UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended May 27, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number
333-33751
ARCHIBALD CANDY CORPORATION
Incorporated in the IRS Employer Identification
State of Illinois No. 36-0743280
1137 West Jackson Boulevard
Chicago, Illinois 60607
(312) 243-2700
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days.
Yes X No
----- -----
As of July 11, 2000, the number of shares outstanding of the
registrant's Common Stock was 19,200 shares, all of which was held by Fannie May
Holdings, Inc.
ARCHIBALD CANDY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MAY 27, 2000
INDEX
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) PAGE NO.
CONDENSED CONSOLIDATED BALANCE SHEETS 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND 16
RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidated Balance Sheets
As of May 27, 2000 and August 28, 1999
(In thousands)
May 27, August 28,
2000 1999
--------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,428 $ 6,908
Accounts receivable, net 3,060 3,591
Inventories 38,638 38,554
Prepaid expenses and other current assets 3,975 3,048
-------- -----
Total current assets 50,101 52,101
Property, plant, and equipment, net 52,279 51,163
Goodwill and other intangibles, net 68,754 71,784
Deferred financing fees, net 9,549 9,071
Investment in joint venture 1,710 1,934
Other assets 2,240 2,234
-------- --------
Total assets $184,633 $188,287
======== ========
See accompanying notes.
1
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidated Balance Sheets
As of May 27, 2000 and August 28, 1999
(In thousands)
May 27, August 28,
2000 1999
----------- ---------
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 13,003 $ 14,994
Revolving line of credit 4,000 8,000
Accrued liabilities 13,551 8,069
Payroll and related liabilities 3,106 3,331
Current portion of capital lease obligations 225 246
--------- ---------
Total current liabilities 33,885 34,640
Due to affiliate 344 344
Long-term debt 170,000 170,000
Deferred rent 2,038 1,750
Capital lease obligations, less current portion 25 89
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 (40,424) (37,239)
Other comprehensive income 65 3
--------- ---------
Total shareholder's equity (deficit) (21,659) (18,536)
--------- ---------
Total liabilities and shareholder's equity (deficit) $ 184,633 $ 188,287
========= =========
See accompanying notes.
2
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Nine Months Ended May 27, 2000 and May 29, 1999
(In thousands)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales $ 56,222 $ 44,704 $ 211,598 $ 155,806
Cost of sales, excluding depreciation 22,436 15,729 78,548 56,039
Selling, general, and administrative expenses,
excluding depreciation and amortization 34,078 25,576 107,737 72,340
Depreciation and amortization expense 3,227 2,773 9,751 6,584
Amortization of goodwill and other intangibles 1,445 808 4,436 1,812
Share of loss in joint venture 89 - 159 -
Management fees and other fees 129 135 390 393
--------- --------- --------- ---------
Operating income (loss) (5,182) (317) 10,577 18,638
Other (income) and expense:
Interest expense 4,597 3,380 13,800 9,373
Interest income - (254) (25) (605)
Other income and expense 227 (89) (163) (209)
--------- --------- --------- ---------
Income (loss) before income taxes (10,006) (3,354) (3,035) 10,079
Provision (benefit) for income taxes 92 (473) 150 (276)
--------- --------- --------- ---------
Net income (loss) $ (10,098) $ (2,881) $ (3,185) $ 10,355
========= ========= ========= =========
See accompanying notes.
3
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months and Nine Months Ended May 27, 2000 and May 29, 1999
(In thousands)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) $(10,098) $ (2,881) $ (3,185) $ 10,355
Other comprehensive income:
Foreign currency translation adjustment 62 - 62 -
-------- -------- -------- --------
Comprehensive income (loss) $(10,036) $ (2,881) $ (3,123) $ 10,355
======== ======== ======== ========
See accompanying notes.
4
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended May 27, 2000 and May 29, 1999
(In thousands)
Nine Months Ended
---------------------------
May 27, May 29,
2000 1999
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ (3,185) $ 10,355
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 14,187 8,396
Share of loss in joint venture 159 -
Changes in operating assets and liabilities:
Accounts receivable, net 531 314
Inventories (84) 2,766
Prepaid expenses and other current assets (927) (129)
Other assets (365) (374)
Accounts payable, accrued liabilities and deferred rent 3,515 (3,239)
-------- --------
Net cash provided by operating activities 13,831 18,089
INVESTING ACTIVITIES
Acquisition of Sweet Factory net of cash acquired - (28,002)
Purchase of property, plant, and equipment (9,591) (4,954)
Sweet Factory license payment (750) -
-------- --------
Net cash used in investing activities (10,341) (32,956)
FINANCING ACTIVITIES
Net payments under revolving line of credit (4,000) -
Proceeds from issuance of long term debt - 30,000
Principal payments of capital lease obligations (85) (218)
Costs related to financing (1,885) (4,152)
-------- --------
Net cash provided by (used in) financing activities (5,970) 25,630
-------- --------
Net increase (decrease) in cash and cash equivalents (2,480) 10,763
Cash and cash equivalents beginning of period 6,908 13,081
-------- --------
Cash and cash equivalents end of period $ 4,428 $ 23,844
======== ========
SUPPLEMENTAL SCHEDULE OF CASH TRANSACTIONS
Interest paid $ 9,302 $ 4,843
======== ========
See accompanying notes.
5
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
May 27, 2000
Note 1. DESCRIPTION OF BUSINESS 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 over 700 Company-operated stores and in
approximately 9,300 third-party retail outlets as well as through quantity
order, mail order and fundraising programs in the United States and Canada. The
Company is a wholly-owned subsidiary of Fannie May Holdings, Inc.
The interim financial statements included herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes these disclosures are adequate to make the information
presented not misleading. In the opinion of management, all adjustments
necessary for fair presentation for the periods presented have been reflected
and are of a normal recurring nature. These financial statements should be read
in conjunction with the financial statements and notes thereto for the year
ended August 28, 1999, included in the Company's Form 10-K. Certain amounts in
the 1999 financial statements have been reclassified to conform with the 2000
presentation.
Results of operations for the period from August 29, 1999 to May 27, 2000 are
not necessarily indicative of the results that may be achieved for the entire
year.
Note 2. INVENTORIES
Inventories at May 27, 2000 and August 28, 1999 are comprised of the following:
May 27, August 28,
2000 1999
------- -------
Raw materials ..................................... $15,250 $13,557
Work in process.................................... 456 333
Finished goods .................................... 22,932 24,664
------- -------
$38,638 $38,554
======= =======
Note 3. DEBT
As of May 27, 2000, we had outstanding $170 million of 10.25% senior secured
notes due July 1, 2004.
As of May 27, 2000, we had approximately $4.0 million of borrowings and
letters of credit in the amount of $0.6 million outstanding under our $25
million revolving credit facility (the "Credit Facility"). For the three
months ended May 27, 2000, we did not meet the fixed charge coverage ratio or
the leverage ratio requirements of the Credit Facility, but have obtained a
waiver of these requirements from our lenders for such three-month period
only. Additionally, as of June 30, 2000, we entered into an amendment of the
Credit Facility that increased, until July 25, 2000, the amount available for
borrowing by approximately $4.0 million (not increasing the $25 million
limit). By July 25, 2000, we must either repay the additional $4 million
borrowed or obtain an additional amendment or waiver to the Credit Facility.
As of July 3, 2000, we had approximately $20.0 million of borrowings
outstanding under the Credit Facility. We intend to pursue further amendments
to the Credit Facility with respect to financial covenants and to increase
the Company's availability thereunder. There can be no assurance that the
lenders under the Credit Facility will be willing to grant such amendment(s)
on favorable terms, if at all.
As our Credit Facility expires on April 15, 2001, for the period after
April 15, 2001, we will need to extend or renew the Credit Facility or obtain
alternative financing to meet our seasonal working capital needs and other
requirements, including interest payments on our 10.25% senior secured notes.
Note 4. INCOME TAXES
The provision for income taxes differs from the amount of income tax expense
computed by applying the United States federal income tax rate due to the
benefit of the net operating losses that were not recognized in prior periods.
6
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
May 27, 2000
Note 5. ACQUISITIONS
On December 7, 1998, the Company acquired Sweet Factory Group, Inc. ("Sweet
Factory") for $25 million in cash and the assumption of approximately $10
million of debt. On June 8, 1999, Archibald's newly incorporated subsidiary,
Archibald Candy (Canada) Corporation, a Canadian company, acquired substantially
all of the assets of the Laura Secord retail business of Nestle Canada, Inc.
("Nestle") for approximately $44 million (together the "Acquisitions"). Both
acquisitions were accounted for under the purchase method. The allocation of the
purchase prices are preliminary, pending final fixed-asset and intangible
valuations. The following summarizes the purchase price allocation and cash
paid:
Book value of assets acquired........................................ $44,164
Goodwill and other intangibles....................................... 42,561
Liabilities assumed.................................................. (7,801)
--------
Cash paid............................................................ $78,924
========
Based on unaudited data, the following table presents selected financial
information for the Company and its subsidiaries on a pro forma basis for the
comparable period in the prior year:
Three Months Ended Nine Months Ended
May 29, May 29,
1999 1999
------------------- -----------------
Net sales................................................... $ 56,573 $216,229
Net income (loss)........................................... (3,405) 9,757
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, 1998.
Note 6. 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 (other than its inactive subsidiaries)
(collectively, the "Guarantor Subsidiaries"). The Company directly or
indirectly wholly owns each of the Guarantor Subsidiaries. None of the
Company's subsidiaries is subject to any restriction on its ability to pay
dividends or make distributions to the Company. The following condensed
consolidating financial information illustrates the composition of the
Company and the Guarantor Subsidiaries as of and for certain dates and
periods. Separate financial statements of the respective Guarantor
Subsidiaries have not been provided because the Company's management
determined that such additional information would not be useful in assessing
the financial composition of the Guarantor Subsidiaries.
7
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidating Balance Sheet
As of May 27, 2000
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,061 $ 2,367 $ - $ 4,428
Accounts receivable, net 2,132 928 - 3,060
Inventories 29,556 9,132 (50) 38,638
Prepaid expenses and other current assets 1,321 2,654 - 3,975
--------- --------- --------- ---------
Total current assets 35,070 15,081 - 50,101
Property, plant and equipment, net 26,103 26,176 - 52,279
Other assets 73,606 8,647 - 82,253
Intercompany 26,619 (26,619) - -
Investment in subsidiaries 14,413 - (14,413) -
--------- --------- --------- ---------
Total assets $ 175,811 $ 23,285 $ (14,463) $ 184,633
========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 10,402 $ 2,601 $ - $ 13,003
Revolving line of credit 4,000 - - 4,000
Other current liabilities 12,724 4,158 - 16,882
--------- --------- --------- ---------
Total current liabilities 27,126 6,759 - 33,885
Long-term debt, less current portion 170,000 25 - 170,025
Other noncurrent liabilities 344 2,038 - 2,382
Total shareholder's equity (deficit) (21,659) 14,463 (14,463) (21,659)
--------- --------- --------- ---------
Total liabilities and shareholder's
Equity (deficit) $ 175,811 $ 23,285 $ (14,463) $ 184,633
========= ========= ========= =========
8
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Condensed Consolidating Balance Sheet
As August 28, 1999
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,290 $ 4,618 $ - $ 6,908
Accounts receivable, net 939 2,652 - 3,591
Inventories 31,348 7,256 (50) 38,554
Prepaid expenses and other current assets 943 2,105 - 3,048
--------- --------- --------- ---------
Total current assets 35,520 16,631 (50) 52,101
Property, plant and equipment, net 22,808 28,355 - 51,163
Other assets 76,721 8,302 - 85,023
Intercompany 30,240 (30,240) - -
Investment in subsidiaries 15,962 - (15,962) -
--------- --------- --------- ---------
Total assets $ 181,251 $ 23,048 $ (16,012) $ 188,287
========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 14,593 $ 401 $ - $ 14,994
Revolving line of credit 8,000 - - 8,000
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
========= ========= ========= =========
9
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Consolidating Statement of Operations for the Three Months Ended May 27, 2000
(Unaudited)
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
Net sales $ 27,329 $ 29,581 $ (688) $ 56,222
Cost of sales, excluding depreciation 11,248 11,577 (389) 22,436
Selling, general, and administrative expenses,
excluding depreciation and amortization 16,706 17,372 - 34,078
Depreciation and amortization expense 1,425 1,802 - 3,227
Amortization of goodwill and other intangibles 1,176 269 - 1,445
Share of loss in joint venture - 89 - 89
Management fees and other fees 129 - - 129
-------- -------- -------- --------
Operating income (loss) (3,355) (1,528) (299) (5,182)
Other (income) expense:
Interest expense 4,383 214 - 4,597
Interest income - - - -
Other income and expenses (211) 737 (299) 227
Equity in income of subsidiaries 2,479 - (2,479) -
-------- -------- -------- --------
Income (loss) before income taxes (10,006) (2,479) 2,479 (10,006)
Provision for income taxes 92 - - 92
-------- -------- -------- --------
Net income (loss) $(10,098) $ (2,479) $ 2,479 $(10,098)
======== ======== ======== ========
10
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Consolidating Statement of Operations for the Nine Months Ended May 27, 2000
(Unaudited)
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
Net sales $ 117,025 $ 96,502 $ (1,929) $ 211,598
Cost of sales, excluding depreciation 44,283 36,194 (1,929) 78,548
Selling, general, and administrative expenses,
excluding depreciation and amortization 53,573 54,164 - 107,737
Depreciation and amortization expense 4,147 5,604 - 9,751
Amortization of goodwill and other intangibles 3,627 809 - 4,436
Share of loss in joint venture - 159 - 159
Management fees and other fees 390 - - 390
--------- --------- --------- ---------
Operating income (loss) 11,005 (428) - 10,577
Other (income) expense:
Interest expense 13,155 645 - 13,800
Interest income (25) - - (25)
Other income and expenses (658) 495 - (163)
Equity in income of subsidiaries 1,568 - (1,568) -
--------- --------- --------- ---------
Income (loss) before income taxes (3,035) (1,568) 1,568 (3,035)
Provision for income taxes 150 - - 150
--------- --------- --------- ---------
Net income (loss) $ (3,185) $ (1,568) $ 1,568 $ (3,185)
========= ========= ========= =========
11
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Consolidating Statement of Operations for the Three Months Ended May 29, 1999
(Unaudited)
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
-------------------- --------------- ---------------- ----------------
Net sales $ 27,010 $ 17,694 $ - $ 44,704
Cost of sales, excluding depreciation 9,649 6,080 - 15,729
Selling, general, and administrative expenses,
excluding depreciation and amortization 14,758 10,818 - 25,576
Depreciation and amortization expense 1,170 1,603 - 2,773
Amortization of goodwill and other intangibles 688 120 - 808
Management fees and other fees 135 - - 135
-------- -------- -------- --------
Operating income 610 (927) - (317)
Other (income) expense:
Interest expense 3,367 13 - 3,380
Interest income (254) - - (254)
Other income and expenses (86) (3) - (89)
Equity in income of subsidiaries 444 - (444) -
-------- -------- -------- --------
Income (loss) before income taxes (2,861) (937) 444 (3,354)
Provision (benefit) for income taxes 20 (493) - (473)
-------- -------- -------- --------
Net income (loss) $ (2,881) $ (444) $ 444 $ (2,881)
======== ======== ======== ========
12
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Consolidating Statement of Operations for the Nine Months Ended May 29, 1999
(Unaudited)
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
Net sales $ 118,260 $ 37,546 $ - $ 155,806
Cost of sales, excluding depreciation 42,727 13,312 - 56,039
Selling, general, and administrative expenses,
excluding depreciation and amortization 50,928 21,412 - 72,340
Depreciation and amortization expense 3,510 3,074 - 6,584
Amortization of goodwill and other intangibles 1,538 274 - 1,812
Management fees and other fees 393 - - 393
--------- --------- --------- ---------
Operating income (loss) 19,164 (526) - 18,638
Other (income) expense:
Interest expense 9,299 74 - 9,373
Interest income (601) (4) - (605)
Other income and expenses (209) - - (209)
Equity in income of subsidiaries 260 - (260) -
--------- --------- --------- ---------
Income (loss) before income taxes 10,415 (596) 260 10,079
Provision (benefit) for income taxes 60 (336) - (276)
--------- --------- --------- ---------
Net income (loss) $ 10,355 $ (260) $ 260 $ 10,355
========= ========= ========= =========
13
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Consolidating Statement of Cash Flows for the Nine Months Ended May 27, 2000
(Unaudited)
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (3,185) $ (1,568) $ 1,568 $ (3,185)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 7,774 6,413 - 14,187
Equity in loss of subsidiaries 1,568 - (1,568) -
Share of loss in joint venture - 159 - 159
Changes in operating assets and liabilities:
Accounts receivables, net (1,193) 1,724 - 531
Inventories 1,792 (1,876) - (84)
Prepaid expenses and other current assets (378) (549) - (927)
Intercompany 3,621 (3,621) - -
Other assets (113) (252) - (365)
Accounts payable and accrued liabilities 1,763 1,752 - 3,515
-------- -------- -------- --------
Net cash provided by operating activities 11,649 2,182 - 13,831
INVESTING ACTIVITIES
Purchase of property, plant, and equipment (7,084) (2,507) - (9,591)
Sweet Factory license payment - (750) - (750)
-------- -------- -------- --------
Net cash used in investing activities (7,084) (3,257) - (10,341)
FINANCING ACTIVITIES
Net payments under revolving line of credit (4,000) - - (4,000)
Principle payments of capital lease obligations (37) (48) - (85)
Costs related to financing (757) (1,128) - (1,885)
-------- -------- -------- --------
Net cash used in financing activities (4,794) (1,176) - (5,970)
Net increase (decrease) in cash and cash
equivalents (229) (2,251) - (2,480)
Cash and cash equivalents beginning of period 2,290 4,618 - 6,908
-------- -------- -------- --------
Cash and cash equivalents end of period $ 2,061 $ 2,367 $ - $ 4,428
======== ======== ======== ========
14
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Consolidating Statement of Cash Flows for the Nine Months Ended May 29, 1999
(Unaudited)
(In thousands)
Archibald Candy Guarantor
Corporation Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 10,355 $ (260) $ 260 $ 10,355
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 5,048 3,348 - 8,396
Equity in loss of subsidiaries 260 - (260) -
Changes in operating assets and liabilities:
Accounts receivables, net (87) 401 - 314
Inventories 1,927 839 - 2,766
Prepaid expenses and other current assets (444) 315 - (129)
Intercompany (18,524) 18,524 - -
Other assets (374) - - (374)
Accounts payable and accrued liabilities 2,570 (5,809) - (3,239)
-------- -------- -------- --------
Net cash provided by operating activities 731 17,358 - 18,089
INVESTING ACTIVITIES
Acquisition of Sweet Factory net of cash acquired - (28,002) - (28,002)
Investment in subsidiaries (18,000) 18,000 - -
Purchase of property, plant, and equipment (4,273) (681) - (4,954)
-------- -------- -------- --------
Net cash used in investing activities (22,273) (10,683) - (32,956)
FINANCING ACTIVITIES
Principle payments of capital lease obligations (105) (113) - (218)
Proceeds of long-term debt 30,000 - - 30,000
Costs related to financing (4,152) - - (4,152)
-------- -------- -------- --------
Net cash provided by (used in) financing activities 25,743 (113) - 25,630
Net increase in cash and cash equivalents 4,201 6,562 - 10,763
Cash and cash equivalents beginning of period 13,081 - - 13,081
-------- -------- -------- --------
Cash and cash equivalents end of period $ 17,282 $ 6,562 $ - $ 23,844
======== ======== ======== ========
15
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
May 27, 2000
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Some information included in the report may constitute forward-looking
statements that involve a number of risks and uncertainties. From time to time,
information provided by the Company or statements made by its employees may
contain other forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include, but
are not limited to: general economic conditions including inflation, interest
rate fluctuations, trade restrictions, and general debt levels; competitive
factors including price pressures, technological development, and products
offered by competitors; inventory risks due to changes in market demand or
business strategies; and changes in effective tax rates. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
OVERVIEW
The Company is a manufacturer and retailer of boxed chocolates and other
confectionery items. The Company manufactures a variety of candies and
operates confectionery retail chains under the Fannie May, Fanny Farmer,
Sweet Factory and Laura Secord brand names. As of May 27, 2000, the Company's
products were sold through 708 Company-operated stores and approximately
9,300 third-party retail outlets in 40 states in the United States and 9
provinces in Canada. The Company also sells Fannie May and Fanny Farmer
branded products through a variety of non-retail programs, including its
quantity order, mail order and fundraising programs.
Historically, Company-operated retail stores has represented the most
significant distribution channel for the Company's products and accounted for
$172.9 million, or 81.7%, of net sales in the nine months ended May 27, 2000.
Third-party retail and non-retail businesses collectively accounted for $38.7
million, or 18.3%, of net sales during the nine months ended May 27, 2000.
Cost of sales includes costs associated with the Company's manufactured products
and costs associated with product purchased from third parties and resold by the
Company. The principal elements of manufactured product costs are
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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. 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, the Company
generally has been able to raise prices of 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 the Company 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.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 27, 2000 COMPARED TO THE THREE MONTHS ENDED MAY 29, 1999.
NET SALES. Consolidated net sales for the three months ended May 27, 2000
were $56.2 million, an increase of $11.5 million, or 25.7%, from $44.7
million for the three months ended May 29, 1999. This increase was due to the
acquisition of Laura Secord with net sales of $13.8 million, offset by lower
Sweet Factory and Fannie May/Fanny Farmer net sales of $1.9 million and $0.4
million, respectively. Same store sales for Laura Secord were up 11.2% during
the quarter while same store sales for Sweet Factory were down 8.4% during
the quarter. With respect to the Company's historical Fannie May and Fanny
Farmer businesses, net sales for the three months ended May 27, 2000 were
$26.6 million, down $0.4 million from $27.0 million for the three months
ended May 29, 1999. Same store sales increased 3.0% offset by a decline in
sales through the Company's third party retail and other distribution
channels of $0.6 million, primarily due to weakness in sales to the Company's
card and gift business customers under a program launched in fiscal 1999
which received heavy initial promotional support, which support was not
repeated during the current fiscal year. Consolidated Company-operated retail
sales were $50.4 million for the three months ended May 27, 2000, an increase
of $11.0 million, or 27.9%, from $39.4 million for the three months ended May
29, 1999. The Company's newly acquired business, Laura Secord, accounted for
the increase. There were 708 Company-operated retail stores at May 27, 2000
compared to 571 stores at May 29, 1999.
GROSS PROFIT. Consolidated gross profit for the three months ended May 27,
2000 was $33.8 million, an increase of $4.8 million, or 16.6%, from $29.0
million for the three months ended May 29, 1999. The Laura Secord acquisition
accounted for $8.5 million of this increase and was offset by lower Sweet
Factory and Fannie May/Fanny Farmer gross profit of $2.4 million and $1.3
million, respectively. Consolidated gross profit as a percentage of net sales
decreased to 60.1% for the three months ended May 27, 2000 from 64.9% for the
three months ended May 29, 1999. This decrease in consolidated gross profit
percent was primarily due to a decline in margins in the Sweet Factory and
Fannie May/Fanny Farmer businesses due to increases in product cost,
discounts to customers and increases in pension, healthcare and other costs.
Gross profit (without giving effect to the Sweet Factory and Laura Secord
acquisitions) for the three months ended May 27, 2000 was $16.1 million, a
decrease of $1.3 million, or 7.5%, from $17.4 million for the three months
ended May 29, 1999. Gross profit as a percentage of net sales (without giving
effect to the Sweet Factory and Laura Secord acquisitions) was 60.5% for the
three months ended May 27, 2000 as compared to 64.4% for the three months
ended May 29, 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general and
administrative ("SG&A") expenses for the three months ended May 27, 2000 were
$34.1 million, an increase of $8.5 million, or 33.2%, from $25.6 million for
the three months ended May 29, 1999. SG&A expenses related to the Laura
Secord business accounted for $5.9 million of this increase. The remaining
increase was due primarily to
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increases in personnel, healthcare, employment recruiting, shop support and
other costs. As the Sweet Factory and Laura Secord businesses generate
substantially all of their revenues from Company-operated retail stores which
incur higher support costs than the Company's third-party retail and other
distribution channels, SG&A expense, as a percentage of net sales, increased
to 60.7% during the three months ended May 27, 2000 from 57.3% for the three
months ended May 29, 1999.
EBITDA. Consolidated earnings before interest, income taxes, depreciation and
amortization ("EBITDA") was $(0.7) million for the three months ended May 27,
2000, a decrease of $4.1 million from $3.4 million for the three months ended
May 29, 1999. The Laura Secord business contributed $2.1 million of increased
EBITDA, while the Fannie May/Fanny Farmer and Sweet Factory businesses
declined $3.1 million and $3.1 million, respectively, for the quarter ended
May 27, 2000. These decreases in EBITDA are due to the lower sales and gross
profit margins and higher operating expenses discussed above. As a percentage
of total net sales, consolidated EBITDA was (1.2)% for the three months ended
May 27, 2000 as compared to 7.6% for the three months ended May 29, 1999.
NET INCOME. Consolidated net loss for the three months ended May 27, 2000 was
$10.1 million, an increase of $7.2 million from $2.9 million for the three
months ended May 29, 1999. The decreased EBITDA of $4.1 million coupled with
additional interest expense and depreciation and amortization expense
primarily related to the Company's Sweet Factory and Laura Secord
acquisitions accounted for this decrease.
NINE MONTHS ENDED MAY 27, 2000 COMPARED TO THE NINE MONTHS ENDED MAY 29, 1999.
NET SALES. Consolidated net sales for the nine months ended May 27, 2000 were
$211.6 million, an increase of $55.8 million, or 35.8%, from $155.8 million
for the nine months ended May 29, 1999. This increase was due to the
acquisitions of Laura Secord, $43.7 million and Sweet Factory, $15.9 million.
Same store sales for Laura Secord were up 5.1% year-to-date while Sweet
Factory same store sales were down 3.3%. With respect to the Fannie May and
Fanny Farmer businesses, net sales for the nine months ended May 27, 2000
were $115.1 million, a decrease of $3.2 million from net sales of $118.3
million for the nine months ended May 29, 1999. During the nine months ended
May 27, 2000, same store sales for the Company's Fannie May and Fanny Farmer
retail stores increased 3.9%. This increase in sales was more than offset by
a decline in sales to third-party retailers and other distribution channels
to $33.6 million during the nine months ended May 27, 2000, from $38.9
million for the nine months ended May 29, 1999, a decrease of $5.3 million,
or 13.6%. This decrease is primarily due to lower sales to the Company's card
and gift business customers under a program initiated during fiscal 1999 as
discussed above.
GROSS PROFIT. Consolidated gross profit for the nine months ended May 27,
2000 was $133.1 million, an increase of $33.3 million, or 33.4%, from $99.8
million for the nine months ended May 29, 1999. The Sweet
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Factory and Laura Secord acquisitions accounted for substantially all of this
increase. Gross profit (without giving effect to the acquisitions) for the
nine months ended May 27, 2000 was $72.7 million, a decrease of $2.8 million,
or 3.7%, from $75.5 million for the nine months ended May 29, 1999. This
decline reflects the net sales decline discussed above and a decline in gross
profit margins due primarily to increased product discounting and increased
pension and healthcare costs. Gross profit as a percentage of net sales
(without giving effect to the acquisitions) decreased to 63.2% for the nine
months ended May 27, 2000 from 63.8% for the nine months ended May 29, 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated SG&A expenses were $107.7
million for the nine months ended May 27, 2000, an increase of $35.4 million,
or 49.0%, from $72.3 million for the nine months ended May 29, 1999. The
Sweet Factory and Laura Secord acquisitions accounted for $32.9 million, or
substantially all of the increase. As these businesses generate substantially
all of their revenues from Company-operated retail stores which incur higher
support costs than the Company's third party retail and other distribution
channels, SG&A expense as a percentage of sales increased to 50.9% during the
nine months ended May 27, 2000 from 46.4% for the nine months ended May 29,
1999. In addition to the effect of the acquisitions, the increase in SG&A
expenses was impacted by increased healthcare costs and increased costs
associated with Company-operated retail stores.
EBITDA. Consolidated EBITDA was $24.9 million for the nine months ended May
27, 2000, a decrease of $2.3 million, or 8.5%, from $27.2 million for the
nine months ended May 29, 1999. The Laura Secord business contributed
approximately $6.9 million of increased EBITDA, while the Fannie May/Fanny
Farmer and Sweet Factory businesses declined $5.0 million and $4.2 million,
respectively, during the nine months ended May 27, 2000. These EBITDA
declines were due to the lower sales, margins and higher operating expenses
discussed above. As a percentage of total net sales, EBITDA was 11.8% for the
nine months ended May 27, 2000 as compared to 17.5% for the nine months ended
May 29, 1999.
NET INCOME. Consolidated net loss for the nine months ended May 27, 2000 was
$3.2 million, a decrease of $13.6 million from net income of $10.4 million
for the nine months ended May 29, 1999. The decreased EBITDA of $2.3 million
coupled with additional interest expense and depreciation and amortization
primarily related to the Company's Sweet Factory and Laura Secord
acquisitions accounted for this decrease.
LIQUIDITY AND CAPITAL RESOURCES. Net cash provided by operating activities
was $13.8 million for the nine months ended May 27, 2000 compared to $18.1
million for the nine months ended May 29, 1999. Net loss was $3.2 million for
the nine months ended May 27, 2000 compared to net income of $10.4 million
for the nine months ended May 29, 1999. Net income included non-cash
depreciation and amortization charges of $14.2 million and
20
interest expense of $13.8 million for the nine months ended May 27, 2000 and
$8.4 million and $9.4 million, respectively, for the nine months ended May
29, 1999.
Net cash used in investing activities was $10.3 million of the nine months
ended May 27, 2000 as compared to $33.0 million for the nine months ended May
29, 1999. The decrease reflects the purchase of Sweet Factory in December
1998 for $28.0 million in cash outlays, partially offset by higher capital
expenditures and a Sweet Factory license payment during the current period.
As of May 27, 2000, we had outstanding $170 million of 10.25% senior secured
notes due July 1, 2004.
As of May 27, 2000, we had approximately $4.0 million of borrowings and
letters of credit in the amount of $0.6 million outstanding under our $25
million revolving credit facility (the "Credit Facility"). For the three
months ended May 27, 2000, we did not meet the fixed charge coverage ratio or
the leverage ratio requirements of the Credit Facility, but have obtained a
waiver of these requirements from our lenders for such three-month period
only. Additionally, as of June 30, 2000, we entered into an amendment of the
Credit Facility that increased, until July 25, 2000, the amount available for
borrowing by approximately $4.0 million (not increasing the $25 million
limit). By July 25, 2000, we must either repay the additional $4 million
borrowed or obtain an additional amendment or waiver to the Credit Facility.
As of July 3, 2000, we had approximately $20.0 million of borrowings
outstanding under the Credit Facility. We intend to pursue further amendments
to the Credit Facility with respect to financial covenants and to increase
the Company's availability thereunder. There can be no assurance that the
lenders under the Credit Facility will be willing to grant such amendment(s)
on favorable terms, if at all.
As our Credit Facility expires on April 15, 2001, for the period after
April 15, 2001, we will need to extend or renew the Credit Facility or obtain
alternative financing to meet our seasonal working capital needs and other
requirements, 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. Assuming that Holdings
continues to exercise its option to pay 50% of the dividends in kind, the
redemption value of the Senior Preferred Stock on August 31, 2001 will be
approximately $12.7 million. The Junior Class A PIK Preferred Stock and the
Junior Class B PIK Preferred Stock were issued in 1991 in the original face
amounts of $7.0 million and $0.7 million, respectively. Both classes of
Junior PIK Preferred Stock are subject to mandatory redemption on November 1,
2001. Assuming that Holdings continues to exercise its option to pay all
dividends in kind, the redemption value of the Junior Class A PIK Preferred
Stock and the Junior Class B PIK Preferred Stock on November 1, 2001 will be
approximately $15.1 million and $1.5 million, respectively.
In order for Holdings to make such redemption payments, Holdings must cause
us, to the extent permitted by the indenture and our Credit Facility, to
advance the necessary funds to Holdings by dividend or otherwise. Such
advances, if paid, will reduce the funds available for our operations. To the
extent that such funds are not available, whether due to the restrictions set
forth in the indenture or our revolving Credit Facility or otherwise, the
failure to make required redemption payments would trigger various provisions
of Holdings' preferred and common stock, including provisions providing for a
change of control of Holdings' and our Board of Directors.
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 Facility and
refinancing the Credit Facility, and pursuing other sources of capital.
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.
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Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
May 27, 2000
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 4.1 - Amendment No. 4 to the Amended and Restated
Credit Agreement dated as of July 2, 1997 among the Company,
the lenders signatory thereto and Bank One, NA, as agent
dated June 30, 2000.
EXHIBIT 4.2 - Waiver to Amended and Restated Credit Agreement
dated as of July 2, 1997 among the Company, the lenders
signatory thereto and Bank One, NA, as Agent dated July 10,
2000.
EXHIBIT 27.1 - Financial data schedule.
(b) No reports were filed on Form 8-K for the quarter ended May 27,
2000.
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Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
May 27, 2000
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ARCHIBALD CANDY CORPORATION
DATE: JULY 11, 2000 By: /s/ Ted A. Shepherd
-----------------------------------
Ted A. Shepherd
President and Chief Operating
Officer (Principal Executive
Officer)
DATE: JULY 11, 2000 By: /s/ Thomas G. Kasvin
-----------------------------------
Thomas G. Kasvin
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
23