ARCHIBALD CANDY CORP, 10-K405, 2000-11-22

ARCHIBALD CANDY CORP
10-K405, 2000-11-22
SUGAR & CONFECTIONERY PRODUCTS

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COMMISSION FILE NUMBER: 333-33751
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 26, 2000.
</TABLE>

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</TABLE>

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ARCHIBALD CANDY CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
ILLINOIS 36-0743280
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1137 WEST JACKSON BOULEVARD, TELEPHONE:
CHICAGO, ILLINOIS 60607 (312) 243-2700
</TABLE>

(Address and telephone number of the registrant's principal executive office)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 243-2700

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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

As of November 22, 2000, none of the registrant's Common Stock, par value
$.01 per share, was held by non-affiliates of the registrant.

As of November 22, 2000, the number of shares outstanding of the
registrant's Common Stock was 19,200, all of which was held by Fannie May
Holdings, Inc.

DOCUMENTS INCORPORATED BY REFERENCE
None.

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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE NUMBER
OR REFERENCE
------------
<S> <C>
PART I
Item 1--Business.......................................... 1
Item 2--Properties........................................ 10
Item 3--Legal Proceedings................................. 10
Item 4--Submission of Matters to a Vote of Security
Holders................................................. 10

PART II
Item 5--Market for the Company's Common Equity and Related
Stockholder Matters..................................... 11
Item 6--Selected Financial Data........................... 12
Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 14
Item 8--Financial Statements and Supplementary Data....... 21
Item 9--Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................... 21

PART III
Item 10--Directors and Executive Officers of the
Company................................................. 22
Item 11--Executive Compensation........................... 24
Item 12--Security Ownership of Certain Beneficial Owners
and Management.......................................... 28
Item 13--Certain Relationships and Related Transactions... 31

PART IV
Item 14--Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 33
</TABLE>
<PAGE>
PART I
ITEM 1--BUSINESS

AS USED IN THIS REPORT, "WE" OR THE "COMPANY" REFERS TO ARCHIBALD CANDY
CORPORATION AND "HOLDINGS" REFERS TO FANNIE MAY HOLDINGS, INC. THE COMPANY IS A
WHOLLY-OWNED SUBSIDIARY OF HOLDINGS.

GENERAL

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 August 26, 2000, we sold our
products through 705 Company-operated stores and approximately 9,300 third-party
retail outlets in 37 states in the United States and 9 provinces in Canada. 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. 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 sales for fiscal year 2000 were approximately $251.3 million. Operating
income for fiscal 2000 was approximately $3.2 million. Earnings before interest,
income taxes, depreciation and amortization for fiscal year 2000 was
approximately $19.3 million.

On December 7, 1998, we acquired Sweet Factory Group, Inc., a leading
specialty bulk candy retailer with 252 stores located throughout the United
States. On June 8, 1999, our subsidiary Archibald Candy (Canada) Corporation
acquired substantially all of the assets of the Laura Secord retail business of
Nestle Canada Inc. Laura Secord is the leading retailer of boxed chocolates in
Canada, with 173 retail stores and distribution through more than 1,300
third-party retail outlets in Canada.

THE INDUSTRY

The U.S. confectionery industry had 1999 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 1999. The
U.S. confectionery market is comprised of two broad sectors: chocolates and
non-chocolates, which represent approximately 58% and 42% 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 1995 to 1999, the pound sales volume in the U.S. chocolate and
non-chocolate sectors grew at the rate of 9.2% and 12.5%, respectively. Within
the U.S. chocolate sector, total sales of boxed chocolates were approximately
$1.6 billion in 1999. Our management believes that the Canadian confectionery
industry had 1999 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 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.

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- 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.

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 our confectionery products, such as seasonal novelties
that we purchase from other sources for resale. Our manufactured products
include more than 350 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 fiscal 2000, bulk products represented 80% 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 20% 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 our Sweet
Factory 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 150 different candies, including
a variety of boxed chocolates and individual chocolate pieces, fudge, ice cream,
nuts, dietetic candy and novelty and other items.

- For fiscal 2000, chocolate items accounted for approximately 68% of Laura
Secord's net sales. As of August 2000, the manufacturing of the majority
of the Laura Secord boxed chocolate and other confectionery items is done
in the Company's Chicago, Illinois manufacturing facility. Prior to
August 2000, the Company purchased the majority of these items under a
co-pack agreement with Nestle Canada. We believe that we can capture
significant efficiencies by consolidating Laura Secord's chocolate
production with our existing manufacturing operations.

- For fiscal 2000, premium scooped ice cream accounted for approximately 20%
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 our Laura Secord stores. In
connection with the Laura Secord acquisition, we entered into a two-year
supply agreement with

2
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an affiliate of Nestle pursuant to which such affiliate will supply all of
the ice cream requirements of our Laura Secord stores through June 8,
2001. We have the right under the supply agreement to extend the term for
two additional two-year periods.

- For fiscal 2000, novelty items made primarily for the Easter, Christmas
and Valentine's Day holiday seasons accounted for approximately 12% of
Laura Secord's net sales.

OPERATIONS

MANUFACTURING AND PRODUCTION. All of our manufacturing operations are
located in Chicago, Illinois where we also maintain our corporate headquarters
as well as cold and dry storage and two of our distribution centers. On
March 31, 1999, we consolidated Sweet Factory's office, manufacturing and
distribution facilities in San Diego, California with those of our Chicago,
Illinois facilities and in August 2000, we consolidated the manufacturing and
distribution of Laura Secord products with our Chicago, Illinois facilities.

The manufacturing process at our Chicago, Illinois 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 cooper 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 of candy produced in the plant
are hand-packed into boxes for sale through our Company-operated retail
stores or other distribution channels. We utilize six packing lines 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 in bulk to our Company-operated stores so that
customers can select their own assortments.

Our plant currently operates in response to seasonal demands with the
busiest seven-month period commencing after Labor Day and running through
Easter. There is an annual summer plant shutdown to allow for comprehensive
maintenance and cleaning activities.

WAREHOUSING AND DISTRIBUTION. We maintain warehousing and distribution
facilities in Chicago, Illinois and Bensalem, Pennsylvania, which facilities
have 200,000 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 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 bulk
candy, pre-boxed chocolates and necessary shop supplies. Independent
distributors, parcel services and selected common carriers and freight
forwarding companies supply all of our sales channels and other stores,
including all of our Sweet Factory and Laura Secord stores.

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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.
Written specifications are provided to our suppliers and certificates of
analysis must accompany incoming shipments. Blommer Chocolate Company
("Blommer") and Merckens Chocolate Company ("Merckens") are our primary
chocolate coating suppliers. We currently have supply agreements with Blommer
and Merckens through calendar year 2001. In fiscal 2000, we purchased
approximately 50% and 40% of our chocolate coatings from Blommer and Merckens,
respectively. All chocolate coatings prepared for us are proprietary and are
produced according to our recipes.

We purchase substantially all of the products that we sell in our Sweet
Factory stores from independent distributors and manufacturers on a purchase
order basis. We purchase all of the ice cream that we sell in our Laura Secord
stores from an affiliate of Nestle Canada pursuant to our supply agreement with
such affiliate.

MARKETING AND SALES

We sell our confectionery products through three channels: (1)
Company-operated retail, (2) third-party retail and (3) non-retail.

COMPANY-OPERATED RETAIL. As of August 26, 2000, we sold our products
through 705 Company-operated stores: 229 Fannie May stores, 68 Fanny Farmer
stores, 232 Sweet Factory stores and 176 Laura Secord stores. These stores were
located in 37 states, the District of Columbia, Puerto Rico, and 9 provinces in
Canada as follows:

<TABLE>
<CAPTION>
FANNIE FANNY SWEET LAURA TOTAL
STATE/PROVINCE MAY FARMER FACTORY SECORD STORES
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Illinois........................................ 155 -- 7 -- 162
Ontario......................................... -- -- -- 91 91
California...................................... -- -- 67 -- 67
Quebec.......................................... -- -- -- 51 51
Florida......................................... 10 2 16 -- 28
Indiana......................................... 24 -- 2 -- 26
New York........................................ -- 17 9 -- 26
Minnesota....................................... 3 20 -- -- 23
Michigan........................................ 7 7 4 -- 18
Washington...................................... -- -- 15 -- 15
Massachusetts................................... -- 8 5 -- 13
Pennsylvania.................................... 6 -- 7 -- 13
Texas........................................... -- -- 13 -- 13
Wisconsin....................................... 7 5 -- -- 12
Alberta......................................... -- -- -- 11 11
Ohio............................................ -- 3 7 -- 10
Missouri........................................ 8 -- 2 -- 10
Virginia........................................ 4 -- 6 -- 10
Arizona......................................... -- -- 8 -- 8
Nevada.......................................... -- -- 8 -- 8
New Jersey...................................... 1 -- 6 -- 7
Georgia......................................... -- -- 6 -- 6
Manitoba........................................ -- -- -- 6 6
British Columbia................................ -- -- -- 5 5
Hawaii.......................................... -- -- 5 -- 5
Iowa............................................ 2 3 -- -- 5
Oregon.......................................... -- -- 5 -- 5
Colorado........................................ -- -- 4 -- 4
</TABLE>

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<TABLE>
<CAPTION>
FANNIE FANNY SWEET LAURA TOTAL
STATE/PROVINCE MAY FARMER FACTORY SECORD STORES
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
District of Columbia............................ 1 -- 3 -- 4
Maryland........................................ 1 -- 3 -- 4
Nova Scotia..................................... -- -- -- 4 4
Connecticut..................................... -- -- 3 -- 3
Louisiana....................................... -- -- 3 -- 3
New Brunswick................................... -- -- -- 3 3
New Hampshire................................... -- 2 1 -- 3
Saskatchewan.................................... -- -- -- 3 3
Kansas.......................................... -- -- 2 -- 2
Kentucky........................................ -- -- 2 -- 2
Mississippi..................................... -- -- 2 -- 2
Newfoundland.................................... -- -- -- 2 2
New Mexico...................................... -- -- 2 -- 2
North Carolina.................................. -- -- 2 -- 2
Puerto Rico..................................... -- -- 2 -- 2
Tennessee....................................... -- -- 2 -- 2
Alabama......................................... -- -- 1 -- 1
North Dakota.................................... -- 1 -- -- 1
South Carolina.................................. -- -- 1 -- 1
Utah............................................ -- -- 1 -- 1
--- -- --- --- ---
229 68 232 176 705
=== == === === ===
</TABLE>

In fiscal 2000, sales through our Company-operated stores accounted for
$210.4 million, or 83.7%, 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 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 Laura Secord stores
typically are located in shopping malls.

Our Fannie May and Fanny Farmer stores had average annual sales of
approximately $308,000 in fiscal 2000 and achieved average annual same store
sales growth of 3.3% during the past five fiscal years. Our Sweet Factory stores
had average annual sales of approximately $289,000 in fiscal 2000. Although
Sweet Factory same store sales have declined since 1997, we believe there are
opportunities to improve the performance of our recently acquired Sweet Factory
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
sell our Fannie May boxed chocolates to a broader consumer market. 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 been selling some of our
Fannie May boxed chocolates in our Sweet Factory stores. We also distribute
certain non-chocolate Sweet Factory products through our Fannie May and Fanny
Farmer stores.

We own 34 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: 482 in shopping malls, 80 in strip centers, 44 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.

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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 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.
As of August 26, 2000, we operated 158 Laura Secord classic stores averaging
approximately 765 square feet in size. These stores had average annual sales of
approximately $297,000 in fiscal 2000. We believe there are opportunities to
continue to improve the performance of our recently acquired Laura Secord
classic stores by implementing many of the same retail store strategies that
improved the operations of our Fannie May and Fanny Farmer stores.

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 and related gift items. The combo stores are operated as
a joint venture between Laura Secord and Hallmark. Laura Secord sells it
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. 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 August 26, 2000, we operated 18 Laura Secord combo stores
averaging approximately 3,400 square feet in size. These stores had average
annual sales of approximately $494,000 for fiscal 2000.

Since fiscal 1996, we have opened 37 new Fannie May and Fanny Farmer stores
and closed 111 Fannie May and Fanny Farmer stores, most of which were
unprofitable. 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 2.6%, 5.2%, 4.2%, 0.5%
and 4.0% in fiscal 1996, 1997, 1998, 1999 and 2000, respectively.
Company-operated Fannie May and Fanny Farmer store openings and closings for
fiscal 1996, 1997, 1998, 1999 and 2000 are set forth below.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
AUGUST 31, AUGUST 30, AUGUST 29, AUGUST 28, AUGUST 26,
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPENINGS:
Fannie May............................... 4 4 9 11 5
Fanny Farmer............................. -- -- -- -- 4
-------- -------- -------- -- --
Total.................................. 4 4 9 11 9
======== ======== ======== == ==
CLOSINGS:
Fannie May............................... 7 6 1 13 5
Fanny Farmer............................. 29 16 13 13 8
-------- -------- -------- -- --
Total.................................. 36 22 14 26 13
======== ======== ======== == ==
</TABLE>

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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 30 new stores, while closing approximately 25
unprofitable stores.

THIRD-PARTY RETAIL. Through our third-party retail channel, we market our
Fannie May, Fanny Farmer and Laura Secord branded products to approximately
9,300 grocery stores, drug stores, card and gift stores, department stores and
other variety stores through our frozen fresh, specialty market and mass market
programs. These programs are designed to make our 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 position the Fanny Farmer
brand at a lower price point for the mass market.

Under the frozen fresh program, we distribute Fannie May 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 and Dominick's, 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
2000, frozen fresh sales accounted for $12.2 million, or 9.4%, of our Fannie May
and Fanny Farmer 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 Albertsons. For fiscal
2000, mass market sales accounted for $1.8 million, or 1.4%, of our Fannie May
and Fanny Farmer net sales.

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 began selling in November 1998 Fannie May boxed chocolates through many of
Hallmark's approximately 5,000 Gold Crown stores during the holiday seasons. For
fiscal 2000, specialty markets program sales accounted for $2.8 million, or
2.2%, of our Fannie May and Fanny Farmer 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 Laura Secord combo stores. These sales
accounted for $5.5 million, or 11.9%, of Laura Secord net sales in fiscal 2000.

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.

7
<PAGE>
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
throughout the United States for our product offering. For fiscal 2000, quantity
order and fundraising sales accounted for $12.4 million, or 9.5%, of our Fannie
May and Fanny Farmer 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 through
a catalog which has a national circulation of over 2.1 million catalogs annually
and a database of over 350,000 customers and over the internet at our web site
(WWW.FANNIEMAYCANDIES.COM). 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. For fiscal 2000, mail order sales accounted for
$6.2 million, or 4.8%, of our Fannie May and Fanny Farmer net sales. 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.

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. 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 $20.00. 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. While generally not competing in the same markets as Fannie May and
Fanny Farmer, 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 $20.00. 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.
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
card and gift 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 (all less than 50 stores) 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.

8
<PAGE>
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 August 26, 2000, we employed approximately 5,950 people, of which
1,400 worked in Fannie May stores, 350 worked in Fanny Farmer stores, 1,800
worked in Sweet Factory stores, 1,400 worked in Laura Secord 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, 750 were salaried. During periods of high seasonal retail
demand in our second and third fiscal quarters, our number of employees
typically increases by approximately 2,400, many of whom work part-time in our
Company-operated retail stores. As of August 26, 2000, over one-half of our
hourly store personnel were employed on a part-time basis. As of August 26,
2000, approximately 1,000 of our employees were members of one of the various
labor unions that represent our employees. The Company has 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.

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.
During fiscal year 2000, Sweet Factory renewed the license for an additional
ten-year period, paying a renewal fee of $750,000. 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 $750,000 for each such additional extension.

9
<PAGE>
ITEM 2--PROPERTIES

As of August 26, 2000, we operated 229 Fannie May stores, 68 Fanny Farmer
stores, 232 Sweet Factory stores and 176 Laura Secord stores. Of the 229 Fannie
May stores, 34 are owned by us and 195 are leased by us. We lease all of our
Fanny Farmer, Sweet Factory and Laura Secord stores. Within four years following
August 26, 2000, approximately 60% 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.

In addition to our Company-operated stores, we have five other principal
properties: (1) an approximately 320,000 square foot manufacturing, storage and
headquarters facility that we own in Chicago, Illinois; (2) an approximately
132,000 square foot warehouse and distribution facility that we lease in
Chicago, Illinois; (3) an approximately 68,000 square foot warehouse that we
lease in Chicago, Illinois; (4) an approximately 17,000 square foot warehouse
and distribution facility that we own in Bensalem, Pennsylvania; and (5) an
approximately 5,000 square foot office facility that we lease in Toronto,
Canada. 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 and our Chicago
warehouse expires in June 2002. 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.

ITEM 3--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
we believe would have a material adverse effect on our results of operations or
financial condition. Also, we were not a party to any such legal proceeding that
terminated during the fourth quarter of fiscal 2000.

ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.

10
<PAGE>
PART II
ITEM 5--MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Holdings owns all of our issued and outstanding common stock. There is no
established public trading market for our common stock. Holdings has four
classes of authorized common stock, all of which are subject to restrictions on
sale and transfer. There is no established public trading market for Holdings'
common stock. As of August 26, 2000, there were seven holders of record of
Holdings' Class A Common Stock, no outstanding shares of Holdings' Class B
Common stock, twelve holders of record of Holdings' Class C Common Stock and one
holder of record of Holdings' Class D Common Stock.

We did not pay any cash dividend on our common stock in fiscal 1999 or 2000.
However, we funded cash to Holdings to the extent necessary to allow Holdings to
pay cash dividends on its 5% senior preferred stock (296,000 with respect to
such dividends paid for 1999 and 303,000 with respect to such dividends paid for
2000). Holdings did not pay any cash dividend on Holdings' Common Stock in
fiscal 1999 or 2000. Any payment of dividends in the future is dependent upon
the financial condition, capital requirements and earnings of us and Holdings,
as well as other factors. Nevertheless, we currently intend to retain all future
earnings, if any, to fund the development and growth of our business and,
therefore, do not anticipate paying any cash dividends to Holdings in the
foreseeable future, except to the extent necessary to allow Holdings to satisfy
its dividend and redemption obligations with respect to its common stock and
preferred stock or as required by the tax sharing and management consulting
agreement entered into between us and Holdings. See "Certain Relationships and
Related Transactions--Tax Sharing and Management Consulting Agreement". Also, we
are subject to certain contractual restrictions on our payment of dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 7, "Debt" of the notes to
the financial statements included in this report for information concerning such
restrictions.

11
<PAGE>
ITEM 6--SELECTED 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 26, 2000, 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 herein.

Net sales............................. $117,348 $121,933 $126,742 $196,789 $251,314
======== ======== ======== ======== ========

Gross profit.............................. $76, 338 $ 79,649 $ 82,764 $125,910 $155,980
Operating Income.......................... 7,945 10,801 12,539 9,465 3,152
Interest expense.......................... 9,455 9,235 10,346 13,831 19,454
Other income and (expense)................ 444 411 1,386 914 1,084
Income tax................................ 349 250 276 143 130
Net income (loss)(5)...................... (1,415) (1,171) 3,303 (3,595) (15,348)
</TABLE>

<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------
AUGUST 31, AUGUST 30, AUGUST 29, AUGUST 28, AUGUST 26,
1996(1) 1997(1) 1998(1) 1999(1) 2000(1)
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 380 $ 15,801 $ 13,081 $ 6,908 $ 3,120
Working capital (deficiency)............... (4,349) 23,475 26,988 17,461 3,623
Total assets............................... 78,668 95,660 98,089 188,287 184,863
Total long-term debt....................... 72,721 100,521 100,145 170,335 170,060
Shareholder's equity (deficit)............. (15,448) (16,619) (14,944) (18,536) (33,734)
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
AUGUST 31, AUGUST 30, AUGUST 29, AUGUST 28, AUGUST 26,
1996(1) 1997(1) 1998(1) 1999(1) 2000(1)
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6).................................. $14,731 $16,868 $18,964 $23,700 $19,332
Cash provided by (used in):
Operating activities..................... 4,117 3,919 4,206 9,694 (160)
Investing activities..................... (1,121) (3,688) (4,709) (86,627) (13,779)
Financing activities..................... (3,098) 15,190 (2,217) 70,757 10,001
Depreciation and amortization.............. 6,807 5,932 6,233 13,955 15,866
Capital expenditures....................... 2,280 3,688 4,574 7,703 11,107
Net sales growth........................... 1.6% 3.9% 3.9% 55.3% 27.7%
Gross margin............................... 65.1% 65.3% 65.3% 64.0% 62.1%
EBITDA margin(7)........................... 12.6% 13.8% 15.0% 12.0% 7.7%
Ratio of earnings to fixed charges(8)...... -- -- 1.2 -- --
</TABLE>

12
<PAGE>

------------------------

(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, 1998, 1999 and 2000 each had 52 weeks (364 days).

(2) Company-operated retail includes sale of products through our Fannie May
and Fanny Farmer stores and through our Sweet Factory stores, for the
period after December 7, 1998, and Laura Secord stores, for the period
after June 8, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."

(3) Third-party retail includes sale of Fannie May, Fanny Farmer and, for the
period after June 8, 1999, Laura Secord products through grocery stores,
drug stores and other independent retailers that purchase our branded
products at wholesale pricing for resale to the consumer. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

(4) Non-Retail includes sale of Fannie May and Fanny Farmer branded products
through our quantity order, mail order and fundraising programs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

(5) 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.

(6) EBITDA for any period presented above is defined as earnings before
interest, income taxes, depreciation and amortization (including
depreciation in the Laura Secord joint venture with Hallmark of $24,000 and
$107,000 in fiscal 1999 and 2000, respectively). 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 any reason, our measure of EBITDA may not be
comparable to that of other companies.

(7) EBITDA margin is EBITDA divided by net sales.

(8) 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 1996, 1997, 1999 and 2000, earnings
were insufficient to cover fixed charges by approximately $15.2 million,
$14.6 million, $27.1 million and $47.5 million, respectively.

(9) The term "stores" includes retail stores and kiosks, but not carts.

(10) 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.

13
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED
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 AUGUST 26, 2000.

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. As of August 26, 2000, we sold our products
through 705 Company-operated stores and approximately 9,300 third party retail
outlets in 37 states in the United States and 9 provinces in Canada. 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 $210.4 million, or 83.7%,
of net sales in fiscal 2000. Our third-party retail and non-retail businesses
collectively accounted for $40.9 million, or 16.3%, of net sales in fiscal 2000.
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, (3) acquiring
additional confectionery brands or complementary products and services and
(4) implementing new product and merchandising strategies at Sweet Factory.

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.

14
<PAGE>
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 stores, in each case, for the
periods indicated. Except with respect to pounds sold and average selling price,
the table and discussion below reflects the results of operations of our Sweet
Factory and Laura Secord stores only for the periods after December 6, 1998 and
June 7, 1999, respectively.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
AUGUST 29, AUGUST 28, AUGUST 26,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
PERCENTAGE OF NET SALES:
Company-operated retail................................... 72.2% 78.8% 83.7%
Third-party retail........................................ 14.4 12.6 8.9
Non-retail................................................ 13.4 8.6 7.4
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
POUNDS SOLD (IN MILLIONS); FANNIE MAY/FANNY FARMER ONLY:
Company-operated retail................................... 8.2 7.9 8.2
Third-party retail........................................ 2.1 2.8 1.9
Non-retail................................................ 1.9 1.9 2.3
------ ------ ------
Total pounds sold....................................... 12.2 12.6 12.4
====== ====== ======
AVERAGE SELLING PRICE PER POUND; FANNIE MAY/FANNY FARMER
ONLY:
Company-operated retail................................... $11.12 $11.57 $11.47
Third-party retail........................................ 8.61 8.67 8.79
Non-retail................................................ 9.05 8.74 8.21
Total average selling price............................. 10.36 10.49 10.45

COMPANY-OPERATED STORES (at period end)..................... 317 727 705
</TABLE>

As a percentage of net sales, Company-operated retail sales increased from
72.2% in fiscal 1998 to 83.7% in fiscal 2000. This increase was due primarily to
our acquisitions in fiscal 1999 of Sweet Factory and Laura Secord, whose sales
are more highly concentrated in the Company-operated retail sales channel than
our Fannie May and Fanny Farmer sales. From the end of fiscal 1998 to the end of
fiscal 2000, the number of Company-operated stores increased from 317 to 705.
This increase reflects the acquisition of 252 Sweet Factory and 173 Laura Secord
stores, offset by our closing of a net total of 35 Fannie May, Fanny Farmer,
Sweet Factory and Laura Secord stores over the same period. While sales
declined, pounds sold in our Fannie May and Fanny Farmer stores remained at
8.2 million in fiscal 1998 and in fiscal 2000.

Pounds sold in our third-party retail sales channel decreased slightly from
2.1 million in fiscal 1998 to 1.9 million in fiscal 2000. The decrease in pounds
sold from fiscal 1999 to fiscal 2000 was primarily due to the weakness in sales
to our card and gift business customers under a program launched in fiscal 1999.
This program received heavy initial promotional support, which was not repeated
during fiscal 2000. As a percentage of net sales, third-party retail sales
decreased from 14.4% to 8.9% over the same period, due to the higher
concentration in Company-operated retail sales as a result of the acquisitions
of Sweet Factory and Laura Secord. Without giving effect to the Sweet Factory
and Laura Secord acquisitions, third-party retail sales as a percentage of net
sales decreased from 18.3% in fiscal 1998 to 13.0% in fiscal 2000.

Pounds sold in our non-retail sales channel increased from 1.9 million in
fiscal 1998 to 2.3 million in fiscal 2000 as a result of additional customers in
our fundraising and mail order businesses. As a percentage of net sales,
non-retail sales decreased from 13.4% to 7.4% over the same period, due to the
higher concentration of sales in Company-operated retail sales as a result of
the acquisitions of Sweet

15
<PAGE>
Factory and Laura Secord. Without giving effect to the Sweet Factory and Laura
Secord acquisitions, non-retail sales as a percentage of net sales increased
from 13.4% for fiscal 1998 to 14.3% in fiscal 2000.

FISCAL YEAR ENDED AUGUST 26, 2000 COMPARED TO FISCAL YEAR ENDED AUGUST 28, 1999

The discussion below with respect to the fiscal year ended August 28, 1999
reflects, for the period after December 6, 1998, our acquisition of Sweet
Factory and, for the period after June 7, 1999, our acquisition of Laura Secord.

NET SALES. Consolidated net sales for fiscal 2000 were $251.3 million, an
increase of $54.5 million, or 27.7%, from $196.8 million for fiscal 1999. The
growth in sales was primarily the result of increased Company-operated retail
sales resulting from the Sweet Factory and Laura Secord acquisitions, which
accounted for $57.4 million. Net sales for fiscal 2000, without giving effect to
the Sweet Factory and Laura Secord acquisitions, were $129.9 million, a decrease
of $2.8 million, or 2.1%, from $132.7 million for fiscal 1999. Consolidated
Company-operated retail net sales for fiscal 2000 were $210.4 million, an
increase of $55.4 million, or 35.7%, from $155.0 million for fiscal 1999,
primarily as a result of the Sweet Factory and Laura Secord acquisitions.
Company-operated retail net sales for fiscal 2000, without giving effect to the
Sweet Factory and Laura Secord acquisitions, were $94.4 million, an increase of
$3.0 million, from $91.4 million for fiscal 1999. This increase was attributable
to a 4.0% same store sales increase in our Fannie May/Fanny Farmer stores.
Consolidated third-party retail net sales for fiscal 2000 were $22.3 million, a
decrease of $2.4 million, or 9.7%, from $24.7 million for fiscal 1999. This
decrease was primarily due to the weakness in sales to our card and gift
business customers under a program launched in fiscal 1999. This program
received heavy initial promotional support, which was not repeated during fiscal
2000. Consolidated non-retail net sales were $18.6 million for fiscal 2000, an
increase of $1.6 million, or 9.4%, from $17.0 million for fiscal 1999. Increases
in the boxed chocolate fundraising business were primarily responsible for the
growth in non-retail sales.

GROSS PROFIT. Consolidated gross profit for fiscal 2000 was
$156.0 million, an increase of $30.1 million, or 23.9%, from $125.9 million for
fiscal 1999. The Sweet Factory and Laura Secord acquisitions primarily accounted
for this increase. As a percentage of total net sales, consolidated gross profit
decreased to 62.1% for fiscal 2000 from 64.0% for fiscal 1999. Gross profit for
fiscal 2000, without giving effect to the Sweet Factory and Laura Secord
acquisitions, was $80.8 million, a decrease of $4.5 million, or 5.3%, from
$85.3 million for fiscal 1999. This decrease was due primarily to a decrease in
third-party retail sales. Gross profit as a percentage of net sales, without
giving effect to the Sweet Factory and Laura Secord acquisitions, decreased to
62.2% for fiscal 2000 from 64.3% for fiscal 1999 due to a shift in mix towards
lower gross margin sales and increased discounts to customers.

SELLING, GENERAL AND ADMINISTRATIVE. Consolidated SG&A expenses for fiscal
2000 were $135.5 million, an increase of $33.6 million, or 33.0%, from
$101.9 million for fiscal 1999. As a percentage of total net sales, consolidated
SG&A expenses increased to 53.9% for fiscal 2000 from 51.8% for fiscal 1999.
SG&A expenses for fiscal 2000, without giving effect to the Sweet Factory and
Laura Secord acquisitions, were $66.2 million, an increase of $0.7 million, or
1.1%, from $65.5 million for fiscal 1999. This increase in SG&A expenses was due
primarily to the growth in our non-retail channel. SG&A expenses as a percentage
of net sales, without giving effect to the Sweet Factory and Laura Secord
acquisitions, increased to 51.0% for fiscal 2000 from 49.4% for fiscal 1999.

EBITDA. Consolidated EBITDA was $19.3 million for fiscal 2000, a decrease
of $4.4 million, or 18.6%, from $23.7 million for fiscal 1999. As a percentage
of total net sales, consolidated EBITDA was 7.7% for fiscal 2000 as compared to
12.0% for fiscal 1999. EBITDA for fiscal 2000, without giving effect to the
Sweet Factory and Laura Secord acquisitions, was $14.2 million, a decrease of
$5.5 million, or 27.9%, from $19.7 million for fiscal 1999. The decrease in
EBITDA was a result of lower third-party retail sales, reduced gross profit
margins, and higher operating expenses, as discussed above. EBITDA as a
percentage

16
<PAGE>
of total net sales for fiscal 2000, without giving effect to the Sweet Factory
and Laura Secord acquisitions, was 10.9% as compared to 14.9% for fiscal 1999.

OPERATING INCOME (LOSS). Consolidated operating income for fiscal 2000 was
$3.2 million, a decrease of $6.3 million, from operating income of $9.5 million
for fiscal 1999. Operating income for fiscal 2000, without giving effect to the
Sweet Factory and Laura Secord acquisitions, was $3.6 million, a decrease of
$7.3 million from income of $10.9 million for fiscal 1999. This decrease
resulted primarily from reduced gross profit margins and higher selling, general
and administrative expenses, as discussed above, an increase in depreciation and
amortization and a restructuring charge of $0.8 million related to severance
costs associated with a reduction in our workforce in July 2000.

FISCAL YEAR ENDED AUGUST 28, 1999 COMPARED TO FISCAL YEAR ENDED AUGUST 29, 1998

NET SALES. Consolidated net sales for fiscal 1999 were $196.8 million, an
increase of $70.1 million, or 55.3%, from $126.7 million for fiscal 1998. The
growth in sales was primarily the result of increased Company-operated retail
sales resulting from the Sweet Factory and Laura Secord acquisitions, which
accounted for $64.1 million, or 91.4%, of the increase in net sales. Net sales
for fiscal 1999, without giving effect to the Sweet Factory and Laura Secord
acquisitions, were $132.7 million, an increase of $6.0 million, or 4.7%, from
$126.7 million for fiscal 1998. This increase was due primarily to growth in
third-party retail sales. Consolidated Company-operated retail net sales for
fiscal 1999 were $155.0 million, an increase of $63.5 million, or 69.4%, from
$91.5 million for fiscal 1998. The Sweet Factory and Laura Secord acquisitions
accounted for all of this increase. Company-operated retail net sales for fiscal
1999, without giving effect to the Sweet Factory and Laura Secord acquisitions,
were $91.4 million, a decrease of $0.1 million, from $91.5 million for fiscal
1998. Consolidated third-party retail net sales for fiscal 1999 were
$24.7 million, an increase of $6.5 million, or 35.7% from $18.2 million for
fiscal 1998. This growth reflects increased third-party retail sales resulting
from the Laura Secord acquisition and the continued results of management's
strategy to expand third-party retail sales into new markets. Consolidated
non-retail net sales were $17.0 million for fiscal 1999 and 1998.

GROSS PROFIT. Consolidated gross profit for fiscal 1999 was
$125.9 million, an increase of $43.1 million, or 52.1%, from $82.8 million for
fiscal 1998. The Sweet Factory and Laura Secord acquisitions accounted for
$40.6 million, or 94.2%, of the increase. As a percentage of total net sales,
consolidated gross profit decreased to 64.0% for fiscal 1999 from 65.4% for
fiscal 1998. Gross profit for fiscal 1999, without giving effect to the Sweet
Factory and Laura Secord acquisitions, was $85.3 million, an increase of
$2.5 million, or 3.0%, from $82.8 million for fiscal 1998. This decrease was due
primarily to reduced third-party retail sales. Gross profit as a percentage of
net sales, without giving effect to the Sweet Factory and Laura Secord
acquisitions, decreased to 64.3% for fiscal 1999 from 65.4% for fiscal 1998 due
to a shift in mix towards lower gross margin sales.

SELLING, GENERAL AND ADMINISTRATIVE. Consolidated SG&A expenses for fiscal
1999 were $101.9 million, an increase of $38.4 million, or 60.5%, from
$63.5 million for fiscal 1998. The Sweet Factory and Laura Secord acquisitions
accounted for $36.4 million, or 94.8%, of the increase. As a percentage of total
net sales, consolidated SG&A expenses increased to 51.8% for fiscal 1999 from
50.1% for fiscal 1998. SG&A expenses for fiscal 1999, without giving effect to
the Sweet Factory and Laura Secord acquisitions, were $65.5 million, an increase
of $2.0 million, or 3.1%, from $63.5 million for fiscal 1998. This increase in
SG&A expenses was due primarily to the growth in our non-retail channel. SG&A
expenses as a percentage of net sales, without giving effect to the Sweet
Factory and Laura Secord acquisitions, increased to 49.4% for fiscal 1999 from
50.1% for fiscal 1998.

17
<PAGE>
EBITDA. Consolidated EBITDA was $23.7 million for fiscal 1999, a decrease
of $4.7 million, or 24.7%, from $19.0 million for fiscal 1998. The Sweet Factory
and Laura Secord acquisitions accounted $4.0 million, or 85.1%, of the increase.
As a percentage of total net sales, consolidated EBITDA was 12.0% for fiscal
1999 as compared to 15.0% for fiscal 1998. EBITDA for fiscal 1999, without
giving effect to the Sweet Factory and Laura Secord acquisitions, was
$19.7 million, an increase of $0.7 million, or 3.7%, from $19.0 million for
fiscal 1998. EBITDA as a percentage of total net sales for fiscal 1999, without
giving effect to the Sweet Factory and Laura Secord acquisitions, was 14.8% as
compared to 15.0% for fiscal 1998.

OPERATING INCOME (LOSS). Consolidated operating income for fiscal 1999 was
$9.5 million, a decrease of $3.0 million, or 24.0%, from operating income of
$12.5 million for fiscal 1998. The Sweet Factory and Laura Secord acquisitions
accounted for $1.4 million of the decrease. Operating income for fiscal 1999,
without giving effect to the Sweet Factory and Laura Secord acquisitions, was
$10.9 million, a decrease of $1.6 million, or 12.8%, from income of
$12.5 million for fiscal 1999. This decrease resulted primarily from an increase
in amortization and SG&A expenses.

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 1998,
1999 and 2000, the net cash generated by (used in) operating activities was
$4.2 million, $9.7 million and ($0.2) million, respectively.

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." Our acquisitions of Sweet Factory and Laura Secord
have not materially changed 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
1998, 1999 and 2000 were $4.6 million, $7.7 million and $11.1 million,
respectively. Capital expenditures for fiscal 1998 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 and 2000, excluding capital expenditures described
in the paragraph below, related primarily to (1) the remodeling of existing
Fannie May, Fanny Farmer and Sweet Factory stores, (2) improvements in our
management information systems and (3) the remodeling and expansion of our
Chicago facilities as a result of the Sweet Factory and Laura Secord
acquisitions.

In addition, we spent approximately $9.5 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 fiscal 2000, we paid
a $750,000 renewal fee in order to extend our license of the Sweet Factory
trademark for the ten-year period beyond the year 2000.

18
<PAGE>
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) $30.0 million (until December 31, 2000 and $20 million thereafter) 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 $30.0 million (until December 31, 2000 and $20 million thereafter) .

For the three months ended February 26, 2000 and May 27, 2000, we did not
meet the fixed-charge coverage ratio or the leverage ratio requirements of the
credit agreements, but obtained a waiver of these requirements from our lenders
for such three-month periods only. Additionally, on June 30, 2000, we entered
into an amendment to our credit agreements that adjusted the borrowing base
calculation, which increased the amount available to borrow by approximately
$4.0 million. On July 25, 2000, we entered into an additional amendment of our
credit agreements that increased the borrowing availability from $25 million to
$30 million until December 31, 2000 and to $20 million thereafter. The amendment
requires the borrowings to be paid in full during the period beginning
December 26, 2000 and ending December 31, 2000. Management believes this
requirement will be satisfied. As of August 26, 2000, our cash balance was
$3.1 million and we had borrowings of approximately $18.5 million and letters of
credit in the amount of $0.3 million outstanding under our revolving credit
agreement while Archibald Candy (Canada) Corporation had no borrowings or
letters of credit outstanding under its revolving credit agreement.

Our credit agreements expire on April 15, 2001. We will need to extend or
renew the credit agreements or obtain alternative financing to meet our seasonal
working capital needs and other requirements for the period after April 15,
2001, including interest payments on our 10.25% senior secured notes.

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. 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. 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. All of the common stock of Holdings and all of the Junior Class A
PIK Preferred Stock and Junior Class B PIK Preferred Stock is owned by the
Jordan Company, TCW Capital or their respective affiliates.

In order for Holdings to make such redemption payments, Holdings must cause
us, to the extent permitted by the indenture, our credit agreements and law, 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 agreements or otherwise, the failure to make
required redemption payments (1) would trigger various provisions of Holdings'
preferred and common stock, including provisions providing for a change of
control of Holdings' and our Board of Directors and (2) could result in defaults
under the indenture and our credit agreements.

19
<PAGE>
In light of the above debt service and dividend and redemption obligations,
and in order to have sufficient funds to meet our projected capital expenditures
and working capital requirements, we are exploring various alternatives,
including extending and/or amending the credit agreements and refinancing the
credit agreements, and pursuing other sources of capital. While management
believes our financing requirements will be met, there can be no assurance that
we will be able to accomplish any of these alternatives or that we will be able
to do so on terms favorable to us.

Instruments governing our indebtedness, including the indenture and our and
Archibald Candy (Canada) Corporation's revolving credit agreements contain
financial (including minimum EBITDA) 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 the 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 our Sweet Factory and
Laura Secord 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 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 increase our raw material

20
<PAGE>
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 by quarter for
fiscal 1999 and 2000 (including our Sweet Factory operations beginning in the
second quarter of fiscal 1999 and our Laura Secord operations beginning in the
fourth quarter of fiscal 1999). In the fourth quarter of fiscal year 2000,
management identified certain adjustments which related to previous quarters and
has adjusted EBITDA in the prior quarters of fiscal year 2000 to appropriately
reflect these adjustments.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FIRST SECORD THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
NOV. 28 FEB. 27, MAY 29, AUG. 28, NOV. 27 FEB. 26, MAY 27, AUG. 26,
1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $29,648 $81,455 $44,704 $40,982 $54,433 $100,943 $56,222 $39,716
EBITDA.................. 1,465 22,474 3,353 (3,592) (193) 25,008 (800) (4,683)
</TABLE>

For the twelve-month period ended August 28, 1999, Sweet Factory had net
sales of $75.7 million on a pro forma basis, of which net sales by quarter were
approximately 22%, 29%, 23% and 26%, respectively. For the twelve-month period
ended August 28, 1999, Laura Secord had net sales of $49.2 million on a pro
forma basis, of which net sales by quarter were approximately 22%, 38%, 24% and
16%, respectively.

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The audited financial statements of Archibald Candy Corporation are included
in this report beginning at page F-1.

ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES

During fiscal 1999 and fiscal 2000, there has been no change in our
accountants or any disagreement between our management and our accountants on
any matter of accounting principles or practices or financial statement
disclosures.

21
<PAGE>
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS AND MANAGEMENT EMPLOYEES

The following table and summary below set forth certain information with
respect to our directors and management employees as of August 26, 2000.*

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- ------ --------------------------------------------------
<S> <C> <C>
Thomas H. Quinn........................... 53 Chairman of the Board and Chief Executive
Officer**
Ted A. Shepherd........................... 41 President and Chief Operating Officer, Director**
Richard J. Anglin......................... 45 Vice President, Chief Financial Officer and
Secretary**
Alan W. Petrik............................ 47 Vice President--Supply Chain Management
Ricky L. Lelli............................ 48 Vice President--Operations
Joseph Chipollini......................... 49 Vice President--Retail Operations
Nicholas Podoba........................... 54 Vice President--Human Resources
John W. Jordan II......................... 52 Director**
Adam E. Max............................... 42 Director, Vice President, Assistant Treasurer and
Assistant Secretary**
Jeffrey Rosen............................. 51 Director**
</TABLE>

------------------------

* In September 2000, we hired Mr. Richard J. Anglin as our Vice President,
Chief Financial Officer and Secretary. Brant Binder resigned as a director
of both us and Holdings on October 24, 2000.

** 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 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 18 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. Mr. Shepherd was
elected a director on October 24, 2000.

MR. ANGLIN was hired in September 2000 as our Vice President, Chief
Financial Officer and Secretary. Mr. Anglin has over 16 years of financial and
operational experience in the retail industry. Prior to joining us, Mr. Anglin
worked for two years as Executive Vice President and Chief Financial Officer for
Florsheim Group, Inc., two years as Vice President of Store Operations for
Service Merchandise, and six years as Vice President of Operations and Chief
Financial Officer for Mark Shale.

MR. PETRIK has served as our Vice President of Supply Chain Management since
June 2000. Mr. Petrik has been with us for 21 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
24 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.

22
<PAGE>
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. Mr. Podoba has over 25 years of experience in human
resource management. 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.,
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.

SHAREHOLDERS AGREEMENT

All holders of Holdings' common stock are party to a shareholder's
agreement, 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. Mr. Rosen currently is the
only director nominated by the affiliates of TCW Capital. On October 24, 2000,
the Boards of Directors of Holdings and us expanded the number of their
respective members from five to six and elected Mr. Shepherd to fill the newly
created director position for each Board.

COMPENSATION

We pay each of our directors a quarterly fee of $2,500. We also pay
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.

23
<PAGE>
ITEM 11--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 other executive officers whose total
annual salary and bonus exceeded $100,000 for each such fiscal year:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) SARS (#)
--------------------------- -------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas H. Quinn........................ 2000 -- -- $52,000(1) --
Chairman of the Board and 1999 -- -- 52,000(1) --
Chief Executive Officer 1998 -- -- 52,000(1) --

Ted A. Shepherd........................ 2000 $300,000 $200,000 61,007(2) --
President and 1999 271,667 350,000 -- 9.75(3)
Chief Operating Officer 1998 235,000 200,000 -- --

Thomas G. Kasvin(4).................... 2000 181,212 -- 79,908(5) 5.00(4)
Vice President, Chief Financial
Officer
and Secretary

Donna M. Snopek(6)..................... 2000 58,333 49,000 92,930(7) --
Vice President--Finance and
Accounting 1999 135,000 99,000 -- 1.00
and Secretary 1998 121,167 67,500 -- --
of Boxed Chocolate Brands

Richard J. Anglin(8)................... 2000 -- -- -- --
Vice President, Chief Financial
Officer
and Secretary
</TABLE>

------------------------

(1) Reflects a consulting fee we paid Mr. Quinn in each of fiscal 2000, 1999 and
1998 in lieu of salary. See "Certain Transactions--Director's Consulting Fee
and TCW Affiliates' Expense Reimbursement."

(2) Represents value of 6.50 shares of Holdings' Class A Common Stock issued to
Mr. Shepherd on August 31, 1999 pursuant to Holdings' 1999 Stock Bonus Plan.
See "Holdings' 1999 Stock Bonus Plan."

(3) Holdings subsequently has converted all of Mr. Shepherd's SARs into an
equivalent number of shares of Holdings' Class A Common Stock. See
"Holdings' 1999 Stock Bonus Plan."

(4) Mr. Kasvin was hired in October 1999 to serve as Vice President, Chief
Financial Officer and Secretary. His annual salary was $230,000 and he was
granted five stock appreciation rights pursuant to Holdings' Stock
Appreciation Rights Plan. In July 2000, Mr. Kasvin's employment was
terminated. Upon such termination, Mr. Kasvin was provided three months
severance to be paid over a three-month period in semi-monthly installments.
In addition, the stock appreciation rights granted to Mr. Kasvin were
terminated.

(5) Includes $40,542 of relocation costs associated with Mr. Kasvin's employment
and $39,366 of severance and vacation costs associated with the termination
of Mr. Kasvin's employment.

(6) Ms. Snopek's employment was terminated on January 28, 2000. In connection
with such termination, we agreed to pay her salary in bi-monthly
installments for the first year following January 28, 2000 and in the event
that a bonus is paid to the senior management team for fiscal year 2000, she
would be eligible for the prorated amount from August 29, 1999 to January
28, 2000. In addition, the four stock appreciation rights granted to Ms.
Snopek were deemed fully vested.

24
<PAGE>
(7) Represents severance and vacation costs associated with the termination of
Ms. Snopek's employment.

(8) Mr. Anglin was hired in September 2000 as Vice President, Chief Financial
Officer and Secretary. His annual salary is $210,000 and he was granted five
stock appreciation rights, pursuant to Holdings' Stock Appreciation Rights
Plan, none of which has yet vested.

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 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 August 26, 2000, 31.6667 SARs were outstanding under
the SAR Plan, with 14 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 of 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.

25
<PAGE>
SAR GRANT IN FISCAL 2000

The following table sets forth information with respect to SARs granted
during fiscal 2000 by Holdings to our executive officers:

<TABLE>
<CAPTION>
SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------
NUMBER OF % OF TOTAL
SHARES SARS EXERCISE
UNDERLYING GRANTED TO OR BASE GRANT DATE
SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR ($/SH) DATE(2) VALUE(3)
---- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Thomas G. Kasvin(1)....................... 5.00 100% $0 -- $0
</TABLE>

------------------------

(1) Five SARs were granted to Mr. Kasvin in October 1999 pursuant to Holdings'
Stock Appreciation Rights Plan. These SARs were terminated upon the
termination of Mr. Kasvin's employment in July 2000.

(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 2000 AND 2000 FISCAL YEAR-END SAR VALUES

No SARs were exercised during fiscal 2000. As of August 26, 2000, none of
our executive officers held SARs.

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 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. 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. On August 31, 1999, Holdings issued an
additional 6.5 shares of its Class A Common Stock to Mr. Shepherd pursuant to
the 1998 Stock Bonus Plan. As of August 26, 2000, Holdings has issued 26.25
shares in aggregate of its Class A Common Stock pursuant to the 1998 Stock Bonus
Plan, all of which has been issued to Mr. Shepherd.

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

26
<PAGE>
to become participants in the applicable pension plan upon attaining age 21 and
completing a 12-month period of service in which the employee works a minimum of
one thousand hours. Participants become vested in their accrued benefits 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. Effective September 1, 1999, employees covered by certain
bargaining units in the pension plan for collective bargaining employees have an
accrued annual benefit of (1) 1.5 times accrued annual benefit, if any, as of
August 31, 1992 and (2) three-fourths of one percent of the "compensation" paid
to the participant during each year of "credited service" 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 $50,000,
in aggregate.

We also sponsor two defined contribution 401(k) profit sharing plans, one
for eligible collective bargaining employees and one for eligible non-collective
bargaining employees. Our non-collective bargaining employees are eligible to
make 401(k) contributions to the profit sharing plan for non-collective
bargaining employees after they have attained the age of 21, and are eligible to
have employer discretionary profit sharing contributions credited to their
profit sharing accounts after they have attained the age of 21 and completed a
12-month period of service in which they work a minimum of one thousand hours.
Our collective bargaining employees are eligible to make 401(k) contributions
and have employer discretionary profit sharing contributions credited to their
profit sharing accounts after they have attained the age of 21 and completed a
12-month period of service in which they work a minimum of one thousand hours.
Participants become vested in their employer discretionary profit sharing
accounts under the applicable profit sharing 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 profit sharing plans. If we make
discretionary profit sharing contributions to the plans for a plan year, the
contributions are allocated to the accounts of participants who completed one
thousand hours of service in such plan year and were still employed on the last
day of the plan year, or who retired, died or became disabled during such plan
year. Discretionary profit sharing contributions are allocated in accordance
with a participant's participation units. Participants receive one participation
unit for each full year of vesting service, and one participation unit for each
full $100 of compensation, as defined in the profit sharing plans.

The normal retirement age under the profit sharing plans is age 65. A
participant may elect early retirement under the profit sharing plans after he
has attained age 55 and completed at least five years of vesting service. If a
participant terminates employment before retirement, he may elect to receive a
distribution of his vested profit sharing plan account balances. Distributions
under the profit sharing plans may be made in a lump sum or installments.
Participants direct the investment of their plan accounts. Loans are available
from the profit sharing plans to participants who are employees.

27
<PAGE>
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

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 August 26, 2000 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 of our
directors and executive officers, as a group, who own shares of Holdings' equity
securities.

<TABLE>
<CAPTION>
PERCENTAGE OF ALL
OUTSTANDING
NUMBER PERCENTAGE VOTING
NAME(1) TITLE OF CLASS(2) OF SHARES OF CLASS COMMON STOCK
------- ----------------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
TCW Capital(3)......................... Class A Common 339.741000 47.1% 33.1%
Jordan Industries, Inc.(4)............. Class A Common 151.128000 20.9 14.7
JZ Equity Partners PLC(5).............. Class A Common 100.752000 14.0 9.8
WCT Investment Pte Ltd.(6)............. Class A Common 82.573000 11.4 8.0
Mezzanine Capital(7)................... Class A Common 21.069000 2.9 2.1
Leucadia Investors, Inc.(8)............ Class C Common 65.788625 22.3 6.4
John W. Jordan II(9)................... Class A Common 151.128000 21.1 14.7
Class C Common.. 43.945960 14.9 4.3
Thomas H. Quinn(10).................... Class A Common 151.128000 20.9 14.7
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 26.250000 3.6 2.6
TCW Special Placements Fund III(7)..... Class D Common 10.000000 100.0 1.0
All directors and executive officers of
Holdings as a group(9)(10)........... Class A Common 177.378000 24.6 17.3
Class C Common.. 101.843910 34.6 9.9
</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 August 26, 2000, there were outstanding (a) 721.513 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 1,026.25
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

28
<PAGE>
holders of Holdings' Senior Preferred Stock have elected a director who is
entitled to exercise 51% of the voting power of the Board of Directors of
Holdings; and (iii) 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 August 26, 2000,
there also were outstanding (A) 1,243.91682 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) 518.4704 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) 51.8469 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 August 31, 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 August 26, 2000, affiliates of
TCW Capital owned 44.2% of the outstanding voting Holdings' Common Stock.
As of August 26, 2000, 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 August 26, 2000, 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 August 26, 2000, JZ Equity Partners PLC also owned 74.0672 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 August 26, 2000, WCT Investment Pte Ltd. also owned 58.8734 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 WCT Investment Pte Ltd. is c/o Government of Singapore
Investment Corporation, 255 Shoreline Drive, Suite 600, Redwood City,
California 94065.

29
<PAGE>
(7) Mezzanine Capital is affiliated with TCW Capital. As of August 26, 2000,
Mezzanine Capital also owned 15.5931 shares of Holdings' Junior Class A PIK
Preferred Stock. The principal address for each of Mezzanine Capital and
TCW Special Placements Fund III is c/o TCW Special Placements Fund III, 865
S. Figueroa St., Suite 1800, Los Angeles, California 90017.

(8) As of August 26, 2000, Leucadia Investors, Inc. also owned 12.9617 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 August 26, 2000, Mr. Max also owned 5.1848 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's address is c/o Archibald Candy Corporation, 1137 West
Jackson Boulevard, Chicago, Illinois 60607.

30
<PAGE>
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT CONSULTING AGREEMENT

On July 2, 1997, Holdings entered into a five year management consulting
agreement with TJC Management Corp., pursuant to which TJC Management Corp. or
its designee will receive a fixed fee for management, consulting and similar
services in the amount of $364,000 per annum plus any out-of-pocket expenses and
additional fees for any investment banking services rendered. In addition,
affiliates of TCW investors will be paid $48,000 in aggregate per year as
reimbursement of expenses. 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. In fiscal 2000, Holdings
paid or accrued $364,000 to TJC Management Corp. in management consulting fees,
and $48,000 to affiliates of TCW Investors in reimbursement of expenses, in each
case 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 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 future 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 under the tax sharing
and consulting agreement are comparable to the terms that we would obtain from
disinterested third parties for comparable services. In fiscal 2000, we paid or
accrued $412,000 to Holdings in management fees and expenses pursuant to our tax
sharing and management consulting agreement.

PREFERRED STOCK

As of August 26, 2000, affiliates of TCW Capital owned approximately 64% of
the Junior Class A PIK Preferred Stock and affiliates of The Jordan Company
owned approximately 36% of the Junior Class A PIK Preferred Stock and
approximately 80% of the Junior Class B PIK Preferred Stock, all of which is
subject to redemption on November 1, 2001.

DIRECTOR'S CONSULTING FEE AND TCW AFFILIATES' EXPENSE REIMBURSEMENT

In each of fiscal 1998, 1999 and 2000, we paid or accrued to 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 receive $48,000 in the aggregate per year as
reimbursement of

31
<PAGE>
expenses incurred in performing financial and management consulting services
thereunder, including, but not limited to, any travel expense.

SHAREHOLDERS AGREEMENT

The holders of Holdings' Common Stock are party to a shareholders agreement,
which contains 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 six, with affiliates of The Jordan Company nominating three directors
and affiliates of TCW Capital nominating two directors. On October 24, 2000, the
Boards of Directors of Holdings and us expanded the number of their respective
members from five to six and elected Mr. Shepherd to fill the newly created
director position for each Board. 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 Placement
Fund III for the purpose of approving or consenting to some actions by Holdings,
including mergers, consolidations, acquisitions or other entities,
recapitalizations, issurances of equity securities and modifications of
Holdings' business.

PROVISION OF SERVICES TO THE COMPANY

Jordan Industries, Inc. owns 80% of PAMCO Printed Labels, which supplied
approximately $517,000 and $916,000 of labels to us in fiscal 1999 and fiscal
2000, respectively. 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.

32
<PAGE>
PART IV

ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K.

1. Report of Independent Auditors

Balance Sheets as of August 28, 1999 and August 26, 2000.

Statements of Operations for the years ended August 29, 1998, August
28, 1999 and August 26, 2000.

Statement of Changes in Shareholder's Equity (Deficit) for the years
ended August 29, 1998, August 28, 1999 and August 26, 2000.

Statements of Cash Flows for the years ended August 29, 1998, August
28, 1999 and August 26, 2000.

Notes to Financial Statements

2. Other Financial Information

None

3. The exhibits listed in the following "Index to Exhibits" are filed
with this Form 10-K or incorporated by reference as set forth below.

(b) The following reports on Form 8-K were filed during the fiscal quarter
ended August 26, 2000.

None.

(c) The exhibits listed in the following "Index to Exhibits" are filed with
this Form 10-K or incorporated by reference as set forth below.

(d) Additional Financial Statement Schedules.

None.

33
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of
November 24, 1998 by and among the Company, Sweet Factory
Acquisition Corp., Sweet Factory Group, Inc., Sweet
Factory, Inc., SF Candy Company, SF Properties, Inc. and
certain stockholders of Sweet Factory Group, Inc. party
thereto (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the SEC on
December 22, 1998)

2.2 Amendment No. 1 dated as of December 7, 1998 to Agreement
and Plan or Reorganization by and among the Company, Sweet
Factory Acquisition Corp., Sweet Factory Group, Inc., Sweet
Factory, Inc., SF Candy Company, SF Properties, Inc. and
Weston Presidio Offshore Capital C.V., as representative of
certain stockholders of Sweet Factory Group, Inc.
(incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-4, File No. 333-71925)

2.3 Asset Purchase Agreement dated as of May 26, 1999 between
Nestle Canada Inc. and the Company (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the SEC on June 23, 1999)

3.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company Registration Statement on Form S-1, File
No. 333-33751)

3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1, File No. 333-33751)

3.3 Certificate of Incorporation of Sweet Factory Group, Inc.
(incorporated by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-4, File No. 333-71925)

3.4 Restated Certificate of Incorporation of Sweet Factory, Inc.
(incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement on Form S-4, File No. 333-71925)

3.5 Certificate of Incorporation of SF Properties, Inc.
(incorporated by reference to Exhibit 3.5 to the Company's
registration Statement on Form S-4, File No. 333-71925)

3.6 Certificate of Incorporation of SF Candy Company
(incorporated by reference to Exhibit 3.6 to the Company's
Registration Statement on Form S-4, File No. 333-71925)

3.7 Articles of Incorporation of Archibald Candy (Canada)
Corporation (incorporated by reference to Exhibit 3.7 to
the Company's Registration Statement on Form S-4, File
No. 333-84685)

3.8 By-Laws of Sweet Factory Group, Inc. (incorporated by
reference to Exhibit 3.7 to the Company's Registration
Statement on Form S-4, File No. 333-71925)

3.9 By-Laws of Sweet Factory, Inc. (incorporated by reference to
Exhibit 3.8 to the Company's Registration Statement on
Form S-4, File No. 333-71925)

3.10 By-Laws of SF Properties, Inc. (incorporated by reference to
Exhibit 3.9 to the Company's Registration Statement on
Form S-4, File No. 333-71925)

3.11 By-Laws of SF Candy Company (incorporated by reference to
Exhibit 3.10 to the Company's Registration Statement on
Form S-4, File No. 333-71925)

3.12 By-Laws of Archibald Candy (Canada) Corporation
(incorporated by reference to Exhibit 3.12 to the Company's
Registration Statement on Form S-4, File No. 333-84685)

4.1 Form of the Company's 10 1/4% Series B Senior Secured Notes
due 2004 (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1, File
No. 333-33751)
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
4.2 Indenture dated as of July 2, 1997 between the Company and
The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

4.3 First Supplemental Indenture dated as of December 7, 1998
among the Company, the Guarantor Subsidiaries and The Bank
of New York, as Trustee (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the SEC on December 22, 1998)

4.4 Second Supplemental Indenture dated as of June 8, 1999 among
the Company, the Guarantor Subsidiaries and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K filed with the
SEC on June 23, 1999)

4.5 Third Supplemental Indenture dated as of March 23, 2000
among the Company, the Guarantor Subsidiaries and The Bank
of New York, as Trustee

4.6 Registration Rights Agreement dated as of July 2, 1997
between the Company and Jefferies & Company, Inc. and First
Chicago Capital Markets, Inc. (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

4.7 Second Amended and Restated Pledge and Security Agreement
dated as of June 8, 1999 between the Company, the Guarantor
Subsidiaries and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-4, File No. 333-84685)

4.8 Second Amended and Restated Intellectual Property Security
Agreement dated as of June 8, 1999 between the Company,
the Guarantor Subsidiaries and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 4.7 to the
Company's Registration Statement on Form S-4, File
No. 333-84685)

4.9 Amended and Restated Guaranty dated as of June 8, 1999 by
each of the Guarantor Subsidiaries (incorporated by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-4, File No. 333-84685)

4.10 Mortgage, Security Agreement of Leases and Rents, Fixture
Filing and Financing Statement dated July 2, 1997 relating
to the Company's Chicago, Illinois manufacturing and
headquarters facility (incorporated by reference to
Exhibit 4.8 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

4.11 First Amendment to Mortgage, Security Agreement, Assignment
of Leases and Rents, Fixture Filing and Financing Statement
dated as of December 7, 1998 relating to the Company's
Chicago, Illinois manufacturing and headquarters facility
(incorporated by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-4, File No. 333-71925)

4.12 Second Amendment to Mortgage, Security Agreement, Assignment
of Leases and Rents, Fixture Filing and Financing Statement
dated as of June 8, 1999 relating to the Company's Chicago,
Illinois manufacturing and headquarters facility
(incorporated by reference to Exhibit 4.11 to the Company's
Registration Statement on Form S-4, File No. 333-84685)

4.13 Correction of Mortgage, Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement
dated as of July 19, 2000 by The Bank of New York, as
Trustee, relating to the Company's Chicago, Illinois
manufacturing and headquarters facility

4.14 Open-End Mortgage, Security Agreement, Assignment of Leases
and Rents, Fixture Filing and Financing Statement dated
July 2, 1997 related to the Company's Bensalem,
Pennsylvania warehouse and distribution facility
(incorporated by reference to Exhibit 4.9 to the Company's
Registration Statement on Form S-1, File No. 333-33751)
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
4.15 First Amendment to Open-End Mortgage, Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement dated as of December 7, 1998 relating
to the Company's Bensalem, Pennsylvania warehouse and
distribution facility (incorporated by reference to
Exhibit 4.10 to the Company's Registration Statement on
Form S-4, File No. 333-71925)

4.16 Second Amendment to Open-End Mortgage, Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement dated as of June 8, 1999 relating to
the Company's Bensalem, Pennsylvania warehouse and
distribution facility (incorporated by reference to
Exhibit 4.14 to the Company's Registration Statement on
Form S-4, File No. 333-84685)

4.17 Amended and Restated Credit Agreement dated as of July 2,
1997 among the Company, the lenders signatory thereto and
The First National Bank of Chicago, as Agent (incorporated
by reference to Exhibit 4.10 to the Company's Registration
Statement on Form S-1, File No. 333-33751)

4.18 Amendment No. 1 to Amendment and Restated Credit Agreement
dated as of December 7, 1998 among the Company, the lenders
signatory thereto and The First National Bank of Chicago,
as Agent (incorporated by reference to Exhibit 4.12 to the
Company's Registration Statement on Form S-4, File
No. 333-71925)

4.19 Waiver and Amendment No. 2 to Amended and Restated Credit
Agreement dated as of June 8, 1999 by and among the
Company, the lenders signatory thereto and The First
National Bank of Chicago, as Agent (incorporated by
reference to Exhibit 4.17 to the Company's Registration
Statement on Form S-4, File No. 333-84685)

4.20 Amendment No. 3 to Amended and Restated Credit Agreement
dated as of July 30, 1999 by and among the Company, the
lenders signatory thereto and The First National Bank of
Chicago, as Agent (incorporated by reference to
Exhibit 4.18 to the Company's Registration Statement on
Form S-4, File No. 333-84685)

4.21 Waiver to Amended and Restated Credit Agreement dated as of
March 23, 2000 by and among the Company, the lenders
signatory thereto and Bank One, NA, as Agent (incorporated
by reference to Exhibit 4.23 to the Company's Form 10-Q for
the quarterly period ended February 26, 2000)

4.22 Amendment No. 4 to Amended and Restated Credit Agreement
dated as of June 30, 200 by and among the Company, the
lenders signatory thereto and Bank One, NA, as Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Form 10-Q for the quarterly period ended May 27, 2000)

4.23 Waiver to Amended and Restated Credit Agreement dated as of
July 10, 2000 by and among the Company, the lenders
signatory thereto and Bank One, NA, as Agent (incorporated
by reference to Exhibit 4.2 to the Company's Form 10-Q for
the quarterly period ended May 27, 2000)

4.24 Amendment No. 5 to the Amended and Restated Credit Agreement
dated as of July 25, 2000 by and among the Company, the
lenders signatory thereto and Bank One, NA, as Agent

4.25 Credit Agreement dated as of July 30, 1999 among Archibald
Candy (Canada) Corporation and First Chicago NBD Bank,
Canada (incorporated by reference to Exhibit 4.19 to the
Company's Registration Statement on Form S-4, File
No. 333-84685)

4.26 Waiver to Credit Agreement dated as of March 23, 2000 by and
among Archibald Candy (Canada) Corporation and Bank One
Canada (incorporated by reference to Exhibit 4.24 to the
Company's Form 10-Q for the quarterly period ended February
26, 2000)
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
4.27 Waiver to Credit Agreement dated as of July 10, 2000 by and
among Archibald Candy (Canada) Corporation and Bank One
Canada

4.28 Participation Agreement dated as of July 30, 1999 by and
among the Company, Archibald Candy (Canada) Corporation,
The First National Bank of Chicago, Fleet Business Credit
Corporation and First Chicago, NBD Bank, Canada
(incorporated by reference to Exhibit 4.20 to the Company's
Registration Statement on Form S-4, File No. 333-84685)

4.29 Form of SAR Agreements (incorporated by reference to
Exhibit 4.12 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

4.30 Lease dated April 17, 1997 between Chicago Midway Joint
Venture, as landlord, and the Company, as tenant, relating
to the Company's Chicago, Illinois warehouse and
distribution facility (incorporated by reference to
Exhibit 4.13 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

10.1 Indemnification Agreement dated as of July 2, 1997 between
the Company and each of its then current directors and
executive officers (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

10.2 Indemnification Agreement dated as of November 1, 1998
between the Company and Brant Binder (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-4, File No. 333-71925)

10.3 Securities Purchase Agreement dated as of October 30, 1991
among Holdings, the Company and the Purchasers (as defined
therein), together with First Amendment thereto dated as of
September 18, 1992, Second Amendment thereto dated as of
August 12, 1994 and Third Amendment thereto dated as of
July 2, 1997 (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1, File
No. 333-33751)

10.4 Fourth Amendment to Securities Purchase Agreement dated as
of October 31, 1998 among Holdings, the Company and the
Purchasers (as defined therein) (incorporated by reference
to Exhibit 10.4 to the Company's Registration Statement on
Form S-4, File No. 333-71925)

10.5 Fifth Amendment to Securities Purchase Agreement dated as of
May 31, 1999 among Holdings, the Company and the Purchasers
(as defined therein) (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on
Form S-4, File No. 333-84685)

10.6 Shareholders Agreement dated as of October 30, 1991 among
the holders of the Company's common stock, together with
First Amendment thereto dated as of July 2, 1997
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, File No. 333-33751)

10.7 Second Amendment to Shareholders Agreement dated as of
July 31, 2000 among the holders of the Company's common
stock

10.8 Tax Sharing and Management Consulting Agreement dated as of
July 2, 1997 between the Company and Holdings (incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1, File No. 333-33751)

10.9 Management Consulting Agreement between Holdings and TJC
Management Corp. dated as of July 2, 1997 (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1, File No. 333-33751)

10.10 Supply Agreement dated February 11, 1997 between the Company
and Nestle Food Company (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on
Form S-1, File No. 333-33751)
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
10.11 Supply Agreement dated June 24, 1997 between the Company and
ADM Cocoa (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, File
No. 333-33751)

10.12 Supply Agreement dated January 22, 1997 between the Company
and Grace Cocoa Chocolate Americas (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, File No. 333-33751)

10.13 Supply Agreement dated September 5, 1996 between the Company
and The Western Sugar Company (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

10.14 Supply Agreement dated March 25, 1997 between the Company
and Cerestar USA, Inc. (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form S-1, File No. 333-33751)

10.15 Fannie May Holdings, Inc. 1998 Stock Bonus Plan
(incorporated by reference Exhibit 10.11 to the Company's
Form 10-K for the fiscal year ended August 29, 1998)

10.16 Executive Subscription Agreement dated as of September 30,
1998 between Holdings and Ted A. Shepherd (incorporated by
reference to Exhibit 10.12 to the Company's Form 10-K for
the fiscal year ended August 29, 1998)

10.17 Co-Pack Agreement dated as of June 8, 1999 between Nestle
Canada Inc. and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the SEC on June 23, 1999)

10.18 Supply Agreement dated as of June 8, 1999 between Nestle
Canada Inc. and the Company (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K
filed with the SEC on June 23, 1999)

10.19 Executive Subscription Agreement dated as of August 31, 1999
between Holdings and Ted A. Shepherd (incorporated by
reference to Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended August 29, 1998)

12.1 Statement re: Computation of Earnings to Fixed Charges

21.1 Subsidiaries of the Company

27.1 Financial Data Schedule
</TABLE>

38
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
ARCHIBALD CANDY CORPORATION
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of August 28, 1999 and
August 26, 2000......................................... F-3
Consolidated Statements of Operations for the years ended
August 29, 1998, August 28, 1999, and August 26, 2000... F-4
Consolidated Statement of Changes in Shareholder's Equity
(Deficit) for the years ended August 29, 1998, August
28, 1999, and August 26, 2000........................... F-5
Consolidated Statements of Cash Flows for the years ended
August 29, 1998, August 28, 1999, and August 26, 2000... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors

Archibald Candy Corporation

We have audited the accompanying consolidated balance sheets of Archibald
Candy Corporation as of August 28, 1999 and August 26, 2000, and the related
consolidated statements of operations, changes in shareholder's equity
(deficit), and cash flows for the years ended August 29, 1998, August 28, 1999,
and August 26, 2000. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 1998, 1999, and 2000 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Archibald Candy Corporation as of August 28, 1999 and August 26,
2000, and the consolidated results of its operations and its cash flows for the
years ended August 29, 1998, August 28, 1999, and August 26, 2000, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

Ernst & Young LLP

November 17, 2000

Chicago, Illinois

F-2
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

CONSOLIDATED BALANCE SHEETS

AS OF AUGUST 28, 1999 AND AUGUST 26, 2000

<TABLE>
<CAPTION>
1999 2000
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,908 $ 3,120
Accounts receivable, net.................................. 3,591 1,433
Inventories............................................... 38,554 42,787
Prepaid expenses and other current assets................. 3,048 3,355
-------- --------
Total current assets........................................ 52,101 50,695

Property, plant, and equipment, net......................... 51,163 52,149
Goodwill, less accumulated amortization of $9,967 ($7,951 in
1999)..................................................... 71,382 70,938
Noncompete agreements and other intangibles, less
accumulated amortization of $553 ($491 in 1999)........... 402 778
Deferred financing fees, less accumulated amortization of
$4,212 ($2,169 in 1999)................................... 9,071 7,252
Investment in joint venture................................. 1,934 1,737
Other assets................................................ 2,234 1,314
-------- --------
Total assets................................................ $188,287 $184,863
======== ========

LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit.................................. $ 8,000 $ 18,500
Accounts payable.......................................... 14,994 17,130
Accrued liabilities....................................... 5,115 4,989
Payroll and related liabilities........................... 3,331 3,141
Accrued interest.......................................... 2,954 3,263
Current portion of capital lease obligations.............. 246 49
-------- --------
Total current liabilities................................... 34,640 47,072
Due to affiliate............................................ 344 40
Long-term debt.............................................. 170,000 170,000
Deferred rent............................................... 1,750 1,474
Capital lease obligations, less current portion............. 89 11
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....................................... (37,239) (52,587)
Other comprehensive income................................ 3 153
-------- --------
Total shareholder's equity (deficit)........................ (18,536) (33,734)
-------- --------
Total liabilities and shareholder's equity (deficit)........ $188,287 $184,863
======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED AUGUST 29, 1998, AUGUST 28, 1999 AND AUGUST 26, 2000

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $126,742 $196,789 $251,314
Cost of sales, excluding depreciation and amortization...... 43,978 70,879 95,334
Selling, general, and administrative expenses............... 63,478 101,935 135,468
Depreciation and amortization expense....................... 4,600 10,513 11,020
Amortization of goodwill and other intangibles.............. 1,633 3,442 4,846
Restructuring expense....................................... -- -- 780
Management fees and other fees.............................. 514 525 519
Share of loss in joint venture.............................. -- 30 195
-------- -------- --------
Operating income............................................ 12,539 9,465 3,152

Other (income) and expense:
Interest expense.......................................... 10,346 13,831 19,454
Interest income........................................... (1,194) (658) (877)
Other income and expense.................................. (192) (256) (207)
-------- -------- --------

Income (loss) before income taxes........................... 3,579 (3,452) (15,218)
Provision for income taxes.................................. 276 143 130
-------- -------- --------

Net Income (loss)........................................... $ 3,303 $ (3,595) $(15,348)
======== ======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>
ARCHIBALD CANDY CORPORATION
WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL OTHER TOTAL
NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY (DEFICIT)
--------- ----------- ---------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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)
Comprehensive loss:
Net loss........................ -- -- -- (3,595) -- (3,595)
Foreign currency translation
adjustment.................... -- -- -- -- 3 3
------ ----------- ------- -------- ---- --------
Total......................... -- -- -- (3,595) 3 (3,592)
------ ----------- ------- -------- ---- --------

Balance at August 28, 1999........ 19,200 -- 18,700 (37,239) 3 (18,536)
Comprehensive loss:
Net loss........................ -- -- -- (15,348) -- (15,348)
Foreign currency translation
adjustment.................... -- -- -- -- 150 150
------ ----------- ------- -------- ---- --------

Total......................... -- -- -- (15,348) 150 (15,198)
------ ----------- ------- -------- ---- --------

Balance at August 26, 2000........ 19,200 $ -- $18,700 $(52,587) $153 $(33,734)
====== =========== ======= ======== ==== ========
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED AUGUST 29, 1998, AUGUST 28, 1999 AND AUGUST 26, 2000

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES

Net income (loss)........................................... $ 3,303 $(3,595) $(15,348)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 6,233 13,955 15,866
Share of loss in joint venture............................ -- 30 195
Changes in operating assets and liabilities:
Accounts receivable, net................................ (804) (1,550) 2,158
Due to affiliate........................................ 1,429 (260) (304)
Inventories............................................. (5,637) (6,489) (4,233)
Prepaid expenses and other current assets............... (39) (486) (307)
Other assets............................................ (805) (401) (42)
Accounts payable, accrued liabilities and deferred
rent.................................................. 526 8,490 1,855
-------- ------- --------
Net cash provided by (used in) operating activities......... 4,206 9,694 (160)

INVESTING ACTIVITIES

Purchase of property, plant, and equipment.................. (4,574) (7,703) (11,107)
Acquisitions, net of cash acquired.......................... (135) (78,924) (1,922)
Sweet Factory license payment............................... -- -- (750)
-------- ------- --------
Net cash used in investing activities....................... (4,709) (86,627) (13,779)

FINANCING ACTIVITIES

Proceeds from long-term debt................................ -- 70,000 --
Net increase in revolving line of credit.................... -- 8,000 10,500
Payments of capital lease obligations....................... (376) (123) (275)
Costs related to loan agreements............................ (213) (7,120) (224)
Distribution under tax-sharing agreement.................... (1,628) -- --
-------- ------- --------

Net cash provided by (used in) financing activities......... (2,217) 70,757 10,001
Effect of exchange rates on cash............................ -- 3 150
-------- ------- --------
Net decrease in cash and cash equivalents................... (2,720) (6,173) (3,788)
Cash and cash equivalents at beginning of year.............. 15,801 13,081 6,908
-------- ------- --------
Cash and cash equivalents at end of year.................... $ 13,081 $ 6,908 $ 3,120
======== ======= ========

SUPPLEMENTAL SCHEDULE OF CASH TRANSACTIONS

Interest paid............................................... $ 10,261 $11,948 $ 18,268
======== ======= ========
</TABLE>

SEE ACCOMPANYING NOTES

F-6
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 26, 2000
(DOLLARS IN THOUSANDS)

1. DESCRIPTION OF BUSINESS ACQUISITIONS AND BASIS OF PRESENTATION

Archibald Candy Corporation (Archibald) and its subsidiaries (collectively,
the Company) are manufacturers and retailers of boxed chocolates and other
confectionery items. The Company sells its Fannie May, Fanny Farmer, Sweet
Factory, and Laura Secord candies in 705 Company-operated stores and
approximately 9,300 third-party retail outlets as well as through quantity
order, mail-order, and fund-raising programs in the United States and Canada.

The accompanying consolidated financial statements include the accounts of
Archibald and its subsidiaries, Sweet Factory Group, Inc. and subsidiaries and
Archibald Candy (Canada) Corporation. All significant intercompany balances and
transactions have been eliminated.

On December 7, 1998, Archibald acquired all of the capital stock of Sweet
Factory Group, Inc. for $27 million and the assumption of approximately
$10 million in debt. On June 8, 1999, Archibald's newly-incorporated subsidiary,
Archibald Candy (Canada) Corporation, a Canadian company, acquired certain
assets and liabilities from Laura Secord, Inc. for approximately $44 million.
Both acquisitions were accounted for under the purchase method. The following
summarizes the purchase price allocation and cash paid:

<TABLE>
<S> <C>
Book value of assets acquired............................... $43,933
Goodwill and other intangibles.............................. 44,714
Liabilities assumed......................................... (7,801)
-------
Cash paid................................................... $80,846
=======
</TABLE>

Based on unaudited data, the following table presents selected financial
information for the Company and its subsidiaries on a pro forma basis, assuming
the companies had been consolidated since August 31, 1997:

<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 29 AUGUST 28
1998 1999
--------- ---------
<S> <C> <C>
Net sales............................................... $260,258 $257,585
Net income (loss)....................................... 554 (3,485)
</TABLE>

The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisitions been made
August 31, 1997.

The Company's fiscal year-end is the last Saturday in August. The fiscal
years ended August 29, 1998, August 28, 1999, and August 26, 2000 each 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.

F-7
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, for both financial reporting and tax purposes,
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements at various locations are amortized over a predetermined
life, considering the term of each lease.

INTANGIBLES AND DEFERRED COSTS

Goodwill and trademarks are 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.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

ADVERTISING COSTS

The Company expenses advertising costs as incurred, except for the costs
associated with the development of print advertising which are deferred and
expensed upon first showing. Advertising expense was $3,051, $3,807, and $5,865
for 1998, 1999, and 2000, respectively. At August 28, 1999 and August 26, 2000,
the Company had $246 and $272, respectively, of print advertising costs which
are included in prepaids and other current assets in the accompanying balance
sheets.

F-8
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

The Company's foreign subsidiaries use the local currency as their
functional currency. Accordingly, assets and liabilities are translated into the
reporting currency using exchange rates at the balance sheet date and income
statement amounts are translated using average exchange rates during the year.
Adjustments as a result of translation are classified as a component of other
comprehensive income. Gains and losses resulting from transactions denominated
in a currency other than the functional currency are included in income.

SEGMENT REPORTING

Based upon the requirements of generally accepted accounting principles, the
Company has determined that it operates in one segment.

RECLASSIFICATIONS

Certain amounts in the 1998 and 1999 financial statements have been
reclassified to conform with the 2000 presentation.

3. INVENTORIES

Inventories at August 28, 1999 and August 26, 2000, are comprised of the
following:

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Raw materials............................................. $13,557 $14,492
Work-in process........................................... 333 304
Finished goods............................................ 24,664 27,991
------- -------
$38,554 $42,787
======= =======
</TABLE>

4. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at August 28, 1999 and August 26, 2000, are
comprised of the following:

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Land...................................................... $ 3,539 $ 3,539
Machinery and equipment................................... 23,336 30,267
Construction in progress.................................. 945 1,229
Buildings and improvements................................ 17,813 18,234
Furniture and fixtures.................................... 8,405 10,552
Leasehold improvements.................................... 38,527 40,903
------- -------
92,565 104,724
Less: Accumulated depreciation............................ (41,402) (52,575)
------- -------
$51,163 $52,149
======= =======
</TABLE>

F-9
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED 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 29, 1998, August 28, 1999, and August 26, 2000, consists of the
following:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Service cost......................................... $ 369 $ 446 $ 507
Interest cost........................................ 396 414 501
Return on plan assets................................ 114 (572) (664)
Other................................................ (747) 36 (15)
------- ----- -----
$ 132 $ 324 $ 329
======= ===== =====
</TABLE>

The following table sets forth the changes in benefit obligation for the
years ended August 29, 1998, August 28, 1999, and August 26, 2000:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Benefit obligation at beginning of year............ $4,971 $ 6,287 $5,309
Service cost....................................... 369 446 507
Interest cost...................................... 396 414 501
Actuarial (gain) loss.............................. 1,221 (1,267) 37
Plan amendments.................................... -- -- 1,020
Benefits paid...................................... (670) (571) (847)
------ ------- ------
Benefit obligation at end of year.................. $6,287 $ 5,309 $6,527
====== ======= ======
</TABLE>

The following table sets forth the changes in plan assets for the years
ended August 29, 1998, August 28, 1999 and August 26, 2000:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Fair value of plan assets at beginning of year...... $6,980 $6,420 $7,327
Actual return on plan assets........................ 110 1,478 997
Employee contributions.............................. -- -- 50
Benefits paid....................................... (670) (571) (847)
------ ------ ------
Fair value of plan assets at end of year............ $6,420 $7,327 $7,527
====== ====== ======
</TABLE>

The following table reconciles the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at August 28, 1999 and
August 26, 2000:

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Funded status at year-end................................... $2,042 $1,000
Unrecognized prior service cost............................. -- 942
Unrecognized (gain) loss.................................... (1,452) (1,619)
------ ------
Pension asset recorded as a long-term asset................. $ 590 $ 323
====== ======
</TABLE>

F-10
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. BENEFIT PLANS (CONTINUED)
The assumptions used in determining the present value of benefits were:

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Discount rate............................................... 8.0% 8.0%
Expected rate of return on assets........................... 9.0 9.0
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. The Company contributes to the Plans a
discretionary amount as approved by the Board of Directors. In 1998, 1999, and
2000, the total Company expense related to the Plans was $75.

Substantially, all of the Company's Canadian employees participate in a
multi-employer defined benefit pension plan. The Company's expense related to
this plan was $34 and $207 in 1999 and 2000, respectively.

6. LEASES

The Company leases the majority of its retail stores under operating leases.
Rent expense, for the years ended August 29, 1998, August 28, 1999 and
August 26, 2000 consisted of the following:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Fixed minimum..................................... $7,746 $17,428 $24,195
Rent based on percentage of sales................. 548 627 578
------ ------- -------
$8,294 $18,055 $24,773
====== ======= =======
</TABLE>

Future minimum lease payments required under the noncancelable leases having
lease terms in excess of one year at August 26, 2000, are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
<S> <C> <C>
2001..................................................... $23,504 $ 52
2002..................................................... 21,215 4
2003..................................................... 17,441 3
2004..................................................... 12,797 3
2005..................................................... 9,072 3
Thereafter............................................... 15,560 2
------- -------
99,589 67
Interest................................................. -- (7)
------- -------
$99,589 $ 60
======= =======
</TABLE>

F-11
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT

At August 28, 1999 and August 26, 2000, the Company had $170 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
(excluding capital leases) and related accrued interest. In 1999, Archibald sold
an additional $70 million of senior secured notes to finance two acquisitions
(Note 1). The Company has 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.

The senior secured notes bear interest at 10.25% and mature on July 1, 2004.
Interest is payable semiannually on January 1 and July 1. The notes are secured
by certain of the Company's equipment, fixtures, and general intangibles and
mortgages on certain real property. The indenture contains covenants that limit
the ability of the Company to: (i) incur additional indebtedness or create
liens, (ii) sell certain assets, (iii) merge, consolidate, or sell substantially
all of the Company's assets, (iv) make restricted payments such as dividends,
purchases of its capital stock, or make payments on behalf of Fannie May
Holdings, Inc. (Holdings), and (v) conduct transactions with affiliates.

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 certain changes in the Board of Directors, the Company is
required to repurchase all the senior secured notes at a purchase price of 101%.

On July 2, 1997, the Company entered into a revolving credit agreement. The
agreement, as amended, provides for borrowings up to the lesser of
(1) $30.0 million and (2) a borrowing base comprised primarily of a percentage
of eligible accounts receivable, eligible inventory and some of the Company's
owned real properties. The agreement expires on April 15, 2001. The agreement
requires the borrowings to be paid in full during the period beginning
December 26, 2000 and ending December 31, 2000 and on January 1, 2001 the
borrowing availability becomes $20 million. As of August 26, 2000, the Company's
cash balance was $3.1 million and the Company had borrowings of approximately
$18.5 million and letters of credit in the amount of $0.3 million outstanding.
Borrowings under the agreement bear interest at prime (9.5% at August 26, 2000)
plus 3.5% or the Eurodollar rate (6.62% at August 26, 2000 for 30 day
borrowings), plus 2.25%. The agreement provides for a commitment fee of .5% per
annum.

The credit agreement is collateralized by the Company's accounts receivable,
certain inventories, and certain properties, as defined. The credit agreement
contains financial covenants (minimum EBITDA and maximum capital expenditures),
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 amounts reported on the balance sheet for debt at August 28,
1999 approximates fair value. At August 26, 2000, the fair value of the senior
secured notes was approximately $99 million and the carrying amount of the
remainder of the debt approximates fair value.

F-12
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

The provision for income taxes consists of the following for the years ended
August 29, 1998, August 28, 1999 and August 26, 2000:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................... $100 $ 50 $ 68
State................................................. 176 93 62
---- ---- ----
$276 $143 $130
==== ==== ====
</TABLE>

Deferred taxes consist of the following at August 28, 1999 and August 26, 2000:

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Assets:
Net operating loss and AMT credit carryforwards......... $ 8,649 $14,744
Property, plant and equipment........................... (161) 3,147
Other................................................... 3,558 2,503
------- -------
Total assets.............................................. 12,046 20,394
Liabilities:
Pension and other....................................... 1,316 510
------- -------
Total liabilities......................................... 1,316 510
------- -------
10,730 19,884
Valuation allowance....................................... (10,730) (19,884)
------- -------
$ -- $ --
======= =======
</TABLE>

The Company files a consolidated income tax return with Holdings. 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, Archibald must compute an amount both with and without
the benefit of its 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 recorded in 1998
under this agreement.

F-13
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax expense
computed by applying the United States federal income tax rate to the income
(loss) before income taxes. A reconciliation of the differences for the years
ended August 29, 1998, August 28, 1999 and August 26, 2000, is as follows:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Computed statutory tax provision (benefit)................ $1,217 $(1,174) $(5,174)
Increase (decrease) resulting from:
Amortization of goodwill................................ 289 459 533
Benefit of current losses not recorded.................. -- 695 4,699
Alternative minimum tax................................. 100 50 --
Change in valuation allowance........................... (2,029) -- --
Changes in deferred tax assets.......................... 208 -- --
State taxes, net of federal benefit..................... 116 61 62
Other items, net........................................ 375 52 10
------ ------- -------
Provision for income taxes................................ $ 276 $ 143 $ 130
====== ======= =======
</TABLE>

At August 26, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $31 million and net operating loss
carryforwards in Canada of approximately $1.6 million. Pursuant to the tax
sharing agreement, $16 million of these carryforwards are available to reduce
Holdings' future taxable income and expire in varying amounts between 2006 and
2020.

9. RELATED PARTY TRANSACTIONS

The Board of Directors, which includes members appointed by parties
affiliated with either The Jordan Company or TCW Capital, was paid $50 for
directors' fees in 1998, 1999, and 2000, respectively. A member of the Board of
Directors affiliated with The Jordan Company earned $52 as a consulting fee
during 1998, 1999, and 2000. Director fees of $28 were accrued at August 26,
2000. Principally all of the common and preferred shareholders of Holdings are
affiliated with The Jordan Company or TCW Capital.

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 $412 in 1998, 1999 and 2000. In connection with the fiscal 1999
acquisitions and related financing, the Company paid management fees of $1,450
to Holdings, which paid such amount to an affiliate of The Jordan Company.
Management and consulting fees to Holdings of $232 were accrued at August 26,
2000.

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.

10. GUARANTOR SUBSIDIARIES

The Company's obligations under its 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 (collectively, the Guarantor Subsidiaries).
None of the Company's subsidiaries is subject to any restrictions on its ability
to pay dividends or make distributions to the Company. The following condensed
consolidating financial

F-14
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. GUARANTOR SUBSIDIARIES (CONTINUED)
data illustrates the composition of the Company and its subsidiaries. Separate
financial statements of the respective Guarantor Subsidiaries have not been
provided because the Company's management determined that such additional
information would not be useful in assessing the financial composition of the
Guarantor Subsidiaries.

CONDENSED CONSOLIDATING BALANCE SHEET
AUGUST 26, 2000

<TABLE>
<CAPTION>
ARCHIBALD CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 800 $ 2,320 $ -- $ 3,120
Accounts receivables, net................. 1,114 319 -- 1,433
Inventories............................... 35,925 6,862 -- 42,787
Prepaids and other current assets......... 2,194 1,161 -- 3,355
-------- -------- -------- --------
Total current assets:....................... 40,033 10,662 -- 50,695
Property, plant, and equipment, net......... 25,492 26,657 -- 52,149
Intercompany................................ 29,110 (29,110) -- --
Investment in subsidiaries.................. 14,660 -- (14,660) --
Other assets................................ 68,538 13,481 -- 82,019
-------- -------- -------- --------
Total assets................................ $177,833 $ 21,690 $(14,660) $184,863
======== ======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Revolving line of credit.................. $ 18,500 $ -- $ -- $ 18,500
Accounts payable.......................... 14,589 2,541 -- 17,130
Other current liabilities................. 8,591 2,851 -- 11,442
-------- -------- -------- --------
Total current liabilities................... 41,680 5,392 -- 47,072
Long-term debt, less current portion........ 170,000 11 -- 170,011
Other noncurrent liabilities................ 40 1,474 -- 1,514
Total shareholder's equity (deficit)........ (33,887) 14,813 (14,660) (33,734)
-------- -------- -------- --------
Total liabilities and shareholder's equity
(deficit)................................. $177,833 $ 21,690 $(14,660) $184,863
======== ======== ======== ========
</TABLE>

F-15
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. GUARANTOR SUBSIDIARIES (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET
AUGUST 28, 1999

<TABLE>
<CAPTION>
ARCHIBALD CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 2,290 $ 4,618 $ -- $ 6,908
Accounts receivables, net................. 939 2,652 -- 3,591
Inventories............................... 31,348 7,256 (50) 38,554
Prepaids and other current assets......... 943 2,105 -- 3,048
-------- -------- -------- --------
Total current assets:....................... 35,520 16,631 (50) 52,101
Property, plant, and equipment.............. 22,808 28,355 -- 51,163
Intercompany................................ 30,240 (30,240) -- --
Investment in subsidiaries.................. 15,962 -- (15,962) --
Other assets................................ 76,721 8,302 -- 85,023
-------- -------- -------- --------
Total assets................................ $181,251 $ 23,048 $(16,012) $188,287
======== ======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Revolving line of credit.................. $ 8,000 $ -- $ -- $ 8,000
Accounts payable.......................... 14,593 401 -- 14,994
Other current liabilities................. 6,783 4,863 -- 11,646
-------- -------- -------- --------
Total current liabilities................... 29,376 5,264 -- 34,640
Long-term debt, less current portion........ 170,020 69 -- 170,089
Other noncurrent liabilities................ 344 1,750 -- 2,094
Total shareholder's equity (deficit)........ (18,489) 15,965 (16,012) (18,536)
-------- -------- -------- --------
Total liabilities and shareholder's equity
(deficit)................................. $181,251 $ 23,048 $(16,012) $188,287
======== ======== ======== ========
</TABLE>

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 26, 2000

<TABLE>
<CAPTION>
ARCHIBALD CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales................................... $133,494 $121,460 $(3,640) $251,314
Cost of sales, excluding depreciation....... 52,675 46,349 (3,690) 95,334
Selling, general, and administrative
expenses, excluding depreciation and
amortization.............................. 66,162 69,306 -- 135,468
Depreciation, amortization, and other....... 11,059 6,301 -- 17,360
-------- -------- ------- --------
Operating income (loss)..................... 3,598 (496) 50 3,152
Interest expense, net....................... 17,713 864 -- 18,577
Other income and expense.................... (151) (56) -- (207)
Equity interest in losses of subsidiaries... 1,303 -- (1,303) --
-------- -------- ------- --------
Income (loss) before income taxes........... (15,267) (1,304) 1,353 (15,218)
Provision for income taxes.................. 131 (1) -- 130
-------- -------- ------- --------
Net income (loss)........................... $(15,398) $ (1,303) $ 1,353 $(15,348)
======== ======== ======= ========
</TABLE>

F-16
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 28, 1999

<TABLE>
<CAPTION>
ARCHIBALD CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales................................... $132,689 $64,100 $ -- $196,789
Cost of sales, excluding depreciation....... 47,426 23,553 (100) 70,879
Selling, general, and administrative
expenses, excluding depreciation and
amortization.............................. 65,541 36,394 -- 101,935
Depreciation, amortization, and other....... 8,861 5,649 -- 14,510
-------- ------- ------- --------
Operating income (loss)..................... 10,861 (1,496) 100 9,465
Interest expense, net....................... 12,801 372 -- 13,173
Other income and expense.................... (532) 126 150 (256)
Equity interest in losses of subsidiaries... 2,038 -- (2,038) --
-------- ------- ------- --------
Income (loss) before income taxes........... (3,446) (1,994) 1,988 (3,452)
Provision for income taxes.................. 99 44 -- 143
-------- ------- ------- --------
Net income (loss)........................... $ (3,545) $(2,038) $ 1,988 $ (3,595)
======== ======= ======= ========
</TABLE>

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 26, 2000

<TABLE>
<CAPTION>
ARCHIBALD CANDY GUARANTOR
CORPORATION SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Cash flows provided by (used in) operating
activities................................ $(7,838) $ 7,678 $ -- $ (160)

INVESTING ACTIVITIES
Purchase of property and equipment.......... (8,395) (2,712) -- (11,107)
Sweet Factory license payment............... -- (750) -- (750)
Acquisitions, net of cash acquired.......... 3,337 (5,259) -- (1,922)
------- ------- --------- -------
Net cash used in investing activities....... (5,058) (8,721) -- (13,779)

FINANCING ACTIVITIES
Net increase in revolving line of credit.... 10,500 -- -- 10,500
Intercompany advances....................... 1,130 (1,130) -- --
Other....................................... (224) (125) -- (349)
------- ------- --------- -------
Net cash provided by (used in) financing
activities................................ 11,406 (1,255) -- 10,151
------- ------- --------- -------
Net decrease in cash and cash equivalents... (1,490) (2,298) -- (3,788)
Cash and cash equivalents at beginning of
year...................................... 2,290 4,618 -- 6,908
------- ------- --------- -------
Cash and cash equivalents at end of year.... $ 800 $ 2,320 $ -- $ 3,120
======= ======= ========= =======
</TABLE>

F-17
<PAGE>
ARCHIBALD CANDY CORPORATION

(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 28, 1999

INVESTING ACTIVITIES
Purchase of property and equipment.......... (6,449) (1,254) -- (7,703)
Acquisitions, net of cash acquired.......... (78,924) -- -- (78,924)
------- ------ --------- -------
Net cash used in investing activities....... (85,373) (1,254) -- (86,627)

FINANCING ACTIVITIES
Proceeds from long-term debt................ 70,000 -- -- 70,000
Net increase in revolving line of credit.... 8,000 -- -- 8,000
Intercompany advances....................... (4,883) 4,883 -- --
Other....................................... (6,850) (390) -- (7,240)
------- ------ --------- -------
Net cash provided by financing activities... 66,267 4,493 -- 70,760
------- ------ --------- -------
Net increase (decrease) in cash and cash
Equivalents............................... (10,791) 4,618 -- (6,173)
Cash and cash equivalents at beginning of
year...................................... 13,081 -- -- 13,081
------- ------ --------- -------
Cash and cash equivalents at end of year.... $ 2,290 $4,618 $ -- $ 6,908
======= ====== ========= =======
</TABLE>

11. GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
FY 1999 FY 2000
------------------------- -------------------------
LONG-LIVED LONG-LIVED
REVENUES (A) ASSETS REVENUES (A) ASSETS
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
United States................. $189,631 $129,469 $199,749 $122,859
Canada........................ 7,158 6,717 51,565 11,309
-------- -------- -------- --------
Consolidated total............ $196,789 $136,186 $251,314 $134,168
======== ======== ======== ========
</TABLE>

------------------------

(a) Revenues are attributed to countries based on the location of customers.

F-18
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereto duly authorized, on November 22, 2000.

<TABLE>
<S> <C> <C>
ARCHIBALD CANDY CORPORATION

By: /s/ TED A. SHEPHERD
-----------------------------------------
Ted A. Shepherd
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS H. QUINN
-------------------------------------------
Thomas H. Quinn Chairman of the Board and November 22, 2000
Chief Executive Officer

/s/ TED A. SHEPHERD
-------------------------------------------
Ted A. Shepherd President and Chief November 22, 2000
Operating Officer
(Principal Executive
Officer) and Director

/s/ RICHARD J. ANGLIN
-------------------------------------------
Richard J. Anglin Vice President and Chief November 22, 2000
Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)

/s/ JOHN W. JORDAN II
-------------------------------------------
John W. Jordan II Director November 22, 2000

/s/ ADAM E. MAX
-------------------------------------------
Adam E. Max Director Novemebr 22, 2000

/s/ JEFFREY J. ROSEN
-------------------------------------------
Jeffrey J. Rosen Director November 22, 2000
</TABLE>

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

Registrant has not sent to any of its security holders any of the following:
(1) any annual report to security holders covering the Registrant's fiscal year
or (2) any proxy statement, form of proxy or other proxy soliciting materials.