<PAGE>
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended February 27, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number
333-33751
----------------------
ARCHIBALD CANDY CORPORATION
Incorporated in the IRS Employer Identification No.
State of Illinois 36-0743280
1137 West Jackson Boulevard
Chicago, Illinois 60607
(312) 243-2700
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of February 27, 1999, the number of shares outstanding of the
registrant's Common Stock was 19,200 shares, all of which was held by
Fannie May Holdings, Inc.
==============================================================================
<PAGE>
ARCHIBALD CANDY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 27, 1999
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION:
- ------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - FEBRUARY 27, 1999 (UNAUDITED) AND
AUGUST 29, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS - THREE MONTH PERIODS
ENDED FEBRUARY 27, 1999 (UNAUDITED) AND
FEBRUARY 28, 1998 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS - SIX MONTH PERIODS
ENDED FEBRUARY 27, 1999 (UNAUDITED) AND
FEBRUARY 28, 1998 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS - SIX MONTH PERIODS
ENDED FEBRUARY 27, 1999 (UNAUDITED) AND
FEBRUARY 28, 1998 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II - OTHER INFORMATION:
- ----------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
</TABLE>
<PAGE>
THIS REPORT UPDATES ARCHIBALD CANDY CORPORATION'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 1998, IN ACCORDANCE WITH THE
INSTRUCTIONS TO FORM 10-Q. IT IS PRESUMED THAT THE READER HAS READ THE
ANNUAL REPORT ON FORM 10-K.
SOME INFORMATION INCLUDED IN THIS REPORT MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
FROM TIME TO TIME, INFORMATION PROVIDED BY ARCHIBALD CANDY CORPORATION OR
STATEMENTS MADE BY ITS EMPLOYEES MAY CONTAIN OTHER FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO: GENERAL
ECONOMIC CONDITIONS INCLUDING INFLATION, INTEREST RATE FLUCTUATIONS, TRADE
RESTRICTIONS, AND GENERAL DEBT LEVELS; COMPETITIVE FACTORS INCLUDING PRICE
PRESSURES, TECHNOLOGICAL DEVELOPMENTS, AND PRODUCTS OFFERED BY COMPETITORS;
INVENTORY RISKS DUE TO CHANGES IN MARKET DEMAND OR BUSINESS STRATEGIES;
CHANGES IN EFFECTIVE TAX RATES; AND ANY DELAY OR INABILITY TO INTEGRATE THE
COMPANY'S RECENT ACQUISITION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
MADE. ARCHIBALD CANDY CORPORATION UNDERTAKES NO OBLIGATION TO PUBLICLY
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS, OR OTHERWISE.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
Archibald Candy Corporation and Subsidiaries
Consolidated Balance Sheets
As of February 27, 1999 and August 29, 1998
<TABLE>
<CAPTION>
FEBRUARY 27, AUGUST 29,
1999 1998
(Unaudited) (Audited)
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,387 $ 13,081
Accounts receivable, net 7,717 1,380
Inventories 24,960 24,602
Prepaid expenses and other
current assets 2,719 306
------------- ------------
Total current assets 63,783 39,369
Property, plant, and equipment, net 47,708 20,927
Goodwill 30,694 31,161
Noncompete agreements and other
intangibles 681 109
Deferred financing fees 6,337 3,698
Other assets 2,866 2,825
Deferred income taxes 3,673 --
------------- ------------
Total assets $ 155,742 $ 98,089
------------- ------------
------------- ------------
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 27, AUGUST 29,
1999 1998
(Unaudited) (Audited)
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 10,891 $ 4,728
Accrued liabilities 9,826 4,956
Payroll and related liabilities 3,983 2,600
Current portion of capital lease
obligations 181 97
------------- ------------
Total current liabilities 24,881 12,381
Due to affiliate 604 604
Long-term debt 130,000 100,000
Deferred rent 1,860 --
Capital lease obligations, less
current portion 105 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 (20,408) (33,644)
------------- ------------
Total shareholder's equity
(deficit) (1,708) (14,944)
------------- ------------
Total liabilities and shareholder's
equity (deficit) $ 155,742 $ 98,089
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
-2-
<PAGE>
Archibald Candy Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales $ 81,455 $ 58,397
Cost of sales, excluding depreciation 27,900 19,375
Selling, general, and administrative
expenses, excluding depreciation and
amortization 31,124 19,373
Depreciation and amortization expense 2,641 1,191
Amortization of goodwill and other
intangibles 597 420
Management fees and other fees 89 129
------------- -------------
Operating income 19,104 17,909
Other (income) and expense:
Interest expense 3,400 2,630
Interest and other income and
expense (307) (385)
------------- -------------
Income before income taxes 16,011 15,664
Provision for income taxes 187 79
------------- -------------
Net Income $ 15,824 $ 15,585
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
-3-
<PAGE>
Archibald Candy Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales $ 111,102 $ 85,570
Cost of sales, excluding depreciation 40,310 29,970
Selling, general, and administrative
expenses, excluding depreciation and
amortization 46,764 34,823
Depreciation and amortization expense 3,811 2,382
Amortization of goodwill and other
intangibles 1,004 840
Management fees and other fees 258 258
------------- -------------
Operating income 18,955 17,297
Other (income) and expense:
Interest expense 5,992 5,259
Interest and other income and
expense (470) (610)
------------- -------------
Income before income taxes 13,433 12,648
Provision for income taxes 197 166
------------- -------------
Net Income $ 13,236 $ 12,482
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
-4-
<PAGE>
Archibald Candy Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
SIX MONTHS ENDED
----------------------------
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,236 $ 12,482
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 4,815 3,222
Changes in operating assets and
liabilities:
Accounts receivable, net (5,676) (3,806)
Inventories 5,397 1,318
Prepaid expenses and other
current assets (157) (408)
Other assets (275) 98
Accounts payable, accrued
liabilities and deferred rent 1,912 2,102
------------- -------------
Net cash provided by operating activities 19,252 15,008
INVESTING ACTIVITIES
Acquisition of Sweet Factory net of
Cash acquired (28,002) --
Purchase of property, plant, and
equipment (2,760) (2,377)
------------- -------------
Net cash used in investing activities (30,762) (2,377)
FINANCING ACTIVITIES
Principal payments of capital lease
obligations (172) (245)
Proceeds of long-term debt 30,000 --
Costs related to refinancing (3,012) (382)
------------- -------------
Net cash provided by (used in)
financing activities 26,816 (627)
------------- -------------
Net increase in cash and cash
equivalents 15,306 12,004
Cash and cash equivalents beginning of
period 13,081 15,801
------------- -------------
Cash and cash equivalents end of
period $ 28,387 $ 27,805
------------- -------------
------------- -------------
SUPPLEMENTAL SCHEDULE OF CASH
TRANSACTIONS
Interest paid $ 6,348 $ 4,705
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
-5-
<PAGE>
Archibald Candy Corporation and Subsidiaries
Notes to Consolidated Financial Statements
February 27, 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 specialty boxed chocolate
confectionery retail chains under the Fannie May and Fanny Farmer brand names
as well as a specialty bulk candy retail chain under the Sweet Factory brand
name. As of February 27, 1999, the Company operated 234 Fannie May stores, 81
Fanny Farmer stores and 256 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 29, 1998 to February
27, 1999 are not necessarily indicative of the results that may be achieved
for the entire year.
-6-
<PAGE>
2. INVENTORIES
Inventories at February 27, 1999 and August 29, 1998 are comprised of
the following:
<TABLE>
<CAPTION>
FEBRUARY 27, AUGUST 29,
1999 1998
------------ ----------
<S> <C> <C>
Raw materials .................. $ 9,078 $ 10,044
Work in process ................ 328 303
Finished goods ................. 15,554 14,255
------------ ----------
$24,960 $ 24,602
------------ ----------
------------ ----------
</TABLE>
3. DEBT AND CAPITAL LEASES
Long-term debt at February 27, 1999 and August 29, 1998 is comprised of
$130.0 million of 10-1/4% senior secured notes due July 1, 2004 and $0.3
million of capital lease obligations, and $100.0 million of 10-1/4% senior
secured notes due July 1, 2004 and $0.1 million of capital lease obligations,
respectively.
4. INCOME TAXES
The provision 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.
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 approximately
$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.
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.
-7-
<PAGE>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 27, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 25,141 $ 3,246 $ - $ 28,387
Accounts receivable, net 7,349 368 - 7,717
Inventories 20,074 4,886 - 24,960
Prepaid expenses and
other current assets 904 1,815 - 2,719
-------- ------- -------- --------
Total current assets 53,468 10,315 - 63,783
Property, plant and equipment, net 21,156 26,552 - 47,708
Goodwill 30,694 - - 30,694
Noncompete agreements and other intangibles 99 582 - 681
Deferred financing fees 6,337 - - 6,337
Other assets 2,866 - - 2,866
Intercompany 10,991 - (10,991) -
Investment in subsidiary 18,184 - (18,184) -
Deferred income taxes - 3,673 - 3,673
-------- ------- -------- --------
Total assets $143,795 $41,122 $(29,175) $155,742
-------- ------- -------- --------
-------- ------- -------- --------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 6,288 $ 4,603 $ - $ 10,891
Accrued liabilities 5,925 3,901 - 9,826
Payroll and related liabilities 2,654 1,329 - 3,983
Current portion of capital lease
obligations - 181 - 181
-------- ------- -------- --------
Total current liabilities 14,867 10,014 - 24,881
Due to affiliate 604 - - 604
Long-term debt 130,000 - - 130,000
Deferred rent - 1,860 - 1,860
Capital lease obligations, less current
portion 32 73 - 105
Intercompany - 10,991 (10,991) -
-------- ------- -------- --------
Total shareholder's equity (deficit) (1,708) 18,184 (18,184) (1,708)
-------- ------- -------- --------
Total liabilities and shareholder's
equity (deficit) $143,795 $41,122 $(29,175) $155,742
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
-8-
<PAGE>
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED FEBRUARY 27, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Net sales $61,602 $19,853 $ -- $ 81,455
Cost of sales, excluding depreciation 20,668 7,232 -- 27,900
Selling, general, and administrative expenses,
excluding depreciation and amortization 20,529 10,595 -- 31,124
Depreciation and amortization expense 1,170 1,471 -- 2,641
Amortization of goodwill and other intangibles 443 154 -- 597
Management fees and other fees 89 -- -- 89
------- ------ ----- -------
Operating income 18,703 401 -- 19,104
Other income (expense):
Interest expense 3,340 60 -- 3,400
Interest and other income and expense (307) -- -- (307)
Equity (earnings) of subsidiaries (184) -- 184 --
------- ------ ----- -------
Income (loss) before taxes 15,854 341 (184) 16,011
Provision (benefit) for income taxes 30 157 -- 187
------- ------ ----- -------
Net income (loss) $15,824 $ 184 $(184) $15,824
------ ------ ----- -------
------ ------ ----- -------
</TABLE>
-9-
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED FEBRUARY 27, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Net sales $91,250 $19,852 $ -- $111,102
Cost of sales, excluding depreciation 33,078 7,232 -- 40,310
Selling, general, and administrative expenses,
excluding depreciation and amortization 36,170 10,594 -- 46,764
Depreciation and amortization expense 2,340 1,471 -- 3,811
Amortization of goodwill and other intangibles 850 154 -- 1,004
Management fees and other fees 258 -- -- 258
------- ------ ----- -------
Operating income 18,554 401 -- 18,955
Other income (expense):
Interest expense 5,932 60 -- 5,992
Interest and other income and expense (470) -- -- (470)
Equity (earnings) of subsidiaries (184) -- 184 --
------- ------ ----- -------
Income before taxes 13,276 341 (184) 13,433
Provision (benefit) for income taxes 40 157 -- 197
------- ------ ----- -------
Net income (loss) $13,236 $ 184 $(184) $13,236
------ ------ ----- -------
------ ------ ----- -------
</TABLE>
-10-
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR SIX MONTHS ENDED FEBRUARY 27, 1999
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 13,236 $ 184 $(184) $13,236
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,190 1,625 - 4,815
Equity earnings in subsidiaries (184) - 184 -
Changes in operating assets and liabilities:
Accounts receivables, net (5,969) 293 - (5,676)
Inventories 4,528 869 - 5,397
Prepaid expenses and other current assets (598) 441 - (157)
Intercompany (10,991) 10,991 - -
Other assets (275) - - (275)
Accounts payable, accrued liabilities and
deferred rent 2,583 (671) - 1,912
-------- -------- ----- -------
Net cash provided by operating activities 5,520 13,732 - 19,252
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 (2,335) (425) - (2,760)
-------- -------- ----- -------
Net cash used in investing activities (20,335) (10,427) - (30,762)
FINANCING ACTIVITIES
Principle payments of capital lease obligations (113) (59) - (172)
Proceeds of long-term debt 30,000 - - 30,000
Costs related to refinancing (3,012) - - (3,012)
-------- -------- ----- -------
Net cash provided by (used in) financing activities 26,875 (59) - 26,816
Net increase in cash and cash equivalents 12,060 3,246 - 15,306
Cash and cash equivalents beginning of period 13,081 - - 13,081
-------- -------- ----- -------
Cash and cash equivalents end of period $ 25,141 $ 3,246 $ - $28,387
-------- -------- ----- -------
-------- -------- ----- -------
</TABLE>
-11-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 27, 1999 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1998
NET SALES. Consolidated net sales for the three months ended February
27, 1999 were $81.5 million, an increase of $23.1 million, or 39.5%, from
$58.4 million for the three months ended February 28, 1998. The growth in
sales was primarily the result of increased Company-Operated Retail (1) sales
from the acquisition of Sweet Factory Group, Inc. in December 1998 (the
"Sweet Factory Acquisition"), which accounted for $19.9 million, or 86.1%, of
the increase in net sales. Consolidated Company-Operated Retail sales were
$61.5 million for the three months ended February 27, 1999, an increase of
$20.1 million, or 48.8%, from $41.3 million for the three months ended
February 28, 1998. The Sweet Factory Acquisition accounted for $19.9 million,
or 98.5%, of the increase. Net sales (without giving effect to the Sweet
Factory Acquisition) were $61.6 million for the three months ended February
27, 1999, an increase of $3.2 million, or 5.5%, from $58.4 million for the
three months ended February 28, 1998. Company-Operated Retail net sales
(without giving effect to the Sweet Factory Acquisition) for the three months
ended February 27, 1999 were $41.6 million, an increase of $0.3 million, or
0.7%, from $41.3 million for the three months ended February 28, 1998. Same
store sales for the Company's Fannie May and Fanny Farmer retail stores
increased 0.6% over the prior period. There were 315 Company-operated Fannie
May and Fanny Farmer retail stores at February 27, 1999 compared to 323
stores at February 28, 1998. Growth in Third-Party Retail (2) sales
accounted for most of this growth over the prior period. For the three
months ended February 27, 1999, Fannie May and Fanny Farmer Third-Party
Retail sales were $11.4 million, an increase of $3.7 million, or 48.1%, from
$7.7 million for the three months ended February 28, 1998. This increase is
primarily the result of the growth in sales of Fannie May boxed chocolates
through the addition of new third-party retail channels. The Company's
Non-Retail (3) sales were $8.6 million for the three months ended February
27, 1998, a decrease of $0.8 million, or 8.3%, from $ 9.4 million for the
three months ended February 28, 1998.
GROSS PROFIT. Consolidated gross profit for the three months ended
February 27, 1999 was $53.6 million, an increase of $14.5 million, or 37.2%,
from $39.0 million for the three months ended February 28, 1998. The Sweet
Factory Acquisition accounted for $12.6 million, or 86.8%, of this increase.
Consolidated gross profit as a percentage of net sales decreased to 65.7% for
the three months ended February 27, 1999 from 66.8% for the three months
ended February 28, 1998. Gross profit (without giving effect to the Sweet
Factory Acquisition) for the three months ended February 27, 1999 was $40.9
million, an increase of $1.9 million, or 4.9%, from $39.0 million for the
three months ended February 28, 1998. Gross profit as a percentage of net
sales (without giving effect to the Sweet Factory Acquisition) of 66.5% for
the three months ended February 27, 1999 was essentially unchanged from 66.4%
for the three months ended February 28, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general and
administrative ("SG&A") expenses for the three months ended February 27, 1999
were $31.1 million, an increase of $11.8 million, or 60.7%, from $19.4
million for the three months ended February 28, 1998. The Sweet Factory
Acquisition accounted for $10.6 million, or 90.2%, of this increase. As a
percentage of total net sales, SG&A expenses increased to 38.2% for the three
months ended February 27, 1999 from 33.2% for the three months ended February
28, 1998. SG&A expenses (without giving effect to the Sweet Factory
Acquisition) for the three months ended February 27, 1999 were $20.5 million,
an increase of $1.2 million. The increase in SG&A expenses was primarily due
to growth in the Company's Third-Party Retail channel.
-12-
<PAGE>
EBITDA. Consolidated earnings before interest, income taxes,
depreciation, and amortization ("EBITDA") was $22.4 million for the three
months ended February 27, 1999, an increase of $2.8 million, or 14.5%, from
$19.6 million for the three months ended February 28, 1998. The Sweet
Factory Acquisition accounted for $2.0 million, or 71.4%, of the increase. As
a percentage of total net sales, consolidated EBITDA was 27.5% for the three
months ended February 27, 1999 as compared to 33.5% for the three months
ended February 28, 1998. EBITDA (without giving effect to the Sweet Factory
Acquisition) was $20.4 million for the three months ended February 27, 1999,
an increase of $0.8 million, or 4.1%, from $19.6 million for the three months
ended February 28, 1998. EBITDA as a percentage of net sales (without
giving effect to the Sweet Factory Acquisition) was 33.1% for the three
months ended February 27, 1999 as compared to 33.5% for the three months
ended February 28, 1998.
OPERATING INCOME. Consolidated operating income was $19.1 million for
the three months ended February 27, 1999, an increase of $1.2 million, or
6.7%, from $17.9 million for the three months ended February 28, 1998. The
Sweet Factory Acquisition accounted for $0.4 million, or 33.6%, of the
increase. Operating income (without giving effect to the Sweet Factory
Acquisition) was $18.7 million for the three months ended February 27, 1999,
an increase of $0.8 million, or 4.4%, from $17.9 million for the three months
ended February 28, 1998. The growth resulted from the increase in EBITDA
partially offset by higher depreciation and amortization expense.
NET INCOME. Consolidated net income was $15.8 million for the three
months ended February 27, an increase of $0.2 million, or 1.5%, from $15.6
million for the three months ended February 28, 1998. The Sweet Factory
Acquisition accounted for $0.2 million, or 77.3%, of the increase. Interest
expense was $3.4 million for the three months ended February 27, 1999, an
increase of $0.8 million, or 29.3%, from $2.6 million for the three months
ended February 28, 1998. This increase in interest expense is a result of the
addition of $30.0 million in long-term debt used to finance the Sweet Factory
Acquisition. Net income (without giving effect to the Sweet Factory
Acquisition) was $15.6 million for the three months ended February 27, 1999,
an increase of $0.2 million, or 1.8%, from net income of $15.6 million for
the three months ended February 28, 1998. Interest expense (without giving
effect to the Sweet Factory Acquisition) was $3.3 million for the three
months ended February 27, 1999, an increase of $0.7 million or 27.0% from
$2.6 million for the three months ended February 28, 1998.
- ----------------------------
(1) Company-Operated Retail includes sale of Company and third-party branded
products through Company-Operated Fannie May, Fanny Farmer, and Sweet
Factory stores.
(2) Third-Party Retail includes sale of the Company's Fannie May and Fanny
Farmer branded products through grocery stores, drug stores and other
independent retailers that purchase Company branded products at wholesale
pricing for resale to the consumer.
(3) Non-Retail includes sale of Company branded Fannie May and Fanny Farmer
products through the Company's quantity order, mail order and fundraising
programs.
-13-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 27, 1999 COMPARED TO THE SIX MONTHS ENDED
FEBRUARY 28, 1998
NET SALES. Consolidated net sales for the six months ended February 27,
1999 were $111.1 million, an increase of $25.5 million, or 29.8%, from $85.6
million for the six months ended February 28, 1998. The growth in sales was
primarily the result of increased Company-Operated Retail sales from the
Sweet Factory Acquisition which accounted for $19.9 million, or 78.1%, of the
increase in net sales. Net sales (without giving effect to the Sweet Factory
Acquisition) for the six months ended February 27, 1999 were $91.3 million,
an increase of $5.7 million, or 6.6%, from $85.6 million for the six months
ended February 28, 1998. Consolidated Company-Operated Retail net sales were
$77.6 million for the six months ended February 27, 1999, an increase of
$20.1 million, or 34.9%, from $57.5 million for the six months ended February
28, 1998. The Sweet Factory Acquisition accounted for $19.9 million, or
98.9%, of the increase. Company-Operated Retail sales (without giving effect
to the Sweet Factory Acquisition) were $57.7 million for the six months ended
February 27, 1999, an increase of $0.2 million, or 0.4%, from $57.5 million
for the six months ended February 28, 1998. Same store sales for the
Company's Fannie May and Fanny Farmer retail stores increased 0.2%. For the
six months ended February 27, 1999, Third-Party Retail sales were $19.3
million, an increase of $5.6 million, or 40.9%, from $13.7 million for the
six months ended February 28, 1998. This increase reflects the continued
results of management's strategy to expand Third-Party Retail sales into new
markets. For the six months ended February 27, 1999, Non-Retail sales were
$14.2 million, a decrease of $0.2 million, or 1.1%, from $ 14.3 million for
the six months ended February 28, 1998.
GROSS PROFIT. Consolidated gross profit for the six months ended
February 27, 1999 was $70.8 million, an increase of $15.2 million, or 27.3%,
from $55.6 million for the six months ended February 28, 1998. The Sweet
Factory Acquisition accounted for $12.6 million, or 83.1%, of the increase.
Gross profit as a percentage of net sales decreased to 63.7% for the six
months ended February 27, 1999 from 65.0% for the six months ended February
28, 1998. Gross profit (without giving effect to the Sweet Factory
Acquisition) for the six months ended February 27, 1999 was $58.2 million, an
increase of $2.6 million, or 4.6%, from $55.6 million for the six months
ended February 28, 1998. Gross profit as a percentage of net sales (without
giving effect to the Sweet Factory Acquisition) decreased to 63.8% for the
six months ended February 27, 1999 from 65.0% for the six months ended
February 28, 1998.
-14-
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated SG&A expenses were
$46.8 million for the six months ended February 27, 1999, an increase of
$11.9 million, or 34.3%, from $34.8 million for the six months ended February
28, 1998. The Sweet Factory Acquisition accounted for $10.6 million, or
88.7%, of the increase. As a percentage of total net sales, SG&A expenses
increased to 42.1% for the six months ended February 27, 1999 from 40.7% for
the six months ended February 28, 1998. SG&A expenses (without giving effect
to the Sweet Factory Acquisition) were $36.2 million for the six months ended
February 27, 1999, an increase of $1.3 million, or 3.9%, from $34.8 million
for the six months ended February 28, 1998. This increase in SG&A expenses
was primarily due to costs associated with growth in the Company's
Third-Party Retail channel. SG&A expenses as a percentage of total net sales
(without giving effect to the Sweet Factory Acquisition) decreased to 39.6%
for the six months ended February 27, 1999 from 40.7% for the six months
ended February 28, 1998.
EBITDA. Consolidated EBITDA was $23.9 million for the six months
ended February 27, 1999, an increase of $3.2 million, or 15.7%, from $20.6
million for the six months ended February 28, 1998. The Sweet Factory
Acquisition accounted for $2.0 million, or 62.4%, of the increase. As a
percentage of total net sales, EBITDA was 21.5% for the six months ended
February 27, 1999 as compared to 24.1% for the six months ended February 28,
1998. EBITDA (without giving effect to the Sweet Factory Acquisition) was
$21.9 million for the six months ended February 27, 1999, an increase of $1.2
million, or 5.9%, from $20.6 million for the six months ended February 28,
1998. EBITDA as a percentage of total net sales (without giving effect to the
Sweet Factory Acquisition) was 24.0% for the six months ended February 27,
1999 as compared to 24.1% for the six months ended February 28, 1998.
OPERATING INCOME. Consolidated operating income was $19.0 million for
the six months ended February 27, 1999, an increase of $1.7 million, or 9.6%,
from income of $17.3 million for the six months ended February 28, 1998. The
Sweet Factory Acquisition accounted for $0.4 million, or 24.2%, of the
increase. Operating income (without giving effect to the Sweet Factory
Acquisition) was $18.6 million for the six months ended February 27, 1999, an
increase of $1.3 million, or 7.3%, from income of $17.3 million for the six
months ended February 28, 1998. The growth resulted from the increase in
EBITDA partially offset by higher depreciation and amortization expense.
NET INCOME. Consolidated net income was $13.2 million for the six
months ended February 27, 1999, an increase of $0.8 million, or 6.0%, from
income of $12.5 million for the six months ended February 28, 1998. The Sweet
Factory Acquisition accounted for $0.2 million, or 24.4%, of the increase.
Interest expense was $6.0 million for the six months ended February 27, 1999,
an increase of $0.7 million, or 13.9%, from $5.3 million for the six months
ended February 28, 1998. This increase in interest expense is a result of the
addition of $30.0 million in long-term debt used to finance the Sweet Factory
Acquisition. Net income (without giving effect to the Sweet Factory
Acquisition) was $13.1 million for the six months ended February 27, 1999, an
increase of $0.6 million, or 4.6%, from income of $12.5 million for the six
months ended February 28, 1998. Interest expense (without giving effect to
the Sweet Factory Acquisition) was $5.9 million for the six months ended
February 27, 1999, an increase of $0.6 million, or 12.8%, from $5.3 million
for the three months ended February 28, 1998.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $19.3 million for the six
months ended February 27, 1999 compared to $15.0 million for the six months
ended February 28, 1998. Net income was $13.2 million for the six months
ended February 27, 1999 and $12.5 million for the six months ended February 28,
1998. Net income included noncash depreciation and amortization charges of $4.8
million for the six months ended February 27, 1999 and $3.2 million for the six
months ended February 28, 1998.
Net cash used in investing activities increased to $30.8 million for the
six months ended February 27, 1999 from $2.4 million for the six months
ended February 28, 1998. The increase was a result of the purchase of Sweet
Factory in December, 1998.
As of February 27, 1999, the Company had $19.5 million available for
borrowings under a $20 million revolving credit facility (the "Credit
Facility"), which matures on July 1, 2000. As of February 27, 1999, a $0.5
million letter of credit was issued under the Credit Facility. As of February
27, 1999, the Company had outstanding $130.0 million of 10-1/4% senior
secured notes due July 1, 2004.
The Company believes that cash flow from operations, together with
available cash and borrowings under the Credit Facility, will provide
sufficient funds to meet the Company's debt service obligations, projected
capital expenditures and working capital requirements for the foreseeable
future. None of the Company's subsidiaries is subject to any restriction on
its ability to pay dividends or make distributions to the Company.
YEAR 2000 READINESS DISCLOSURE
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred.
The Company has surveyed substantially all of its computer systems and is
in the process of contacting suppliers and consultants to address "Year 2000"
issues for software and hardware used by the Company. The Company currently is
in the process of upgrading and improving its internal computer systems, which
work is expected to be completed by August 1999. Following completion of this
work and based on the representations and warranties of the Company's suppliers
and consultants, the Company's computer systems are expected to be year 2000
compliant. The Company does not believe that the costs associated with making
its computer systems year 2000 compliant will be material. However, if the
Company's systems or the systems of other companies on whose services the
Company depends or with whom the Company's systems interface are not year 2000
compliant, it could have a material adverse effect on the Company's results of
operation and financial condition.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 27.1 -- FINANCIAL DATA SCHEDULE FOR QUARTER ENDED
FEBRUARY 27, 1999, FILED HEREWITH.
(b) For the quarter ended February 27, 1999, the Company filed
Current Reports on Form 8-K with the Securities and Exchange
Commission on December 2, 1998 and December 22, 1998 and a
Current Report on Form 8-K/A on February 19, 1999, which
amended the Current Report on Form 8-K filed on December 22,
1998.
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ARCHIBALD CANDY CORPORATION
DATE: APRIL 13, 1999. BY: /S/ DONNA M. SNOPEK
-------------------------
DONNA M. SNOPEK
VICE PRESIDENT OF FINANCE
& ACCOUNTING
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> FEB-27-1999
<CASH> 28,387
<SECURITIES> 0
<RECEIVABLES> 8,034
<ALLOWANCES> (317)
<INVENTORY> 24,960
<CURRENT-ASSETS> 63,783
<PP&E> 82,489
<DEPRECIATION> (34,781)
<TOTAL-ASSETS> 155,742
<CURRENT-LIABILITIES> 24,881
<BONDS> 130,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 155,742
<SALES> 111,102
<TOTAL-REVENUES> 111,102
<CGS> 40,310
<TOTAL-COSTS> 51,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,992
<INCOME-PRETAX> 13,433
<INCOME-TAX> 197
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,236
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
