<PAGE>
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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 May 29, 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
36-0743280
Incorporated in the (IRS Employer
State of Illinois Identification No.)
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 May 29, 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.
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<PAGE>
ARCHIBALD CANDY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MAY 29, 1999
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION:
- -------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - AUGUST 29, 1998 AND
MAY 29, 1999 (UNAUDITED) 1
CONSOLIDATED STATEMENTS OF OPERATIONS - THREE-MONTH PERIODS
ENDED MAY 30, 1998 (UNAUDITED) AND
MAY 29, 1999 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS - NINE-MONTH PERIODS
ENDED MAY 30, 1998 (UNAUDITED) AND
MAY 29, 1999 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE-MONTH PERIODS
ENDED MAY 30, 1998 (UNAUDITED) AND
MAY 29, 1999 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
PART II - OTHER INFORMATION:
- ----------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
<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 ACQUISITIONS. 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 August 29, 1998 and May 29, 1999
<TABLE>
<CAPTION>
AUGUST 29, MAY 29,
1998 1999
(Audited) (Unaudited)
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,081 $ 23,844
Accounts receivable, net 1,380 1,727
Inventories 24,602 27,591
Prepaid expenses and other
current assets 306 2,691
------------ ---------
Total current assets 39,369 55,853
Property, plant, and equipment, net 20,927 47,211
Goodwill, net 31,161 30,461
Noncompete agreements and other
intangibles, net 109 1,932
Deferred financing fees, net 3,698 6,790
Other assets 2,825 2,848
Deferred income taxes -- 3,673
------------ ---------
Total assets $ 98,089 $ 148,768
------------ ----------
------------ ----------
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
AUGUST 29, MAY 29,
1998 1999
(Audited) (Unaudited)
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,728 $ 4,624
Accrued liabilities 4,956 12,467
Payroll and related liabilities 2,600 3,577
Current portion of capital lease
obligations 97 156
------------- -----------
Total current liabilities 12,381 20,824
Due to affiliate 604 604
Long-term debt 100,000 130,000
Deferred rent -- 1,845
Capital lease obligations, less
current portion 48 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 (33,644) (23,289)
------------- ------------
Total shareholder's equity
(deficit) (14,944) ( 4,589)
------------- ------------
Total liabilities and shareholder's
equity (deficit) $ 98,089 $ 148,768
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
2
<PAGE>
Archibald Candy Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
MAY 30, MAY 29,
1998 1999
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales $ 26,216 $ 44,704
Cost of sales, excluding depreciation 9,092 15,729
Selling, general, and administrative
expenses, excluding depreciation and
amortization 14,944 25,576
Depreciation and amortization expense 1,191 2,773
Amortization of goodwill and other
intangibles 420 808
Management fees and other fees 133 135
------------- ------------
Operating income (loss) 436 (317)
Other (income) and expense:
Interest expense 2,521 3,380
Interest income (390) (254)
Other income and expense (68) (89)
------------- -------------
(Loss) before income taxes (1,627) (3,354)
Provision (benefit) for income taxes 43 (473)
------------- -------------
Net (loss) $ (1,670) $ (2,881)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
3
<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 39,062 56,039
Selling, general, and administrative
expenses, excluding depreciation and
amortization 49,767 72,340
Depreciation and amortization expense 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.
4
<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.
5
<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.
6
<PAGE>
2. INVENTORIES
Inventories at August 29, 1998 and May 29, 1999 are comprised of the
following:
<TABLE>
<CAPTION>
AUGUST 29, MAY 29,
1998 1999
------------ ----------
<S> <C> <C>
Raw materials .................. $10,044 $ 9,918
Work in process ................ 303 469
Finished goods ................. 14,255 17,204
------------ ----------
$24,602 $ 27,591
------------ ----------
------------ ----------
</TABLE>
3. DEBT AND CAPITAL LEASES
Long-term debt at August 29, 1998 and May 29, 1999 is comprised of
$100.0 million of 10-1/4% senior secured notes due July 1, 2004 and $0.1 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.
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.
7
<PAGE>
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.
8
<PAGE>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 29, 1999
(UNAUDITED)
<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>
9
<PAGE>
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 29, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ARCHIBALD
CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 27,010 $ 17,694 $ - $ 44,704
Cost of sales, excluding depreciation 9,649 6,080 - 15,729
Selling, general, and administrative expenses,
excluding depreciation and amortization 14,758 10,818 - 25,576
Depreciation and amortization expense 1,170 1,603 - 2,773
Amortization of goodwill and other intangibles 688 120 - 808
Management fees and other fees 135 - - 135
--------- --------- ------- ---------
Operating income (loss) 610 (927) - (317)
Other (income) expense:
Interest expense 3,367 13 - 3,380
Interest income (254) - - (254)
Other income and expense (86) (3) - (89)
Equity (earnings) of subsidiaries 444 - (444) -
--------- --------- ------- ---------
Income (loss) before income taxes (2,861) (937) 444 (3,354)
Provision (benefit) for income taxes 20 (493) - (473)
--------- --------- ------- ---------
Net income (loss) $ (2,881) $ (444) $ 444 $ (2,881)
--------- --------- ------- ---------
--------- --------- ------- ---------
</TABLE>
10
<PAGE>
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 42,727 13,312 - 56,039
Selling, general, and administrative expenses,
excluding depreciation and amortization 50,928 21,412 - 72,340
Depreciation and amortization expense 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>
11
<PAGE>
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
Principle 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>
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 29, 1999 COMPARED TO THREE MONTHS ENDED MAY 30, 1998
NET SALES. Consolidated net sales for the three months ended May 29,
1999 were $44.7 million, an increase of $18.5 million, or 70.5%, from $26.2
million for the three months ended May 30, 1998. The growth in sales was
primarily the result of increased Company-Operated Retail (1) sales resulting
from the acquisition of Sweet Factory Group, Inc. in December 1998 (the
"Sweet Factory Acquisition"), which accounted for $17.7 million, or 95.7%, of
the increase in net sales. Consolidated Company-Operated Retail net sales were
$39.4 million for the three months ended May 29, 1999, an increase of $17.7
million, or 82.1%, from $21.6 million for the three months ended May 30,
1998. The Sweet Factory Acquisition accounted for $17.7 million, or 99.7%, of
the increase. Net sales (without giving effect to the Sweet Factory
Acquisition) for the three months ended May 29, 1999, were $27.0 million, an
increase of $0.8 million, or 3.0%, from $26.2 million for the three months
ended May 30, 1998. Company-Operated Retail net sales (without giving effect
to the Sweet Factory Acquisition) for the three months ended May 29, 1999
were $21.7 million, and $21.6 million for the three months ended May 30,
1998. Same store sales for the Company's Fannie May and Fanny Farmer retail
stores increased 1.1% over the prior period. 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 three months ended May 29, 1999, Fannie May
and Fanny Farmer Third-Party Retail (2) sales were $3.2 million, an increase
of $0.7 million, or 27.1%, from $2.5 million for the three months ended May
30, 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. For the three months ended May 29, 1999 and May 30, 1998,
Non-Retail (3) sales were $2.1 million.
GROSS PROFIT. Consolidated gross profit for the three months ended May
29, 1999 was $29.0 million, an increase of $11.9 million, or 69.2%, from $17.1
million for the three months ended May 30, 1998. The Sweet Factory Acquisition
accounted for $11.6 million, or 98.0%, of this increase. Consolidated gross
profit as a percentage of net sales decreased to 64.8% for the three months
ended May 29, 1999 from 65.3% for the three months ended May 30, 1998. Gross
profit (without giving effect to the Sweet Factory Acquisition) for the three
months ended May 29, 1999 was $17.4 million, an increase of $0.2 million, or
1.4%, from $17.1 million for the three months ended May 30, 1998. Gross profit
as a percentage of net sales (without giving effect to the Sweet Factory
Acquisition) decreased to 64.3% for the three months ended May 29, 1999 from
65.3% for the three months ended May 30, 1998 due to the shift in mix towards
lower gross margin sales.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general and
administrative ("SG&A") expenses for the three months ended May 29, 1999 were
$25.6 million, an increase of $10.6 million, or 71.1%, from $14.9 million for
the three months ended May 30, 1998. The Sweet Factory Acquisition accounted for
$10.8 million of the increase. As a percentage of total net sales,
SG&A expenses increased to 57.2% for the three months ended May 29, 1999 from
57.0% for the three months ended May 30, 1998. SG&A expenses (without giving
effect to the Sweet Factory Acquisition) for the three months ended May 29, 1999
were $14.8 million, a decrease of $0.2 million, or 1.2%, from $14.9 million for
the three months ended May 30, 1998. SG&A expenses as a percentage of net sales
(without giving effect to the Sweet Factory Acquisition) decreased to 54.6% for
the three months ended May 29, 1999 from 57.0% for the three months ended May
30, 1998.
EBITDA. Consolidated earnings before interest, income taxes,
depreciation, and amortization ("EBITDA") was $3.4 million for the three months
ended May 29, 1999, an increase of $1.2 million, or 58.5%, from $2.1 million for
the three months ended May 30, 1998. The Sweet Factory Acquisition accounted for
$0.8 million, or 64.6%, of the increase. As a percentage of total net sales,
consolidated EBITDA was 7.5% for the three months ended May 29, 1999 as compared
to 8.1% for the three months ended May 30, 1998. EBITDA (without giving effect
to the Sweet Factory Acquisition) was $2.6 million for the three months ended
May 29, 1999, an increase of $0.4 million, or 20.7%, from $2.1 million for the
three months ended May 30, 1998. EBITDA as a percentage of net sales (without
giving effect to the Sweet Factory Acquisition) was 9.5% for the three months
ended May 29, 1999 as compared to 8.1% for the three months ended May 30, 1998.
13
<PAGE>
OPERATING INCOME (LOSS). Consolidated operating loss was $0.3 million
for the three months ended May 29, 1999, a decrease of $0.8 million, from
operating income of $0.4 million for the three months ended May 30, 1998. The
Sweet Factory Acquisition accounted for an operating loss of $0.9 million.
Operating income (without giving effect to the Sweet Factory Acquisition) was
$0.6 million for the three months ended May 29, 1999, an increase of $0.2
million, or 39.9%, from $0.4 million for the three months ended May 30, 1998.
The increase was a result of higher EBITDA.
NET INCOME (LOSS). Consolidated net loss was $2.9 million for the
three months ended May 29, an increase of $1.2 million, or 72.5%, from a net
loss of $1.7 million for the three months ended May 30, 1998. The Sweet
Factory Acquisition accounted for $0.4 million, or 36.7%, of the increase.
Interest expense was $3.4 million for the three months ended May 29, 1999, an
increase of $0.9 million, or 34.1%, from $2.5 million for the three months
ended May 30, 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 loss (without giving effect to the Sweet Factory
Acquisition) was $2.4 million for the three months ended May 29, 1999, an
increase of $0.8 million, or 45.9%, from a net loss of $1.7 million for the
three months ended May 30, 1998. Interest expense (without giving effect to
the Sweet Factory Acquisition) was $3.4 million for the three months ended
May 29, 1999, an increase of $0.8 million, or 33.6%, from $2.5 million for
the three months ended May 30, 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 such products at wholesale pricing for
resale to the consumer.
(3) Non-Retail includes sale of the Company's Fannie May and Fanny Farmer
branded products through the Company's quantity order, mail order and
fundraising programs.
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 29, 1999 COMPARED TO NINE MONTHS ENDED MAY 30, 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 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. Same store sales for the Company's
Fannie May and Fanny Farmer retail stores increased 0.5% over the prior period.
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, Non-Retail sales were $16.3
million and $16.4 million for the nine months ended May 30, 1998.
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 the Company's 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.
15
<PAGE>
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
$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.
NET INCOME (LOSS). Consolidated net income was $10.4 million for the
nine months ended May 29, 1999, a decrease of $0.5 million, or 4.2 %, from
net income of $10.8 million for the nine months ended May 30, 1998. The Sweet
Factory Acquisition accounted for a net loss of $0.3 million. Interest
expense was $9.4 million for the nine months ended May 29, 1999, an increase
of $1.6 million, or 20.5%, from $7.8 million for the nine months ended May
30, 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 $10.6 million for the nine months ended May 29, 1999, a
decrease of $0.2 million, or 1.8%, from net income of $10.8 million for the
nine months ended May 30, 1998. Interest expense (without giving effect to
the Sweet Factory Acquisition) was $9.3 million for the nine months ended May
29, 1999, an increase of $1.5 million, or 19.5%, from $7.8 million for the
nine months ended May 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net income was $10.4 million for the nine months ended May 29, 1999
and $10.8 million for the nine months ended May 30, 1998. Net cash provided
by operating activities was $18.1 million for the nine months ended May 29,
1999 compared to $18.3 million for the nine months ended May 30, 1998. Net
income included noncash depreciation and amortization charges of $8.4
million for the nine months ended May 29, 1999 and $4.8 million for the nine
months ended May 30, 1998.
Net cash used in investing activities increased to $33.0 million for
the nine months ended May 29, 1999 from $3.4 million for the nine months
ended May 30, 1998. The increase was a result of the Sweet Factory
Acquisition.
As of May 29, 1999, the Company had $13.3 million (per the borrowing
base calculation) available for borrowings under a $20 million revolving
credit facility (the "Credit Facility"), which matures on July 1, 2000. As
of May 29, 1999, a $0.5 million letter of credit was issued under the Credit
Facility. As of May 29, 1999, the Company had outstanding $130.0 million of
10-1/4% senior secured notes due July 1, 2004.
The Company believes that cash flows 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.
16
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 27.1 -- FINANCIAL DATA SCHEDULE FOR QUARTER ENDED MAY 29, 1999,
FILED HEREWITH.
(b) No reports were filed on Form 8-K for the quarter ended May 29, 1999.
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: July 13, 1999.
BY: /S/ DONNA M. SNOPEK
DONNA M. SNOPEK
VICE PRESIDENT OF FINANCE & ACCOUNTING
17
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