- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 November 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number
333-33751
ARCHIBALD CANDY CORPORATION
Incorporated in the IRS Employer Identification No.
State of Illinois 36-0743280
1137 West Jackson Boulevard
Chicago, Illinois 60607
(312) 243-2700
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of November 28, 1998, 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 NOVEMBER 28, 1998
INDEX
-----
PAGE NO.
PART I - FINANCIAL INFORMATION:
- -----------------------------
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - NOVEMBER 28, 1998 (UNAUDITED) AND
AUGUST 29, 1998 1
STATEMENTS OF OPERATIONS - THREE MONTH PERIODS
ENDED NOVEMBER 28, 1998 (UNAUDITED) AND
NOVEMBER 29, 1997 (UNAUDITED) 3
STATEMENTS OF CASH FLOWS - THREE MONTH PERIODS
ENDED NOVEMBER 28, 1998 (UNAUDITED) AND
NOVEMBER 29, 1997 (UNAUDITED) 4
NOTES TO FINANCIAL STATEMENTS 5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
PART II - OTHER INFORMATION:
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 8
SIGNATURES 9
THIS REPORT UPDATES ARCHIBALD CANDY CORPORATION'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 1998, IN ACCORDANCE WITH THE
INSTRUCTIONS TO FORM 10-Q. IT IS PRESUMED THAT THE READER HAS READ THE ANNUAL
REPORT ON FORM 10-K.
SOME INFORMATION INCLUDED IN THIS REPORT MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. FROM TIME TO TIME,
INFORMATION PROVIDED BY ARCHIBALD CANDY CORPORATION OR STATEMENTS MADE BY ITS
EMPLOYEES MAY CONTAIN OTHER FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO: GENERAL ECONOMIC CONDITIONS INCLUDING INFLATION,
INTEREST RATE FLUCTUATIONS, TRADE RESTRICTIONS, AND GENERAL DEBT LEVELS;
COMPETITIVE FACTORS INCLUDING PRICE PRESSURES, TECHNOLOGICAL DEVELOPMENTS, AND
PRODUCTS OFFERED BY COMPETITORS; INVENTORY RISKS DUE TO CHANGES IN MARKET DEMAND
OR BUSINESS STRATEGIES; 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. ARCHIBALD CANDY CORPORATION UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Balance Sheets
As of November 28, 1998 and August 29, 1998
NOVEMBER 28, AUGUST 29,
1998 1998
------------- ------------
(DOLLARS IN THOUSANDS)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,443 $ 13,081
Accounts receivable, net 6,552 1,380
Inventories 26,818 24,602
Prepaid expenses and other current assets 896 306
------------- ------------
Total current assets 41,709 39,369
Property, plant, and equipment 20,754 20,927
Goodwill 30,928 31,161
Noncompete agreements and other
intangibles 104 109
Deferred financing fees 3,838 3,698
Other assets 2,895 2,825
------------- ------------
Total assets $ 100,228 $ 98,089
------------- ------------
------------- ------------
-1-
NOVEMBER 28, AUGUST 29,
1998 1998
------------- ------------
(DOLLARS IN THOUSANDS)
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,659 $ 4,728
Accrued liabilities 7,721 4,956
Payroll and related liabilities 2,679 2,600
Current portion of capital lease
obligations 59 97
------------- ------------
Total current liabilities 17,118 12,381
Due to affiliate 604 604
Long-term debt 100,000 100,000
Capital lease obligations, less
current portion 38 48
Shareholder's equity (deficit):
Common stock, $0.01 par value:
Authorized -- 25,000 shares
Issued and outstanding -- 19,200 shares -- --
Additional paid-in-capital 18,700 18,700
Accumulated deficit (36,232) (33,644)
------------- ------------
Total shareholder's equity (deficit) (17,532) (14,944)
------------- ------------
Total liabilities and shareholder's
equity (deficit) $ 100,228 $ 98,089
------------- ------------
------------- ------------
See accompanying notes.
-2-
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Statements of Operations
(Unaudited)
THREE MONTHS ENDED
----------------------------
NOVEMBER 28, NOVEMBER 29,
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
Net sales $ 29,648 $ 27,173
Cost of sales, excluding depreciation 12,410 10,595
Selling, general, and administrative
expenses, excluding depreciation and
amortization 15,641 15,450
Depreciation and amortization expense 1,170 1,191
Amortization of goodwill and other
intangibles 407 420
Management fees and other fees 169 129
------------- -------------
Operating (Loss) (149) (612)
Other (income) and expense:
Interest expense 2,592 2,629
Interest and other income and
expense (163) (225)
------------- -------------
Loss before income taxes (2,578) (3,016)
Provision for income taxes 10 87
------------- -------------
Net Loss $ (2,588) $ (3,103)
------------- -------------
------------- -------------
See accompanying notes.
-3-
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
----------------------------
NOVEMBER 28, NOVEMBER 29,
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net loss $ (2,588) $ (3,103)
Adjustments to reconcile net income to
net cash provided by (used in)operating
activities:
Depreciation and amortization 1,577 1,611
Changes in operating assets and
liabilities:
Accounts receivable, net (5,172) (2,813)
Inventories (2,216) (4,294)
Prepaid expenses and other
current assets (590) (842)
Other assets (186) 37
Accounts payable and accrued
liabilities 4,775 5,058
------------- -------------
Net cash used in operating activities (4,400) (4,346)
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment (880) (1,287)
------------- -------------
Net cash used in investing activities (880) (1,287)
FINANCING ACTIVITIES
Principal payments of capital lease
obligations (48) (82)
Costs related to financing (310) -
Costs related to refinancing - (32)
------------- -------------
Net cash used in
financing activities (358) (114)
------------- -------------
Net increase (decrease)in cash and cash
equivalents (5,638) (5,747)
Cash and cash equivalents beginning of
period 13,081 15,801
------------- -------------
Cash and cash equivalents end of
period $ 7,443 $ 10,054
------------- -------------
------------- -------------
SUPPLEMENTAL SCHEDULE OF CASH
TRANSACTIONS
Interest paid $ 249 $ 255
------------- -------------
------------- -------------
See accompanying notes.
-4-
Archibald Candy Corporation
(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)
Notes to Financial Statements
November 28, 1998
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Archibald Candy Corporation (the "Company") is a manufacturer and marketer
of boxed chocolates and other confectionery items. The Company sells its Fannie
May and Fanny Farmer brand candies in over 300 Company-operated stores and in
approximately 8,000 third-party grocery stores, drug stores and independent
retail accounts as well as through a variety of non-retail programs, including
quantity order, mail order and fundraising programs. 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 29, 1998.
Results of operations for the period from August 29, 1998 to November
28, 1998 are not necessarily indicative of the results that may be achieved for
the entire year.
2. INVENTORIES
Inventories at November 28, 1998 and August 29, 1998 are comprised of the
following:
NOVEMBER 28, AUGUST 29,
1998 1998
------------ ----------
Raw materials .................. $10,058 $10,110
Work in process ................ 252 237
Finished goods ................. 16,508 14,255
------------ ----------
$26,818 $24,602
------------ ----------
------------ ----------
3. DEBT
Debt at November 28, 1998 and August 29, 1998 is comprised of $100 million of
10.25% senior secured notes due July 1, 2004.
-5-
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.
5. ACQUISITION
On December 7, 1998, the Company acquired Sweet Factory Group, Inc. ("Sweet
Factory") for $18 million in cash and the assumption of approximately $10
million of indebtedness and other obligations of Sweet Factory pursuant to
the merger of Sweet Factory Acquisition Corp., a wholly owned subsidiary of
the Company ("Acquisition Corp."), with and into Sweet Factory (the
"Acquisition"). The Acquisition was effected pursuant to an Agreement and
Plan of Reorganization dated as of November 24, 1998 by and among the
Company, Acquisition Corp., Sweet Factory, Sweet Factory, Inc., SF Candy
Company, SF Properties, Inc. and certain stockholders of Sweet Factory. The
Company funded the Acquisition through the issuance of $30 million of
senior secured debt. Sweet Factory is a bulk candy retailer with 256 stores
in 36 states. This transaction will be accounted for as a purchase.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 28, 1998 COMPARED TO THE THREE MONTHS ENDED NOVEMBER
29, 1997
NET SALES. Net sales for the three months ended November 28, 1998 were
$29.6 million, an increase of $2.5 million, or 9.1%, from $27.2 million for
the three months ended November 29, 1997. Company-Operated Retail(1) sales
were $16.1 million for the three months ended November 28, 1998, a decrease
of $0.1 million, or 0.4%, from $16.2 million for the three months ended
November 29, 1997. This decrease was primarily a result of a decline in same
store sales of 0.2%, partially offset by seven additional Company-operated
stores being open at November 28, 1998 compared to November 29, 1997. For the
three months ended November 28, 1998, Third-Party Retail(2) sales were $8.0
million, an increase of $1.9 million, or 31.7%, from $6.1 million for the
three months ended November 29, 1997. This increase reflects the continued
results of management's strategy to expand Third-Party Retail sales into new
markets, including the launch in October 1998 of the Company's Specialty
Markets Hallmark line. For the three months ended November 28, 1998,
Non-Retail(3) sales were $5.6 million, an increase of $0.6 million, or 12.7%,
from $4.9 million for the three months ended November 29, 1997. The increase
was primarily a result of growth in the fundraising boxed chocolate business.
Pounds sold for the three months ended November 28, 1998 were 3.3 million, an
increase of 0.3 million, or 10.2%, from 3.0 million pounds sold for the three
months ended November 29, 1997. The growth in pounds sold was due to an
increase in pounds sold in the Company's Third-Party Retail and Non-Retail
channels.
GROSS PROFIT. Gross profit for the three months ended November 28, 1998 was
$17.2 million, an increase of $0.7 million, or 4.0%, from $16.6 million for the
three months ended November 29, 1997. Gross profit as a percentage of net sales
decreased to 58.1% for the three months ended November 28, 1998 from 61.0% for
the three months ended November 29, 1997. This decrease in gross margin was due
to the continuing shift from Company-Operated Retail sales to lower margin
Third-Party Retail sales.
-6-
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $15.6 million
for the three months ended November 28, 1998, an increase of $0.2 million, or
1.2%, from $15.5 million for the three months ended November 29, 1997. This
increase in SG&A expenses was primarily due to an increase in (i) Third-Party
Retail operating expenses resulting from growth of the Specialty Markets
Hallmark line and (ii) Non-Retail operating expenses resulting from growth in
the fundraising boxed chocolate business. As a percentage of net sales, SG&A
expenses decreased to 52.8% for the three months ended November 28, 1998 from
56.9% for the three months ended November 29, 1997 as the Company was able to
leverage its costs against higher net sales.
EBITDA. Earnings before interest, income taxes, depreciation, and
amortization (EBITDA) was $1.5 million for the three months ended November 28,
1998, an increase of $0.4 million or 38.6%, from $1.1 million for the three
months ended November 29, 1997. As a percentage of net sales, EBITDA was 4.9%
for the three months ended November 28, 1998 as compared to 3.9% for the three
months ended November 29, 1997.
OPERATING LOSS. Operating loss was $0.1 million for the three months ended
November 28, 1998, a decrease of $0.5 million, or 75.7%, from a loss of $0.6
million for the three months ended November 29, 1997. Operating loss decreased
as a result of the increase in net sales and gross profit.
NET LOSS. Net loss was $2.6 million for the three months ended November 28,
1998, a decrease of $0.5 million, or 16.6%, from $3.1 million for the three
months ended November 29, 1997.
- -----------------------------
(1) Company-Operated Retail includes sale of Company branded products
through Company-operated Fannie May and Fanny Farmer stores.
(2) Third-Party Retail includes sale of Company branded products through
grocery stores, drug stores and other independent retailers that
purchase Company branded products at wholesale pricing for resale to
the consumer.
(3) Non-Retail includes sale of Company branded products through the
Company's quantity order, mail order and fundraising programs.
LIQUIDITY AND CAPITAL RESOURCES
Net loss was $2.6 million for the three months ended November 28, 1998
compared to $3.1 million for the three months ended November 29, 1997. Net loss
included noncash depreciation and amortization charges of $1.6 million for the
three months ended on each of November 28, 1998 and November 29, 1997. Net cash
used in operating activities was $4.4 million for the three months ended
November 28, 1998 compared to $4.3 million for the three months ended November
29, 1997.
Net cash used in investing activities decreased to $0.9 million for the
three months ended November 28, 1998 from $1.3 million for the three months
ended November 29, 1997. The decrease in capital expenditures was due to a
timing difference as it relates to spending.
As of November 28, 1998, the Company had $20 million available for
borrowings under a $20 million revolving credit facility (the "Credit Facility")
which matures on July 1, 2000. As of November 28, 1998, the Company had
outstanding $100 million of 10.25% senior secured notes due July 1, 2004.
-7-
The Company believes that available cash flow, together with cash on the
Company's balance sheet and available borrowings under the Credit Facility, will
provide sufficient funds to meet the Company's debt service obligations,
projected capital expenditures and working capital requirements for the
foreseeable future.
YEAR 2000 READINESS DISCLOSURE
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred.
The Company has surveyed substantially all of its computer systems and
is in the process of contacting suppliers and consultants to address year
2000 issues for the software and hardware used by the Company. The Company
currently is in the process of upgrading and improving its internal computer
systems, which work is expected to be completed by August 1999. Following
completion of this work and based on the representations and warranties of
the Company's suppliers and consultants, the Company's computer systems are
expected to be year 2000 compliant. The Company does not believe that the
costs associated with making its computer systems year 2000 compliant will be
material. However, if the Company's systems or the systems of other companies
on whose services the Company depends or with whom the Company's systems
interfaces are not year 2000 compliant, it could have a material adverse
effect on the Company's results of operation and financial condition.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 27.1 -- FINANCIAL DATA SCHEDULE FOR QUARTER ENDED
NOVEMBER 28, 1998, FILED HEREWITH.
(b) NO REPORTS WERE FILED ON FORM 8-K FOR THE QUARTER ENDED NOVEMBER
28, 1998.
-8-
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: JANUARY 12, 1999. BY: /S/ DONNA M. SNOPEK
-------------------------
DONNA M. SNOPEK
VICE PRESIDENT OF FINANCE
& ACCOUNTING
-9-