
Indebtedness secured by the assets sold and assumed by third parties
or repaid with the proceeds of such Asset Sale, in each case as if
the same had occurred at the beginning of the applicable period.
For purposes of making the computation referred to above, acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
all mergers and consolidations, subsequent to the commencement of such period
will be calculated on a PRO FORMA BASIS, assuming that all such acquisitions,
mergers and consolidations had occurred on the first day of such period. Without
limiting the foregoing, the financial information of the Company with respect to
any portion of a period that falls before the Issue Date will be adjusted to
give pro forma effect to the issuance of the Notes and the application of the
proceeds therefrom as if they had occurred at the beginning of such period.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of loans,
Guarantees, advances or capital contributions (excluding commission, travel and
similar advances to officers and employees of such Person made in the ordinary
course of business and bona fide accounts receivable arising from the sale of
goods or services in the ordinary course of business consistent with past
practice), purchases or other acquisitions for
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consideration of Indebtedness, Equity Interests or other securities, and any
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"ISSUE DATE" means the date upon which the Company originally issued $100.0
million of its 10 1/4% Senior Secured Notes due 2004.
"LIEN" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"NET INCOME" means, with respect to any Person for any period, the net
income (loss) of such Person for such period, determined in accordance with
GAAP, excluding any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with any Asset Sales
and dispositions pursuant to sale and leaseback transactions, and excluding any
extraordinary gain (but not loss), together with any related provision for taxes
on such gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received in respect of any
Asset Sale, net of:
(1) the reasonable and customary direct out-of-pocket costs relating to such
Asset Sale, other than any such costs payable to an Affiliate of the
Company, including legal, accounting and investment banking fees and
sales commissions;
(2) amounts required to be applied to the repayment of Indebtedness secured
by a Lien on the asset or assets the subject of such Asset Sale;
(3) any reserve for adjustment in respect of the sale price of such asset or
assets;
(4) taxes paid or payable as a result thereof;
(5) any relocation expenses and pension, severance and shutdown costs
incurred as a result thereof; and
(6) any deduction or appropriate amounts to be provided by the Company or
any of its Subsidiaries as a reserve in accordance with GAAP against any
liabilities associated with the assets disposed of in such transaction
and retained by the Company or any Subsidiary after such sale or
disposition thereof including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters or against any indemnification obligations with respect to such
transaction.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other obligations and liabilities
of the Company or any of the Guarantors under the Indenture, the Notes, the
Guarantees of the Notes or any of the Collateral Agreements.
"OTHER PERMITTED INDEBTEDNESS" means:
(1) Indebtedness in respect of reimbursement-type obligations regarding
workers' compensation claims;
(2) Indebtedness of the Company and its Restricted Subsidiaries in
connection with performance, surety, statutory, appeal or similar bonds
in the ordinary course of business;
(3) Indebtedness of the Company and its Restricted Subsidiaries in
connection with agreements providing for indemnification, purchase price
adjustments and similar obligations in connection with the sale or
disposition of any of their business, properties or assets; and
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(4) The guarantee by the Company or any of its Restricted Subsidiaries of
Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred by another provision of the covenant
described under the sub-heading "Limitation on Incurrence of
Indebtedness."
"PERMITTED INVESTMENTS" means:
(1) Investments in the Company or any Wholly Owned Subsidiary;
(2) Investments in Cash Equivalents;
(3) Investments in a Person, if as a result of such Investment (a) such
Person becomes a Wholly Owned Subsidiary and the Capital Stock of such
Person is pledged to secure the Obligations, or (b) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or
a Wholly Owned Subsidiary; and
(4) other Investments that do not exceed in the aggregate $7.5 million at
any time outstanding.
"PERMITTED LIENS" means:
(1) Liens in favor of the Company and/or its Restricted Subsidiaries other
than with respect to intercompany Indebtedness;
(2) Liens on property of a Person existing at the time such Person is
acquired by, merged into or consolidated with the Company or any
Restricted Subsidiary; PROVIDED, that such Liens were not created in
contemplation of such acquisition and do not extend to assets other than
those subject to such Liens immediately prior to such acquisition;
(3) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary, PROVIDED, that such Liens were not
created in contemplation of such acquisition and do not extend to assets
other than those subject to such Liens immediately prior to such
acquisition;
(4) Liens incurred in the ordinary course of business in respect of Hedging
Obligations;
(5) Liens to secure Indebtedness for borrowed money of a Subsidiary in favor
of the Company or a Wholly Owned Subsidiary;
(6) Liens (other than pursuant to ERISA or environmental laws) to secure the
performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations, exclusive of obligations constituting
Indebtedness, of a like nature incurred in the ordinary course of
business;
(7) Liens existing or created on the Issue Date;
(8) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested or remedied in good faith
by appropriate proceedings promptly instituted and diligently concluded,
PROVIDED, that any reserve or other appropriate provision as may be
required in conformity with GAAP has been made therefor;
(9) Liens arising by reason of any judgment, decree or order of any court
with respect to which the Company or any of its Restricted Subsidiaries
is then in good faith prosecuting an appeal or other proceedings for
review, the existence of which judgment, order or decree is not an Event
of Default under the Indenture;
(10) encumbrances consisting of zoning restrictions, survey exceptions,
utility easements, licenses, rights of way, easements of ingress or
egress over property of the Company or any of its Restricted
Subsidiaries, rights or restrictions of record on the use of real
property, minor
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defects in title, landlord's and lessor's liens under leases on property
located on the premises rented, mechanics' liens, vendors' liens, and
similar encumbrances, rights or restrictions on personal or real
property, in each case not interfering in any material respect with the
ordinary conduct of the business of the Company or any of its Restricted
Subsidiaries;
(11) Liens incidental to the conduct of business or the ownership of
properties incurred in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security, or to secure the performance of tenders, bids, and government
contracts and leases and subleases; and
(12) any extension, renewal, or replacement (or successive extensions,
renewals or replacements), in whole or in part, of Liens described in
clauses (1) through (11) above.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity.
"PREFERRED STOCK" means amounts sufficient to pay:
(1) cash dividends and mandatory redemption payments under the Senior
Preferred Stock and the Class A Preferred Stock and Class B Preferred
Stock; and
(2) interest payments on Indebtedness of Holdings, the net proceeds of which
are in an amount no greater than the amount necessary to redeem the
Senior Preferred Stock and Class A Preferred Stock and Class B Preferred
Stock and which Indebtedness has no installment of principal due prior to
the first anniversary of the Stated Maturity of the Notes.
"PUBLIC EQUITY OFFERING" means a bona fide underwritten public offering of
Qualified Stock of the Company, pursuant to a registration statement filed with
and declared effective by the Commission in accordance with the Securities Act.
"PURCHASE MONEY LIENS" means Liens to secure or securing Purchase Money
Obligations permitted to be incurred under the Indenture.
"PURCHASE MONEY OBLIGATIONS" means Indebtedness representing, or incurred to
finance, the cost:
(1) of acquiring any assets; and
(2) of construction or build-out of manufacturing, distribution or
administrative facilities, including Purchase Money Obligations of any
other Person at the time such other Person is merged with or into or is
otherwise acquired by the Company or any Restricted Subsidiary,
PROVIDED, that:
(a) the principal amount of such Indebtedness does not exceed 100% of
such cost, including construction charges;
(b) any Lien securing such Indebtedness does not extend to or cover any
other asset or property other than the asset or property being so
acquired; and
(c) such Indebtedness is incurred, and any Liens with respect thereto are
granted, within 180 days of the acquisition of such property or
asset.
"QUALIFIED STOCK" means, with respect to any Person, Capital Stock of such
Person other than Disqualified Stock.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" means a Subsidiary other than an Unrestricted
Subsidiary.
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"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of Voting Stock thereof is at the
time owned or controlled, directly or indirectly, by such Person or one
or more of the other subsidiaries of that Person or a combination
thereof; and
(2) any partnership in which such Person or any of its subsidiaries is a
general partner.
"SUBSIDIARY" means any subsidiary of the Company.
"UNRESTRICTED SUBSIDIARY" means:
(1) the Inactive Subsidiaries; and
(2) any other Subsidiary that has been designated by the Company (by written
notice to the Trustee as provided below) as an Unrestricted Subsidiary;
PROVIDED, that a Subsidiary may not be designated as an "Unrestricted
Subsidiary" unless:
(a) such Subsidiary does not own any Capital Stock of, or own or hold any
Lien on any property of, the Company or any Restricted Subsidiary
(other than such Subsidiary);
(b) neither immediately prior thereto nor after giving pro forma effect
to such designation, would there exist a Default or Event of Default;
(3) immediately after giving effect to such designation on a pro forma
basis, the Company could incur at least $1.00 of Indebtedness pursuant to
the Interest Coverage Ratio test set forth in the covenant described
under the sub-heading "--Limitation on Incurrence of Indebtedness"; and
(4) the creditors of such Subsidiary have no direct or indirect recourse
(including, without limitation, recourse with respect to the payment of
principal or interest on Indebtedness of such Subsidiary) to the assets
of the Company or of a Restricted Subsidiary (other than such
Subsidiary).
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if no Default or Event of Default
is existing or will occur as a consequence thereof; and immediately after giving
effect to such designation, on a pro forma basis, the Company could incur at
least $1.00 of Indebtedness pursuant to the Interest Coverage Ratio test set
forth in the covenant described under the sub-heading "--Limitation on
Incurrence of Indebtedness." Each such designation will be evidenced by filing
with the Trustee a certified copy of the board resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions. The Company will be deemed to make an
Investment in each Subsidiary designated as an "Unrestricted Subsidiary"
immediately following such designation in an amount equal to the Investment in
such Subsidiary and its subsidiaries immediately prior to such designation;
provided, that if such Subsidiary is subsequently redesignated as a Restricted
Subsidiary, the amount of such Investment will be deemed to be reduced (but not
below zero) by the fair market value of the net consolidated assets of such
Subsidiary on the date of such redesignation.
"VOTING STOCK" means, with respect to any Person:
(1) one or more classes of the Capital Stock of such Person having general
voting power to elect at least a majority of the board of directors,
managers or trustees of such Person (irrespective of whether or not at
the time Capital Stock of any other class or classes have or might have
voting power by reason of the happening of any contingency); and
(2) any Capital Stock of such Person convertible or exchangeable without
restriction at the option of the holder thereof into Capital Stock of
such Person described in clause (1) above.
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"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years (rounded to the nearest one-twelfth) obtained
by dividing:
(1) the then outstanding principal amount of such Indebtedness; into
(2) the total of the product obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, in respect thereof; by
(b) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
REGISTRATION RIGHTS
We issued and sold the unregistered notes to the initial purchaser on June
8, 1999 pursuant to the terms and conditions of a purchase agreement dated as of
May 26, 1999. We agreed in the purchase agreement to provide the holders of the
unregistered notes with the same registration rights granted to the holders of
our $130.0 million of 10 1/4% Series A Senior Secured Notes due 2004 that were
issued and sold in unregistered offerings on July 2, 1997 and December 7, 1998
and subsequently exchanged for a like principal amount of our 10 1/4% Series B
Senior Secured Notes due 2004 that were registered under the Securities Act. The
registration rights with respect to the unregistered notes are set forth in a
registration rights agreement dated as of July 2, 1997 between us and the
initial purchasers of the notes issued on July 2, 1997.
The registration rights agreement requires us to file with the SEC by August
7, 1999 a registration statement with respect to an offer to exchange the
unregistered notes for registered notes, which would have terms substantially
identical in all material respects to the unregistered notes. Upon the
effectiveness of the exchange offer registration statement, we will offer to the
holders of unregistered notes who are not prohibited by any law or policy of the
SEC from participating in the exchange offer the opportunity to exchange their
unregistered notes for registered notes. If applicable interpretations of the
staff of the SEC do not permit us to effect the exchange offer or, in the case
of any holder of unregistered notes that participates in the exchange offer,
such holder does not receive freely tradable registered notes on the date of the
exchange for tendered notes, or if for some reason the exchange offer is not
consummated within 165 days after the date on which the unregistered notes are
issued, or upon the request of the initial purchaser, we will, at our cost, file
with the SEC a shelf registration statement to cover resales of unregistered
notes by the holders thereof who satisfy conditions relating to the provision of
information in connection with the shelf registration statement. We will use our
best efforts to cause the applicable registration statement to be declared
effective by the SEC as promptly as practicable after the date of filing.
Based on an interpretation of the staff of the SEC set forth in several
no-action letters to third parties, we believe that the registered notes issued
pursuant to the exchange offer may be offered for resale, resold and otherwise
transferred by holders thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act. However, any purchaser of
unregistered notes who is an "affiliate" of ours or who intends to participate
in the exchange offer for the purpose of distributing the registered notes (1)
will not be able to rely on the interpretation of the staff of the SEC set forth
in the above referenced no-action letters, (2) will not be able to tender its
unregistered notes in the exchange offer and (3) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the unregistered notes unless such sale
or transfer is made pursuant to an exemption from such requirements.
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Unless the exchange offer would not be permitted by a policy of the SEC, we
will commence the exchange offer and use our best efforts to issue, on or prior
to 45 days after the date on which the exchange offer registration statement is
declared effective by the SEC, registered notes in exchange for all unregistered
notes tendered prior thereto in the exchange offer. Upon the occurrence of some
registration defaults, we will pay liquidated damages to each holder of
registrable securities, during the first 90-day period immediately following the
occurrence of such registration default, in an amount equal to $.05 per week per
$1,000 principal amount of unregistered notes held by such holder. The amount of
the liquidated damages thereafter will increase each week an additional $.05 per
$1,000 principal amount of registrable securities, up to a maximum of $.40 per
week per $1,000 principal amount of unregistered notes until such registration
default is cured. All accrued liquidated damages will be paid in the same manner
as interest payments on the unregistered notes on semiannual damages payment
dates that correspond to interest payment dates for the unregistered notes and
upon redemption dates, change of control payment dates and excess proceed
payment dates. Following the cure of a registration default, the accrual of
liquidated damages will cease.
In order to participate in the exchange offer, holders of unregistered notes
will be required to make to us the representations described in the registration
rights agreement. Holders of unregistered notes will be required to deliver
information to be used in connection with the shelf registration statement and
to provide comments on the shelf registration statement within the time periods
set forth in the registration rights agreement in order to have their
unregistered notes included in the shelf registration statement. A holder of
unregistered notes that sells such notes pursuant to the shelf registration
statement generally would be required to be named as a selling security-holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to some of the indemnification, civil liability and other provisions of
the Securities Act in connection with such sales and will be bound by the
provisions of the registration rights agreement which are applicable to such
holder. We will provide a copy of the registration rights agreement to
prospective investors upon request.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the notes to be issued as set
forth herein will initially be issued in the form of one or more registered
global notes, each of which will be deposited on the date of acceptance for
exchange of the notes and the issuance of the notes with, or on behalf of, the
DTC and registered in the name of Cede & Co., as nominee of the DTC, such
nominee being referred to herein as the "global holder". Interests in global
notes will be available for purchase only by "qualified institutional buyers."
The following are summaries of certain rules and operating procedures of the DTC
which affect the global notes.
Notes that are (1) originally issued to or transferred to institutional
accredited investors who are not qualified institutional buyers or to any other
persons who are not qualified institutional buyers, referred to herein as the
"non-global purchasers," or (2) issued as described under "Certificated Notes,"
will be issued in registered form, referred to in this section as the
"certificated notes." Upon the transfer to a qualified institutional buyers of
certificated notes initially issued to a non-global purchaser, such certificated
notes will, unless the applicable global note has previously been exchanged for
certificated notes, be exchanged for an interest in the global note representing
the principal amount of notes being transferred. For a description of the
restrictions on the transfer of certificated notes, see "Notice to Investors."
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DTC has advised us that it is a limited-purpose trust company that was
created to hold securities for its participating organizations and to facilitate
the clearance and settlement of transactions in such securities between
participants through electronic book-entry changes in accounts of its
participants. DTC's participants include securities brokers and dealers, banks
and trust companies, clearing corporations and some other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by or on behalf of DTC
only through DTC's participants or indirect participants.
We expect that pursuant to procedures established by DTC (1) upon deposit of
the global notes, DTC will credit the accounts of participants designated by the
initial purchaser with portions of the global notes and (2) ownership of the
notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the interests of DTC's
participants), DTC's participants and indirect participants. The laws of some
states require that some persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer notes will be
limited to such extent. For other restrictions on the transferability of the
notes, see "Notice to Investors."
So long as the global holder is the registered owner of any notes, the
global holder will be considered the sole owner of such notes outstanding under
the indenture. Except as provided below, owners of beneficial interests in a
global note will not be entitled to have notes represented by such global note
registered in their names, will not receive or be entitled to receive physical
delivery of notes in certificated form, and will not be considered the owners or
holders thereof under the indenture for any purpose. As a result, the ability of
a person having a beneficial interest in notes represented by a global note to
pledge such interest to persons or entities that do not participate in DTC's
system or to otherwise take actions in respect of such interest, may be affected
by the lack of a physical certificate evidencing such interest. Accordingly,
each qualified institutional buyer owning a beneficial interest in a global note
must rely on the procedures of DTC and, if such qualified institutional buyer is
not a participant or an indirect participant, on the procedures of the
participant through which such qualified institutional buyer owns its interest,
to exercise any rights of a holder under such global note or the indenture.
Neither we nor the trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
notes.
Payments in respect of the principal of, premium, if any, and interest on
any notes registered in the name of a global holder on the applicable record
date will be payable by the trustee to or at the direction of such global holder
in its capacity as the registered holder under the indenture. Under the terms of
the indenture, we and the trustee may treat the persons in whose names the
notes, including the global notes, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither we nor the trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of notes (including principal, premium, if any, and interest), or to immediately
credit the accounts of the relevant participants with such payment, in amounts
proportionate to their respective interests in the global notes in principal
amount of beneficial interests in the relevant security as shown on the records
of DTC. Payments by DTC's participants and indirect participants to the
beneficial owners of notes will be governed by standing instructions and
customary practice and will be the responsibility of DTC's participants or
indirect participants.
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CERTIFICATED NOTES
If (1) we notify the trustee in writing that DTC is no longer willing or
able to act as a depository and we are unable to locate a qualified successor
within 90 days or (2) we, at our option, notify the trustee in writing that we
elect to cause the issuance of notes in definitive form under the indenture,
then, upon surrender by the relevant global holder of its global note,
certificated notes in such form will be issued to each person that such global
holder and DTC identify as the beneficial owner of the related notes. In
addition, subject to conditions, any person having a beneficial interest in the
global note may, upon request to the trustee, exchange such beneficial interest
for notes in the form of certificated notes. Upon any such issuance, the trustee
is required to register such certificated securities in the name of, and cause
the same to be delivered to, such person or persons, or the nominee of any
thereof, in fully registered form.
YEAR 2000
The following information has been provided by DTC:
DTC's management is aware that some computer applications, systems, and the
like for processing data, referred to in this section as "systems," that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems." DTC has informed its participants and
other members of the financial community that it has developed and is
implementing a program so that its systems, as the same relate to the timely
payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial industry that it is contacting, and will continue to contact, third
party vendors from whom DTC acquires services to: (1) impress upon them the
importance of such services being Year 2000 compliant; and (2) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, DTC is in the process of developing such
contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty, or contract modification of any kind.
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
The following is a general discussion of the material United States federal
tax consequences associated with the exchange of the unregistered notes for the
registered notes pursuant to the exchange offer and disposition of the
registered notes. This discussion applies only to a beneficial owner of
registered notes who acquired unregistered notes at the initial offering for the
original offering price thereof and who acquires the registered notes pursuant
to the exchange offer. A beneficial owner of registered notes is the person who
is the owner of the registered notes for federal income tax purposes. This
discussion is based upon the United States federal tax law now in effect, which
is subject to change, possibly retroactively. This discussion does not consider
any specific facts or circumstances that may apply to a particular beneficial
owner of registered notes. Prospective investors are urged to consult their tax
advisors regarding the United States federal tax consequences of acquiring,
holding, and disposing of the registered notes, as well as any tax consequences
that may arise under the laws of any foreign, state, local, or other taxing
jurisdiction.
For purposes of this discussion, a "U.S. holder" means a beneficial owner of
registered notes that is either a citizen or resident of the United States, a
corporation, partnership, or other entity created or organized in the United
States or under the laws of the United States or of any political subdivision
thereof, an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source, or a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust. A non-U.S. holder is a
beneficial owner of registered notes other than a U.S. holder.
EXCHANGE OFFER
The exchange of unregistered notes for registered notes pursuant to the
exchange offer will not constitute a "significant modification" of the
unregistered notes for United States federal income tax purposes and,
accordingly, the registered notes received will be treated as a continuation of
the unregistered notes in the hand of such holder. As a result, there will be no
United States federal income tax consequences to a United States holder who
exchanges unregistered notes for registered notes pursuant to the exchange
offer, and any such holder will have the same adjusted tax basis and holding
period in the registered notes for United States federal income tax purposes as
it had in the unregistered notes immediately before the exchange.
STATED INTEREST
The holders of registered notes will include stated interest in gross income
in accordance with their methods of accounting for tax purposes as if the
exchange had not occurred, including accrued, unpaid interest on unregistered
notes to the date of the issuance of the registered notes.
DISPOSITION
A beneficial owner of registered notes will recognize gain or loss upon the
sale, exchange, redemption or other taxable disposition of the registered notes
measured by the difference between (i) the amount of cash and fair market value
of property received (not attributable to accrued, but unpaid interest that has
not yet been subject to federal income tax) and (ii) the beneficial owner's tax
basis in the registered notes. A beneficial owner's tax basis in a note will
generally equal the price paid by the beneficial owner for the note, decreased
by any payments of principal received, and increased by the amount of accrued,
unpaid interest that has been subject to federal income tax. Any such gain or
loss will be long-term capital gain or loss, provided that the registered notes
constitute a capital asset in the hands of the beneficial owner and had been
held for more than one year (including the period that such beneficial owner
held the unregistered notes exchanged for such registered notes).
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NON-U.S. HOLDERS
Under present United States federal income and estate tax law, assuming
certain certification requirements are satisfied (which include identification
of the beneficial owner of the instrument), and subject to the discussion of
backup withholding below:
(a) payments of interest on the registered notes to any non-U.S. holder will
not be subject to United States federal income or withholding tax,
provided that (1) the holder does not actually or constructively own 10%
or more of the total combined voting power of all classes of our stock
entitled to vote, (2) the holder is not (i) a bank receiving interest
pursuant to a loan agreement entered into in the ordinary course of its
trade or business or (ii) a controlled foreign corporation that is
related to us through stock ownership, and (3) such interest payments are
not effectively connected with the conduct of a United States trade or
business of the holder;
(b) a non-U.S. holder of registered notes will not be subject to the United
States federal income tax on gain realized on the sale, exchange, or
other disposition of registered notes, unless (1) such holder is an
individual who is present in the United States for 183 days or more
during the taxable year and certain other requirements are met, or (2)
the gain is effectively connected with the conduct of a United States
trade or business of such holder; and
(c) if interest on the registered notes is exempt from withholding of United
States federal income tax under the rules described above (without regard
to the certification requirement), the registered notes will not be
included in the estate of a deceased non-U.S. holder for United States
Federal estate tax purposes.
The certification referred to above may be made on an Internal Revenue
Service Form W-8 or a substantially similar substitute form.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We will, where required, report to the beneficial owners of registered notes
and the Internal Revenue Service the amount of any interest paid on the
registered notes in each calendar year and the amounts of federal tax withheld,
if any, with respect to such payments. A noncorporate U.S. holder may be subject
to information reporting and to backup withholding at a rate of 31% with respect
to payments of principal and interest made on registered notes, or on proceeds
of the disposition of registered notes before maturity, unless such U.S. holder
provides a correct taxpayer identification number or proof of an applicable
exemption, and otherwise complies with applicable requirements of the
information reporting and backup withholding rules. Such information may be made
on an Internal Revenue Service Form W-9 or a substantially similar substitute
form.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to interest paid on the registered notes to a non-U.S. holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the registered notes are subject to both
backup withholding at a rate of 31% and information reporting unless the holder
certifies its non-U.S. holder status under penalties of perjury and provides its
name and address or otherwise establishes an exemption. This certification may
be made on an Internal Revenue Service Form W-8 or substantially similar
substitute form. Information reporting requirements (but not backup withholding)
will also apply to payments of the proceeds of sales of the registered notes by
foreign offices of United States brokers, or foreign brokers with certain types
of relationships to the United States, unless the broker has documentary
evidence in its records that the beneficial owner is a non-U.S. holder and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption.
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Backup withholding is not an additional tax. Any amount withheld under the
backup withholding rules will be refunded or credited against the beneficial
owner's United States Federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
NEW TREASURY REGULATIONS APPLICABLE TO NON-U.S. HOLDERS
On October 6, 1997, the United States Treasury Department issued final
Treasury regulations governing certification procedures regarding both United
States federal withholding tax and backup withholding tax on certain amounts
paid to non-U.S. holders after December 31, 2000. The new Treasury regulations
modify and, in general, unify the way in which non-U.S. holders may establish
eligibility for United States federal withholding tax exemptions, including
under a tax treaty, and an exemption from backup withholding.
For example, the new Treasury regulations will require new forms, which
non-U.S. holders will generally have to provide earlier than you would have had
to provide replacements for expiring existing forms. The new Treasury
regulations also clarify the standards upon which withholding agents of non-U.S.
holders may rely, add requirements in order for non-U.S. holders to claim
reduced federal tax withholding under a tax treaty, and provide different
procedures in order for foreign intermediaries and flow-through entities (such
as foreign partnerships) to claim the benefit of applicable exemptions if they
receive payments on behalf of non-U.S. holders.
The new Treasury regulations are particularly complex. Non-U.S. holders
should consult their tax advisors concerning the effect, if any, of such new
Treasury regulations on their investment in the registered notes.
PLAN OF DISTRIBUTION
Based on existing interpretations of the Securities Act by the SEC's staff
set forth in several no-action letters issued to third parties in similar
transactions, we believe that the registered notes issued in the exchange offer
in exchange for the unregistered notes may be offered for resale, resold and
otherwise transferred by holders without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the
registered notes are acquired in the ordinary course of such holders' business
and the holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of registered notes. This position does not apply to any holder that is (1) an
"affiliate" of ours within the meaning of Rule 406 under the Securities Act, (2)
a broker-dealer who acquired notes directly from us or (3) broker-dealers who
acquired notes as a result of market-making or other trading activities,
referred to in this section as "participating broker-dealers". Any participating
broker-dealers receiving registered notes in the exchange offer is subject to a
prospectus delivery requirement with respect to resales of the registered notes.
To date, the SEC has taken the position that participating broker-dealers may,
for a limited period, fulfill their prospectus delivery requirements with
respect to transactions involving an exchange of securities such as the exchange
pursuant to the exchange offer, other than a resale of an unsold allotment from
the sale of the unregistered notes to the initial purchaser, with this
prospectus.
Each broker-dealer receiving registered notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in any resale
of the registered notes. Participating broker-dealers may use this prospectus in
reselling registered notes, if the unregistered notes were acquired for their
own accounts as a result of market-making activities or other trading
activities. We have agreed that a participating broker-dealer may use this
prospectus in reselling registered notes for a period ending 180 days after the
expiration date or, if earlier, when a participating broker-dealer has disposed
of all registered notes. A participating broker-dealer intending to use this
prospectus in the resale of registered notes must notify us on or before the
expiration date, that it is a participating broker-dealer. This notice may be
given in the space provided for in the letter of transmittal or may be delivered
to
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the exchange agent. We have agreed that, for a period of 180 days after the
expiration date, we will make this prospectus, and any amendment or supplement
to this prospectus, available to any broker-dealer that requests these documents
in the letter of transmittal. See "The Exchange Offer--Resales of Registered
Notes" for more information.
We will not receive any cash proceeds from any sale of the registered notes
by broker-dealers. Broker-dealers acquiring registered notes for their own
accounts may sell the notes in one or more transactions in the over-the-counter
market, in negotiated transactions, through writing options on the registered
notes or a combination of such methods. Any resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any broker-dealer and/or the
purchasers of registered notes.
Any broker-dealer reselling registered notes that it received in the
exchange offer and any broker or dealer that participates in a distribution of
registered notes may be deemed to be an "underwriter" within the meaning of the
Securities Act. Any profit on any resale of registered notes and any commissions
or concessions received by any persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not admit that it is an "underwriter" within the meaning of
the Securities Act.
LEGAL MATTERS
Winston & Strawn will pass upon legal matters for us related to the
registered notes.
EXPERTS
Our financial statements as of August 30, 1997 and August 29, 1998 and for
each of the fiscal years in the three year period ended August 29, 1998,
appearing in this prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of Laura Secord as of December 31, 1997 and 1998
and for the years then ended included in this prospectus have been audited by
Deloitte & Touche LLP, chartered accountants, to the extent and for the periods
indicated in their report thereon. Such financial statements have been included
in reliance upon the report of Deloitte & Touche LLP appearing elsewhere herein.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the periodic reporting and other information requirements
of the Exchange Act. As long as we are subject to such periodic reporting and
informational requirements, we will furnish all reports and other information
required thereby to the SEC and pursuant to the indenture will furnish copies of
such reports and other information to the trustee. Such reports and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the SEC: Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained by mail from the Public Reference Section of the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the SEC maintains a site on the World Wide Web
that contains reports, proxies and information statements and other information
filed electronically by us with the SEC which can be accessed over the Internet
at http://www.sec.gov.
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We have agreed that, whether or not we are required to do so by the rules
and regulations of the SEC, so long as any notes are outstanding, we will
furnish to the trustee, and deliver or cause to be delivered to the holders of
the notes, (1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K if we
were required to file such forms, including for each a "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and, with
respect to the annual financial statements only, a report thereon by our
independent auditors; and (2) all reports that would be required to be filed
with the SEC on Form 8-K if we were required to file such reports. In addition,
we have agreed, for so long as any of the notes remain outstanding, to make
available, upon request, to any prospective purchaser of the notes and
beneficial owner of the notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act. Information
may be obtained from us at 1137 West Jackson Boulevard, Chicago, Illinois 60607;
Attention: Secretary, telephone number (312) 243-2700.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" certain information that we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information filed later with the
SEC will update and supersede the information then on file. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act until the exchange
offer is completed.
1. Archibald Candy's Annual Report on Form 10-K for the fiscal year ended
August 29, 1998 filed with the SEC on November 27, 1998;
2. Archibald Candy's Quarterly Reports on Form 10-Q for the quarterly periods
ended November 28, 1998, February 27, 1999 and May 29, 1999, filed with the
SEC on January 12, 1999, April 13, 1999 and July 13, 1999, respectively; and
3. Archibald Candy's Current Reports on Form 8-K filed with the SEC on December
2, 1998, December 22, 1998 (as amended by Form 8-K/A, filed with the SEC on
February 19, 1999), June 3, 1999 and June 23, 1999 (as amended by Form
8-K/A, filed with the SEC on August 19, 1999).
On the request of any person to whom a copy of this prospectus is delivered,
we will provide, without charge, a copy of any or all of the documents
incorporated herein by reference, other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference. Written requests for
such copies should be directed to Archibald Candy Corporation, 1137 West Jackson
Boulevard, Chicago, Illinois 60607; Attention: Secretary (telephone number (312)
243-2700).
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. Archibald Candy
Corporation has not authorized anyone to provide you with different or
additional information. We are not making an offer to sell any notes in any
state or country where the exchange offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of this document.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<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
Consolidated Balance Sheets as of May 30, 1998 and May 29, 1999 (UNAUDITED).......... F-14
Consolidated Statements of Operations for the nine months ended May 30, 1998 and May
29, 1999 (UNAUDITED)............................................................... F-15
Consolidated Statements of Cash Flows for the nine months ended May 30, 1998 and
May 29, 1999 (UNAUDITED)........................................................... F-16
Notes to Consolidated Financial Statements (UNAUDITED)............................... F-17
THE LAURA SECORD RETAIL BUSINESS
Auditors' Report..................................................................... F-22
Balance Sheets as of December 31, 1997 and December 31, 1998......................... F-23
Statements of Operations for the years ended December 31, 1997 and December 31,
1998............................................................................... F-24
Statements of Cash Flows for the years ended December 31, 1997 and December 31,
1998............................................................................... F-25
Notes to Financial Statements........................................................ F-26
Balance Sheets as of May 2, 1998 and May 1, 1999 (UNAUDITED)......................... F-33
Statements of Operations for the four months ended May 2, 1998 and May 1, 1999
(UNAUDITED)........................................................................ F-34
Statements of Cash Flows for the four months ended May 2, 1998 and May 1, 1999
(UNAUDITED)........................................................................ F-35
Notes to Financial Statements (UNAUDITED)............................................ F-36
</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 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 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, net............... 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................................................ 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 temporary differences and carryforwards using the enacted rates
and laws that will be in effect when the differences are expected to reverse.
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)
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>
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>
F-8
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-9
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. BENEFIT PLANS (CONTINUED)
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.
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
F-10
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
covenants that limit the ability of the Company to: (i) incur additional
indebtedness or create liens, (ii) sell certain assets, (iii) merge,
consolidate, or sell substantially all of the Company's assets, (iv) make
restricted payments such as dividends, purchases of its capital stock, or make
payments on behalf of Holdings, and (v) conduct transactions with affiliates.
Prior to July 1, 2000, the Company may redeem up to $33.0 million of the
Senior Secured notes at a redemption price of 110.25% with proceeds from one or
more public equity offerings. The Company may redeem the Senior Secured notes,
in whole or in part, at a redemption price of 105.125% beginning July 1, 2001,
102.563% in the year beginning July 1, 2002, and 100% beginning July 1, 2003.
During the term of the indenture, in the event of a change in control, whereby
there is a sale or transfer of substantially all the Company's assets or stock,
a merger, consolidation, or change in Board of Directors, the Company is
required to repurchase all the Senior Secured notes at a purchase price of 101%.
In November 1997, the Company exchanged these notes for new senior secured
notes which have been registered under the Securities Act of 1933. These new
notes are substantially identical (including principal amount, interest rate,
maturity, security, and ranking) to the form and terms of the old notes for
which they were exchanged.
On July 2, 1997, the Company amended its credit facility. The amended
facility provides for revolving loans up to $20.0 million (including a $2.0
million letter of credit facility), based on eligible assets, as defined, and
expires July 1, 2000. Borrowings under the credit facility bear interest at
prime (8.5% at August 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-11
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
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.
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
F-12
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
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-13
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MAY 30, 1998 AND MAY 29, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 30, MAY 29,
1998 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 29,924 $ 23,844
Accounts receivable, net................................................................ 1,122 1,727
Inventories............................................................................. 18,206 27,591
Prepaid expenses and other current assets............................................... 1,389 2,691
---------- ----------
Total current assets...................................................................... 50,641 55,853
Due from affiliate........................................................................ 825 --
Property, plant, and equipment, net....................................................... 20,478 47,211
Goodwill, net............................................................................. 31,260 30,461
Noncompete agreements and other intangibles, net.......................................... 113 1,932
Deferred financing fees, net.............................................................. 3,771 6,790
Other assets.............................................................................. 1,965 2,848
Deferred income taxes..................................................................... -- 3,673
---------- ----------
Total assets.............................................................................. $ 109,053 $ 148,768
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................................ $ 3,820 $ 4,624
Accrued liabilities..................................................................... 8,693 12,467
Payroll and related liabilities......................................................... 2,157 3,577
Current portion of capital lease obligations............................................ 129 156
---------- ----------
Total current liabilities................................................................. 14,799 20,824
Due to affiliate.......................................................................... -- 604
Long-term debt............................................................................ 100,000 130,000
Deferred rent............................................................................. -- 1,845
Capital lease obligations, less current portion........................................... 61 84
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..................................................................... (24,507) (23,289)
---------- ----------
Total shareholder's equity (deficit)...................................................... (5,807) (4,589)
---------- ----------
Total liabilities and shareholder's equity (deficit)...................................... $ 109,053 $ 148,768
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
MAY 30, MAY 29,
1998 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales................................................................................. $ 111,786 $ 155,806
Cost of sales, excluding depreciation and amortization.................................... 39,062 56,039
Selling, general, and administrative expenses, excluding depreciation and amortization.... 49,767 72,340
Depreciation and amortization............................................................. 3,573 6,584
Amortization of goodwill and other intangibles............................................ 1,260 1,812
Management fees and other fees............................................................ 391 393
---------- ----------
Operating income.......................................................................... 17,733 18,638
Other (income) and expense:
Interest expense........................................................................ 7,780 9,373
Interest income......................................................................... (873) (605)
Other income and expense................................................................ (195) (209)
---------- ----------
Income before income taxes................................................................ 11,021 10,079
Provision (benefit) for income taxes...................................................... 209 (276)
---------- ----------
Net income................................................................................ $ 10,812 $ 10,355
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-15
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
MAY 30, MAY 29,
1998 1999
--------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................. $ 10,812 $ 10,355
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................ 4,833 8,396
Changes in operating assets and liabilities:
Accounts receivable, net............................................................... (546) 314
Inventories............................................................................ 759 2,766
Prepaid expenses and other current assets.............................................. (599) (129)
Other assets........................................................................... 154 (374)
Accounts payable, accrued liabilities and deferred rent................................ 2,912 (3,239)
--------- ----------
Net cash provided by operating activities.................................................. 18,325 18,089
INVESTING ACTIVITIES
Acquisition of Sweet Factory net of cash acquired.......................................... -- (28,002)
Purchase of property, plant, and equipment................................................. (3,370) (4,954)
--------- ----------
Net cash used in investing activities...................................................... (3,370) (32,956)
FINANCING ACTIVITIES
Principal payments of capital lease obligations............................................ (331) (218)
Proceeds of long-term debt................................................................. -- 30,000
Costs related to refinancing............................................................... (501) (4,152)
--------- ----------
Net cash provided by (used in) financing activities........................................ (832) 25,630
--------- ----------
Net increase in cash and cash equivalents.................................................. 14,123 10,763
Cash and cash equivalents beginning of period.............................................. 15,801 13,081
--------- ----------
Cash and cash equivalents end of period.................................................... $ 29,924 $ 23,844
--------- ----------
--------- ----------
SUPPLEMENTAL SCHEDULE OF CASH TRANSACTIONS
Interest paid.............................................................................. $ 4,295 $ 4,843
--------- ----------
--------- ----------
</TABLE>
See accompanying notes.
F-16
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 29, 1999
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Archibald Candy Corporation (the "Company") is a manufacturer and marketer
of boxed chocolates and other confectionery items. The Company manufactures a
variety of candies and operates confectionery retail chains under the Fannie
May, Fanny Farmer and Sweet Factory brand names. As of May 29, 1999, the Company
operated 233 Fannie May stores, 74 Fanny Farmer stores and 253 Sweet Factory
stores. The Company also sells its Fannie May and Fanny Farmer branded products
in approximately 8,000 third-party retail outlets as well as through its
quantity order, mail order and fundraising programs. The Company is a wholly
owned subsidiary of Fannie May Holdings, Inc. The Company conducts its Sweet
Factory operations through Sweet Factory Group, Inc., a wholly-owned subsidiary
of the Company, and its three wholly-owned subsidiaries.
The interim financial statements included herein are unaudited and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes these disclosures are adequate to
make the information presented not misleading. In the opinion of management, all
adjustments necessary for fair presentation for the periods presented have been
reflected and are of a normal recurring nature. These financial statements
should be read in conjunction with the financial statements and notes thereto
for the year ended August 29, 1998.
Results of operations for the period from August 30, 1998 to May 29, 1999
are not necessarily indicative of the results that may be achieved for the
entire year.
2. INVENTORIES
Inventories at May 30, 1998 and May 29, 1999 are comprised of the following:
<TABLE>
<CAPTION>
MAY 30, MAY 29,
1998 1999
--------- ---------
<S> <C> <C>
Raw materials........................................................... $ 8,878 $ 9,918
Work in process......................................................... 306 469
Finished goods.......................................................... 9,022 17,204
--------- ---------
$ 18,206 $ 27,591
--------- ---------
--------- ---------
</TABLE>
3. DEBT AND CAPITAL LEASES
Long-term debt at May 30, 1998 and May 29, 1999 is comprised of $100.0
million of 10 1/4% senior secured notes due July 1, 2004 and $0.2 million of
capital lease obligations, and $130.0 million of 10 1/4% senior secured notes
due July 1, 2004 and $0.2 million of capital lease obligations, respectively.
4. INCOME TAXES
The provision (benefit) for income taxes differs from the amount of income
tax expense computed by applying the United States federal income tax rate due
to the benefit of net operating losses that were not recognized in prior
periods.
F-17
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1999
(DOLLARS IN THOUSANDS)
5. ACQUISITION AND RELATED FINANCING
On December 7, 1998, the Company acquired Sweet Factory Group, Inc. pursuant
to an Agreement and Plan of Reorganization dated as of November 24, 1998. The
purchase price of approximately $28.0 million consisted of Archibald Candy
Corporation's (i) payment of $18.0 million in cash to the stockholders of Sweet
Factory Group, Inc. and (ii) repayment of $10.0 million of indebtedness and
other obligations of Sweet Factory Group, Inc.
The Company funded the acquisition of Sweet Factory Group, Inc., in part,
through the issuance and sale of $30.0 million of 10 1/4% senior secured notes
due July 1, 2004 in an unregistered offering.
On June 8, 1999, the Company acquired through its subsidiary Archibald Candy
(Canada) Corporation, substantially all of the assets of the Laura Secord retail
business of Nestle Canada Inc. ("Nestle") pursuant to an Asset Purchase
Agreement dated as of May 26, 1999 between the Company and Nestle for total
consideration of approximately $42.2 million (U.S.).
The Company funded the Laura Secord acqusition, in part, through the
issuance and sale of $40.0 million of 10 1/4% senior secured notes due July 1,
2004 in an unregistered offering.
6. GUARANTOR SUBSIDIARIES
The Company's obligations under its currently outstanding $130.0 million of
10 1/4% senior secured notes due 2004 are fully and unconditionally guaranteed
on a senior secured, joint and several basis by each of the Company's
subsidiaries (other than its inactive subsidiaries) (collectively, the
"Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is directly or
indirectly wholly owned by the Company. None of the Company's subsidiaries is
subject to any restriction on its ability to pay dividends or make distributions
to the Company. The following condensed consolidating financial information
illustrates the composition of the Company and the Guarantor Subsidiaries as of
and for certain dates and periods. Separate financial statements of the
respective Guarantor Subsidiaries have not been provided because the Company's
management has determined that such additional information would not be useful
in assessing the financial composition of the Guarantor Subsidiaries.
Investments in subsidiaries are accounted for by the Company using the
equity method for purposes of the supplemental condensed consolidating
presentation. Earnings of subsidiaries are therefore reflected in the Company's
investment accounts and earnings. The principal elimination entries eliminate
the Company's investment in subsidiaries and intercompany balances and
transactions.
F-18
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1999
(DOLLARS IN THOUSANDS)
6. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 29, 1999
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 17,282 $ 6,562 $ -- $ 23,844
Accounts receivable, net................................. 1,467 260 -- 1,727
Inventories.............................................. 22,675 4,916 -- 27,591
Prepaid expenses and other current assets................ 750 1,941 -- 2,691
----------- ----------- ------------ ------------
Total current assets....................................... 42,174 13,679 -- 55,853
Property, plant and equipment, net......................... 22,041 25,170 -- 47,211
Goodwill, net.............................................. 30,461 -- -- 30,461
Noncompete agreements and other intangibles, net........... 95 1,837 -- 1,932
Deferred financing fees, net............................... 6,790 -- -- 6,790
Other assets............................................... 2,848 -- -- 2,848
Intercompany............................................... 18,524 -- (18,524) --
Investment in subsidiary................................... 17,740 -- (17,740) --
Deferred income taxes...................................... -- 3,673 -- 3,673
----------- ----------- ------------ ------------
Total assets............................................... $ 140,673 $ 44,359 $ (36,264) $ 148,768
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable......................................... $ 3,364 $ 1,260 $ -- $ 4,624
Accrued liabilities...................................... 8,633 3,834 -- 12,467
Payroll and related liabilities.......................... 2,621 956 -- 3,577
Current portion of capital lease obligations............. 15 141 -- 156
----------- ----------- ------------ ------------
Total current liabilities.................................. 14,633 6,191 -- 20,824
Due to affiliate........................................... 604 -- -- 604
Long-term debt............................................. 130,000 -- -- 130,000
Deferred rent.............................................. -- 1,845 -- 1,845
Capital lease obligations, less current portion............ 25 59 -- 84
Intercompany............................................... -- 18,524 (18,524) --
----------- ----------- ------------ ------------
Total shareholder's equity (deficit)....................... (4,589) 17,740 (17,740) (4,589)
----------- ----------- ------------ ------------
Total liabilities and shareholder's equity (deficit)....... $ 140,673 $ 44,359 $ (36,264) $ 148,768
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
F-19
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1999
(DOLLARS IN THOUSANDS)
6. GUARANTOR SUBSIDIARIES (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED MAY 29, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.................................................. $ 118,260 $ 37,546 $ -- $ 155,806
Cost of sales, excluding depreciation and amortization..... 42,727 13,312 -- 56,039
Selling, general, and administrative expenses, excluding
depreciation and amortization............................ 50,928 21,412 -- 72,340
Depreciation and amortization.............................. 3,510 3,074 -- 6,584
Amortization of goodwill and other intangibles............. 1,538 274 -- 1,812
Management fees and other fees............................. 393 -- -- 393
----------- ----------- ----- ------------
Operating income (loss).................................... 19,164 (526) -- 18,638
Other (income) expense:
Interest expense......................................... 9,299 74 -- 9,373
Interest income.......................................... (601) (4) -- (605)
Other income and expense................................. (209) -- -- (209)
Equity (earnings) of subsidiaries.......................... 260 -- (260) --
----------- ----------- ----- ------------
Income (loss) before income taxes.......................... 10,415 (596) 260 10,079
Provision (benefit) for income taxes....................... 60 (336) -- (276)
----------- ----------- ----- ------------
Net income (loss).......................................... $ 10,355 $ (260) $ 260 $ 10,355
----------- ----------- ----- ------------
----------- ----------- ----- ------------
</TABLE>
F-20
<PAGE>
ARCHIBALD CANDY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1999
(DOLLARS IN THOUSANDS)
6. GUARANTOR SUBSIDIARIES (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR NINE MONTHS ENDED MAY 29, 1999
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $ 10,355 $ (260) $ 260 $ 10,355
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 5,048 3,348 -- 8,396
Equity earnings in subsidiaries.......................... 260 -- (260) --
Changes in operating assets and liabilities:
Accounts receivables, net.............................. (87) 401 -- 314
Inventories............................................ 1,927 839 -- 2,766
Prepaid expenses and other current assets.............. (444) 315 -- (129)
Intercompany........................................... (18,524) 18,524 -- --
Other assets........................................... (374) -- -- (374)
Accounts payable, accrued liabilities and deferred
rent................................................. 2,570 (5,809) -- (3,239)
----------- ----------- ----- ------------
Net cash provided by operating activities.................. 731 17,358 -- 18,089
INVESTING ACTIVITIES
Acquisition of Sweet Factory net of cash acquired.......... -- (28,002) -- (28,002)
Investment in subsidiaries................................. (18,000) 18,000 -- --
Purchase of property, plant, and equipment................. (4,273) (681) -- (4,954)
----------- ----------- ----- ------------
Net cash used in investing activities...................... (22,273) (10,683) -- (32,956)
FINANCING ACTIVITIES
Principal payments of capital lease obligations............ (105) (113) -- (218)
Proceeds of long-term debt................................. 30,000 -- -- 30,000
Costs related to refinancing............................... (4,152) -- -- (4,152)
----------- ----------- ----- ------------
Net cash provided by (used in) financing activities........ 25,743 (113) -- 25,630
Net increase in cash and cash equivalents.................. 4,201 6,562 -- 10,763
Cash and cash equivalents beginning of period.............. 13,081 -- -- 13,081
----------- ----------- ----- ------------
Cash and cash equivalents end of period.................... $ 17,282 $ 6,562 $ -- $ 23,844
----------- ----------- ----- ------------
----------- ----------- ----- ------------
</TABLE>
F-21
<PAGE>
AUDITORS' REPORT
To Nestle Canada Inc.
We have audited the balance sheets of the Laura Secord Retail Business as at
December 31, 1997 and 1998 and the statements of operations and of cash flows
for the years then ended. These financial statements are the responsibility of
the management of Nestle Canada Inc. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Laura Secord Retail Business as at
December 31, 1997 and 1998 and the results of its operations and its cash flows
for the years then ended, in accordance with generally accepted accounting
principles in the United States.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
May 14, 1999
F-22
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT
Store cash floats......................................................................... $ 81 $ 76
Inventories (Note 3)...................................................................... 4,415 2,578
Prepaid expenses.......................................................................... 790 637
--------- ---------
TOTAL CURRENT ASSETS........................................................................ 5,286 3,291
ACCRUED LIABILITIES (Note 4)................................................................ 1,151 468
--------- ---------
WORKING CAPITAL............................................................................. 4,135 2,823
INVESTMENT IN JOINT VENTURE (Note 5)........................................................ 2,746 2,640
PROPERTY, PLANT AND EQUIPMENT (Note 6)...................................................... 11,289 9,206
--------- ---------
NET ASSETS.................................................................................. $ 18,170 $ 14,669
--------- ---------
--------- ---------
</TABLE>
F-23
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
NET SALES................................................................................... $ 79,759 $ 78,803
--------- ---------
COST OF SALES, excluding depreciation....................................................... 40,525 38,086
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, excluding depreciation and amortization....... 35,538 35,334
DEPRECIATION AND AMORTIZATION............................................................... 2,049 2,787
SHARE OF JOINT VENTURE LOSS (Note 5)........................................................ 707 453
--------- ---------
78,819 76,660
--------- ---------
OPERATING INCOME............................................................................ 940 2,143
INTEREST EXPENSE............................................................................ 430 864
--------- ---------
INCOME BEFORE INCOME TAXES.................................................................. 510 1,279
PROVISION FOR INCOME TAXES.................................................................. 272 607
--------- ---------
NET INCOME.................................................................................. $ 238 $ 672
--------- ---------
--------- ---------
</TABLE>
F-24
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................. $ 238 $ 672
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization............................................................ 2,049 2,787
Loss on disposal of property, plant and equipment........................................ 6 678
Share of joint venture loss.............................................................. 707 453
--------- ---------
3,000 4,590
Changes in operating assets and liabilities
Accounts receivable...................................................................... (221) 189
Inventories.............................................................................. (3,300) 5,361
Prepaid expenses......................................................................... (562) 154
Accounts payable and accrued liabilities................................................. 571 (1,608)
Due to related parties................................................................... 1,395 1,386
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES........................................................ 883 10,072
--------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment.................................................. (5,558) (1,382)
Received from (contributed to) joint venture............................................... (916) 885
--------- ---------
CASH USED IN INVESTING ACTIVITIES............................................................ (6,474) (497)
--------- ---------
FINANCING ACTIVITY
Advanced from (repaid to) Nestle Canada.................................................... (803) 7,363
--------- ---------
NET (DECREASE) INCREASE IN CASH.............................................................. $ (6,394) $ 16,938
--------- ---------
--------- ---------
</TABLE>
F-25
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Nestle Canada Inc. ("Nestle Canada") is proposing to sell its Laura Secord
Retail Business (the "Business"). The Business is a retailer and distributor of
chocolates, greeting cards, ice cream and other items primarily through 178
(1997--187) business-operated stores of which 18 (1997--16) stores, the "Combo"
stores, are in a joint venture between Nestle Canada and Hallmark Cards.
The Business comprises the following operations:
- The Laura Secord stores operated by Laura Secord Inc. (a wholly-owned
subsidiary of Nestle Canada);
- A 50% interest in the "Combo" stores;
- Sales by Laura Secord Inc. to distributors and retailers; and
- Sales by Nestle Canada to the "Combo" stores.
These financial statements have been prepared on the basis that the Business
has operated as a stand-alone entity.
The balance sheets include only those assets and liabilities which are
intended to be included in the sale. Accordingly, the following assets and
liabilities of Laura Secord Inc. have not been included in these financial
statements:
- Cash and bank balances, except for store cash floats;
- Accounts receivable;
- Inter-company balances;
- Inventory at the Nestle Canada warehouse;
- Accounts payable;
- Income tax balances.
The statements of operations and cash flows are complete portrayals of the
results of the Business and are not integrated with the balance sheets, as the
balance sheets include only specified assets and liabilities.
Trademarks relating to the Business, while being transferred as part of this
transaction, are not included in these financial statements as they are not
owned by Nestle Canada or Laura Secord Inc. but by a foreign affiliate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
While Nestle Canada maintains its accounting records and prepares its
financial statements in accordance with International Accounting Standards,
appropriate adjustments have been made in order to state the accompanying
financial statements in accordance with generally accepted accounting principles
in the United States.
F-26
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The significant accounting policies followed in the presentation of these
financial statements are as follows:
REVENUE RECOGNITION
Net sales are recognized when products are sold at Laura Secord stores or,
in the case of trade customers, when products are shipped.
INVENTORIES
Product held for sale is stated at the lower of cost (on a first-in,
first-out basis) and net realizable value. Shop supplies and sundries are stated
at the lower of average cost and replacement cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less depreciation and
amortization. Depreciation and amortization is recorded on the straight-line
basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Store equipment --5 to 15 years
Leasehold improvements --the term of the lease plus the first renewal term (generally
ten years)
Computer hardware --5 years
Operating software --3 years
</TABLE>
Store premises are leased under agreements which are accounted for as
operating leases.
PREPAID EXPENSES
Packaging design costs are written off over two or three years, depending on
the expected life of the packaging. The deferred costs are included in prepaid
expenses.
JOINT VENTURE
A number of shops (referred to as "Combo" Shops) are operated as a 50/50
joint venture with Hallmark Canada, with both parties contributing the financing
and sharing equally in profits and losses. This joint venture has been accounted
for on the equity basis.
INCOME TAXES
The provision for income taxes has been calculated as if the business was a
self-standing entity, following the principles of tax allocation using the
liability method.
F-27
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accounting principles requires management to make estimates and assumptions that
affect the amounts recorded in the financial statements. Actual results may
differ from these estimates.
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Product held for sale................................................... $ 3,664 $ 2,051
Shop supplies and sundries.............................................. 751 527
----------- -----------
$ 4,415 $ 2,578
----------- -----------
----------- -----------
</TABLE>
4. ACCRUED LIABILITIES
Included in accrued liabilities are the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accrued wages........................................................... $ 496 $ --
Percentage rent......................................................... 220 249
</TABLE>
5. INVESTMENT IN JOINT VENTURE
The business has a 50% interest in a joint venture which operates 18 retail
stores (1997--16). Financial information for the joint venture as at December
31, 1997 and 1998, and for the years then ended, on the same basis as outlined
in Note 1 with respect to the Business, is as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Store cash floats....................................................... $ 8 $ 10
Inventories............................................................. 2,279 2,530
Prepaid expenses........................................................ 73 28
----------- ---------
Total current assets.................................................... 2,360 2,568
Accrued liabilities..................................................... 90 19
----------- ---------
Working capital......................................................... 2,270 2,549
Property, plant and equipment........................................... 3,118 2,628
----------- ---------
Net assets.............................................................. 5,388 5,177
----------- ---------
50% share of net assets................................................. 2,694 2,588
Additional contribution................................................. 52 52
----------- ---------
Investment in joint venture............................................. $ 2,746 $ 2,640
----------- ---------
----------- ---------
</TABLE>
F-28
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
5. INVESTMENT IN JOINT VENTURE (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Net sales............................................................... $ 7,737 $ 11,660
----------- ---------
Cost of sales, excluding depreciation................................... 4,998 6,964
Selling, general and administrative expenses, excluding depreciation and
amortization.......................................................... 3,842 5,228
Depreciation and amortization........................................... 242 326
----------- ---------
9,082 12,518
----------- ---------
Operating loss.......................................................... 1,345 858
Interest expense........................................................ 69 48
----------- ---------
Joint venture loss...................................................... $ 1,414 $ 906
----------- ---------
----------- ---------
50% Share of loss....................................................... $ 707 $ 453
----------- ---------
----------- ---------
</TABLE>
Related party charges to the joint venture are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Trademark royalties..................................................... $ 70 $ 0
Purchases of inventory from Nestle Canada............................... 2,032 2,740
Purchases of inventory from Hallmark Canada............................. 2,063 2,883
Interest on financing from Nestle Canada................................ 29 46
Management fee from Laura Secord Inc.................................... 464 466
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
<TABLE>
<CAPTION>
1997
------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
--------- ------------ -----------
<S> <C> <C> <C>
Leasehold improvements.................................... $ 16,985 $ 10,724 $ 6,261
Store equipment........................................... 8,131 7,044 1,087
Computer equipment........................................ 4,567 626 3,941
--------- ------------ -----------
$ 29,683 $ 18,394 $ 11,289
--------- ------------ -----------
--------- ------------ -----------
</TABLE>
F-29
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
--------- ------------ -----------
<S> <C> <C> <C>
Leasehold improvements.................................... $ 16,632 $ 11,124 $ 5,508
Store equipment........................................... 7,962 7,178 784
Computer equipment........................................ 5,052 2,138 2,914
--------- ------------ -----------
$ 29,646 $ 20,440 $ 9,206
--------- ------------ -----------
--------- ------------ -----------
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current
Federal............................................................... $ 157 $ 382
Provincial............................................................ 115 225
----- -----
$ 272 $ 607
----- -----
----- -----
</TABLE>
The following table reconciles the provision for income taxes to the amount
derived by applying the Canadian federal income tax rate to income before income
taxes.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Federal tax at statutory rate........................................... $ 148 $ 372
Increase resulting from:
Provincial income taxes............................................. 111 221
Permanent differences............................................... 13 14
----- -----
$ 272 $ 607
----- -----
----- -----
</TABLE>
8. BENEFIT PLANS
The Business provides pension benefits for its head office employees and
store managers as part of the Nestle Canada contributory defined benefit pension
plan (the "Plan") for salaried employees. Benefits are based on length of
service and rates of compensation. Employees of the Business represent
approximately 3% of the assets and obligations of the Plan. The market value of
the Plan assets exceeded the actuarial present value of the accumulated benefit
obligation by approximately 17% at December 31, 1998.
F-30
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
8. BENEFIT PLANS (CONTINUED)
Pension cost (credit) of the Business, based on a 3% allocation of Plan
costs, comprises the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Service cost............................................................ $ 69 $ 73
Interest cost........................................................... 280 288
Return on plan assets................................................... (314) (331)
Other................................................................... (13) (51)
----- -----
$ 22 $ (21)
----- -----
----- -----
</TABLE>
The significant actuarial assumptions used in valuing the Plan obligations
were:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Rate of return on assets................................................ 8.25% 8.25%
Discount rate........................................................... 8.25% 8.25%
Rate of compensation increase........................................... 5.25% 5.25%
</TABLE>
9. LEASE COMMITMENTS
The Laura Secord retail operations are conducted from leased premises under
operating leases which are generally for a five-year term with renewal options.
Under some of the agreements additional rent is payable based on sales levels.
The remaining minimum undiscounted rental obligation under these agreements
is $32,677 and $6,695 for the "Combo" stores, falling due as follows:
<TABLE>
<CAPTION>
LAURA SECORD "COMBO" STORES
STORES 100%
--------------- ---------------
<S> <C> <C>
1999....................................................... $ 8,015 $ 1,587
2000....................................................... 6,616 1,385
2001....................................................... 5,258 1,122
2002....................................................... 4,246 649
2003....................................................... 3,228 593
Thereafter................................................. 5,314 1,359
</TABLE>
Rental expense was as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Minimum rent............................................................ $ 6,860 $ 6,728
Rent based on percentage of sales....................................... 266 240
----------- -----------
$ 7,126 $ 6,968
----------- -----------
----------- -----------
</TABLE>
F-31
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF CANADIAN DOLLARS)
10. RELATED PARTY TRANSACTIONS
Nestle Canada is a wholly-owned Canadian operating subsidiary in the
world-wide Nestle Group. Laura Secord Inc. is a wholly-owned subsidiary of
Nestle Canada.
The following charges (credits) from related parties are included in the
statements of operations:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Purchases on inventory from Nestle Canada............................... $ 29,272 $ 24,054
Trademark royalties to a group company.................................. 2,103 2,234
Rent to Nestle Canada for office space.................................. 396 398
Central office expenses to Nestle Canada, relating primarily to human
resources, data processing, quality assurance, financial services and
compensation for the president of Laura Secord Inc.................... 1,782 1,865
Interest on financing from Nestle Canada................................ 461 835
Management fee charges by Laura Secord Inc. to "Combo" stores........... (464) (466)
</TABLE>
Purchases of inventory from Nestle Canada are at cost plus a mark-up of
4.17%. Central office expenses are an allocation of the costs of the respective
functions.
11. YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the ability of the Business to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue affecting the
Business, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
F-32
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
BALANCE SHEETS
MAY 2, 1998 AND MAY 1, 1999
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT
Store cash floats......................................................................... $ 60 $ 60
Inventories............................................................................... 2,799 2,023
Prepaid expenses.......................................................................... 46 232
--------- ---------
TOTAL CURRENT ASSETS........................................................................ 2,905 2,315
ACCRUED LIABILITIES......................................................................... 601 1,365
--------- ---------
WORKING CAPITAL............................................................................. 2,304 950
INVESTMENT IN JOINT VENTURE................................................................. 2,894 2,454
PROPERTY, PLANT AND EQUIPMENT............................................................... 10,947 8,428
--------- ---------
NET ASSETS.................................................................................. $ 16,145 $ 11,832
--------- ---------
--------- ---------
</TABLE>
F-33
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
STATEMENTS OF OPERATIONS
FOUR MONTHS ENDED MAY 2, 1998 AND MAY 1, 1999
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
NET SALES................................................................................... $ 29,243 $ 26,285
--------- ---------
COST OF SALES, excluding depreciation....................................................... 15,146 11,375
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, excluding depreciation and amortization....... 12,862 12,895
DEPRECIATION AND AMORTIZATION............................................................... 1,044 751
SHARE OF JOINT VENTURE LOSS................................................................. 239 202
--------- ---------
29,291 25,223
--------- ---------
OPERATING (LOSS) INCOME..................................................................... (48) 1,062
INTEREST EXPENSE............................................................................ 210 19
--------- ---------
(LOSS) INCOME BEFORE INCOME TAXES........................................................... (258) 1,043
INCOME TAX (RECOVERY) PROVISION............................................................. (120) 462
--------- ---------
NET (LOSS) INCOME........................................................................... $ (138) $ 581
--------- ---------
--------- ---------
</TABLE>
F-34
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED MAY 2, 1998 AND MAY 1, 1999
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income......................................................................... $ (138) $ 581
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization........................................................... 1,044 751
Share of joint venture loss............................................................. 239 202
Loss on disposal of property, plant and equipment....................................... -- 28
--------- ---------
1,145 1,562
Changes in operating assets and liabilities
Accounts receivable..................................................................... 161 150
Inventories............................................................................. 3,045 1,299
Prepaid expenses........................................................................ 478 213
Accounts payable and accrued liabilities................................................ (3,207) (1,291)
Due to related parties.................................................................. (1,260) (306)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES....................................................... 362 1,627
--------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment................................................. (475) --
Contributed to joint venture.............................................................. (256) (1,286)
--------- ---------
CASH USED IN INVESTING ACTIVITIES........................................................... (731) (1,286)
--------- ---------
FINANCING ACTIVITY
Advanced from (repaid to) Nestle Canada................................................... 1,430 (1,881)
--------- ---------
NET INCREASE (DECREASE) IN CASH............................................................. $ 1,061 $ (1,540)
--------- ---------
--------- ---------
</TABLE>
F-35
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 1, 1999
(IN THOUSANDS OF CANADIAN DOLLARS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Nestle Canada Inc. ("Nestle Canada") is proposing to sell its Laura Secord
Retail Business (the "Business"). The Business is a retailer and distributor of
chocolates, greeting cards, ice cream and other items primarily through 174
(1998--183) business-operated stores of which 18 stores, the "Combo" stores, are
in a joint venture between Nestle Canada and Hallmark Cards.
The Business comprises the following operations:
- The Laura Secord stores operated by Laura Secord Inc. (a wholly-owned
subsidiary of Nestle Canada);
- A 50% interest in the "Combo" stores;
- Sales by Laura Secord Inc. to distributors and retailers; and
- Sales by Nestle Canada to the "Combo" stores.
These financial statements have been prepared on the basis that the Business
has operated as a stand-alone entity.
The balance sheets include only those assets and liabilities which are
intended to be included in the sale. Accordingly, the following assets and
liabilities of Laura Secord Inc. have not been included in these financial
statements:
- Cash and bank balances, except for store cash floats;
- Accounts receivable;
- Inter-company balances;
- Inventory at the Nestle Canada warehouse;
- Accounts payable;
- Income tax balances.
The statements of operations and cash flows are complete portrayals of the
results of the Business and are not integrated with the balance sheets, as the
balance sheets include only specified assets and liabilities.
Trademarks relating to the Business, while being transferred as part of this
transaction, are not included in these financial statements as they are not
owned by Nestle Canada or Laura Secord Inc. but by a foreign affiliate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
While Nestle Canada maintains its accounting records and prepares its
financial statements in accordance with International Accounting Standards,
appropriate adjustments have been made in order to state the accompanying
financial statements in accordance with generally accepted accounting principles
in the United States.
F-36
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 2, 1998 AND MAY 1, 1999
(IN THOUSANDS OF CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The significant accounting policies followed in the presentation of these
financial statements are as follows:
REVENUE RECOGNITION
Net sales are recognized when products are sold at Laura Secord stores or,
in the case of trade customers, when products are shipped.
INVENTORIES
Product held for sale is stated at the lower of cost (on a first-in,
first-out basis) and net realizable value. Shop supplies and sundries are stated
at the lower of average cost and replacement cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less depreciation and
amortization. Depreciation and amortization is recorded on the straight-line
basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Store equipment --5 to 15 years
Leasehold improvements --the term of the lease plus the first renewal term (generally
ten years)
Computer hardware --5 years
Operating software --3 years
</TABLE>
Store premises are leased under agreements which are accounted for as
operating leases.
PREPAID EXPENSES
Packaging design costs are written off over two or three years, depending on
the expected life of the packaging. The deferred costs are included in prepaid
expenses.
JOINT VENTURE
A number of shops (referred to as "Combo" Shops) are operated as a 50/50
joint venture with Hallmark Canada, with both parties contributing the financing
and sharing equally in profits and losses. This joint venture has been accounted
for on the equity basis.
INCOME TAXES
The provision for income taxes has been calculated as if the business was a
self-standing entity, following the principles of tax allocation using the
liability method.
F-37
<PAGE>
THE LAURA SECORD RETAIL BUSINESS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 2, 1998 AND MAY 1, 1999
(IN THOUSANDS OF CANADIAN DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accounting principles requires management to make estimates and assumptions that
affect the amounts recorded in the financial statements. Actual results may
differ from these estimates.
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Product held for sale................................................... $ 2,265 $ 1,476
Shop supplies and sundries.............................................. 534 547
----------- -----------
$ 2,799 $ 2,023
----------- -----------
----------- -----------
</TABLE>
4. RELATED PARTY TRANSACTIONS
Nestle Canada is a wholly-owned Canadian operating subsidiary in the
world-wide Nestle Group. Laura Secord Inc. is a wholly-owned subsidiary of
Nestle Canada.
The following charges (credits) from related parties are included in the
statements of operations:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Purchases of inventory from Nestle Canada............................... $ 6,962 $ 5,749
Trademark royalties to a group company.................................. 581 529
Rent to Nestle Canada for office space.................................. 133 112
Central office expenses to Nestle Canada, relating primarily to human
resources, data processing, quality assurance, financial services and
compensation for the president of Laura Secord Inc.................... 732 855
Interest on financing from Nestle Canada................................ 210 19
Management fee charged by Laura Secord Inc. to "Combo" stores........... (141) (164)
</TABLE>
Purchases of inventory from Nestle Canada are at cost plus a mark-up of
4.17%. Central office expenses are an allocation of the costs of the respective
functions.
F-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNTIL MAY 7, 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
ARCHIBALD CANDY CORPORATION
EXCHANGE OFFER FOR
$40,000,000
10 1/4% SENIOR SECURED NOTES DUE 2004
---------------------
PROSPECTUS
---------------------
OCTOBER 6, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
