INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sweet Factory Group, Inc.:
We have audited the accompanying consolidated balance sheets of Sweet
Factory Group, Inc. and subsidiaries as of January 4, 1997 and January 3, 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the fiscal years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sweet
Factory Group, Inc. and subsidiaries as of January 4, 1997 and January 3, 1998,
and the results of their operations and their cash flows for the fiscal years
then ended in conformity with generally accepted accounting principles.
KPMG LLP
February 20, 1998
San Diego, California
1
SWEET FACTORY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 4, 1997 AND JANUARY 3, 1998
1996 1997
------------- -------------
ASSETS (NOTE 6)
Cash and cash equivalents.......................................................... $ 779,461 $ 867,802
Inventories........................................................................ 4,255,240 4,485,998
Prepaid expenses and other current assets.......................................... 2,092,082 2,970,906
------------- -------------
Total current assets......................................................... 7,126,783 8,324,706
Property and equipment, net (note 4)............................................... 29,216,599 31,999,061
Other assets, net (note 5)......................................................... 2,732,196 2,328,603
Deferred income taxes (note 9)..................................................... 972,000 1,645,000
------------- -------------
$ 40,047,578 $ 44,297,370
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft................................................................... $ 1,454,918 $ 1,890,219
Accounts payable and accrued expenses............................................ 4,459,786 4,208,629
Accrued payroll.................................................................. 1,215,073 1,378,002
Current portion of capital lease obligations (note 8)............................ 301,405 355,411
Income taxes payable (note 9).................................................... 604,904 --
------------- -------------
Total current liabilities.................................................... 8,036,086 7,832,261
Revolving line of credit (note 6).................................................. 2,174,457 6,755,786
Capital lease obligations, excluding current portion (note 8)...................... 237,213 421,906
Deferred rent...................................................................... 1,349,592 1,651,185
------------- -------------
Total liabilities............................................................ 11,797,348 16,661,138
------------- -------------
Stockholders' equity (note 7):
Cumulative Convertible Preferred stock, $.001 par value, 19,145,000 shares
authorized:
Series A preferred stock, voting, 12,745,000 shares authorized, issued and
outstanding; liquidation value of $12,745,000................................ 12,745 12,745
Series B preferred stock, voting, 6,187,141 shares authorized, 6,179,566 shares
issued and outstanding; liquidation value of $13,904,024..................... 6,180 6,180
Series C preferred stock, nonvoting, 212,859 shares authorized, issued and
outstanding; liquidation value of $478,933................................... 213 213
Common stock, $.001 par value; 21,818,385 shares authorized; 1,261,733 shares
issued and outstanding in 1996, 1,289,900 shares issued and outstanding in
1997; less treasury stock of 6,000 shares.................................... 1,255 1,283
Additional paid-in capital, net of cost of treasury shares....................... 27,354,154 27,366,638
Retained earnings................................................................ 1,107,558 520,275
Notes receivable from officers................................................... (231,875) (271,102)
------------- -------------
Total stockholders' equity................................................... 28,250,230 27,636,232
------------- -------------
Commitments and contingencies (notes 8 and 11)..................................... $ 40,047,578 $ 44,297,370
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
2
SWEET FACTORY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 4, 1997 AND JANUARY 3, 1998
1996 1997
------------- -------------
Sales.............................................................................. $ 65,061,655 $ 74,208,849
Cost of sales and occupancy costs.................................................. 32,859,846 39,143,728
------------- -------------
Gross profit..................................................................... 32,201,809 35,065,121
Selling, general and administrative expenses....................................... 24,996,800 29,217,031
Depreciation and amortization...................................................... 5,079,909 6,199,113
------------- -------------
Operating income (loss).......................................................... 2,125,100 (351,023)
Interest expense, net.............................................................. 305,757 576,260
------------- -------------
Income (loss) before income tax expense (benefit)................................ 1,819,343 (927,283)
Income tax expense (benefit) (note 9).............................................. 782,000 (340,000)
------------- -------------
Net income (loss)................................................................ $ 1,037,343 $ (587,283)
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
3
SWEET FACTORY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 4, 1997 AND JANUARY 3, 1998
CUMULATIVE
CONVERTIBLE NOTES TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCK-
-------------------- -------------------- PAID-IN RETAINED FROM HOLDERS'
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS OFFICERS EQUITY
--------- --------- --------- --------- ----------- --------- ----------- ---------
Balances at December 30,
1995..................... 19,137,425 $ 19,138 937,400 $ 937 27,239,910 70,215 (231,875) 27,098,325
Issuance of common stock
for cash................. -- -- 318,333 318 114,244 -- -- 114,562
Net income................. -- -- -- -- -- 1,037,343 -- 1,037,343
--------- --------- --------- --------- ----------- --------- ----------- ---------
Balances at January 4,
1997..................... 19,137,425 19,138 1,255,733 1,255 27,354,154 1,107,558 (231,875) 28,250,230
Issuance of common stock
for cash................. -- -- 28,167 28 12,484 -- -- 12,512
Interest earned on notes
receivable from
officers................. -- -- -- -- -- -- (39,227) (39,227)
Net loss................... -- -- -- -- -- (587,283) -- (587,283)
--------- --------- --------- --------- ----------- --------- ----------- ---------
Balances at January 3,
1998..................... 19,137,425 $ 19,138 1,283,900 $ 1,283 27,366,638 520,275 (271,102) 27,636,232
--------- --------- --------- --------- ----------- --------- ----------- ---------
--------- --------- --------- --------- ----------- --------- ----------- ---------
See accompanying notes to consolidated financial statements.
4
SWEET FACTORY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 4, 1997 AND JANUARY 3, 1998
1996 1997
-------------- -------------
Cash flows from operating activities:
Net income (loss)................................................................ $ 1,037,343 $ (587,283)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 5,079,909 6,199,112
Loss on disposal of property and equipment..................................... 34,942 54,417
Deferred income taxes.......................................................... (167,000) (765,000)
Interest earned on notes receivable from officers.............................. -- (39,227)
Changes in assets and liabilities:
Increase in inventories...................................................... (889,691) (230,758)
Increase in prepaid expenses and other current assets........................ (444,815) (878,824)
Increase (decrease) in accounts payable and accrued expenses................. 1,238,299 (129,634)
Increase in accrued payroll.................................................. 209,809 162,929
Increase (decrease) in income taxes payable.................................. 294,478 (512,904)
Increase in deferred rent.................................................... 342,538 301,593
-------------- -------------
Net cash provided by operating activities.................................. 6,735,812 3,574,421
-------------- -------------
Cash flows from investing activities:
Capital expenditures, excluding additions for capital leases..................... (8,550,932) (8,004,578)
Proceeds from disposal of property and equipment................................. 3,900 125,000
Payments for other assets........................................................ (47,089) (254,552)
-------------- -------------
Net cash used in investing activities...................................... (8,594,121) (8,134,130)
-------------- -------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft............................................ (280) 435,301
Proceeds from issuance of common stock........................................... 114,562 12,512
Borrowings on revolving line of credit........................................... 19,720,599 21,790,583
Payments on revolving line of credit............................................. (17,546,142) (17,209,254)
Payments on capital leases....................................................... (468,203) (381,092)
-------------- -------------
Net cash provided by financing activities.................................. 1,820,536 4,648,050
-------------- -------------
Net increase (decrease) in cash and cash equivalents............................... (37,773) 88,341
Cash and cash equivalents at beginning of year..................................... 817,234 779,461
-------------- -------------
Cash and cash equivalents at end of year........................................... $ 779,461 $ 867,802
-------------- -------------
-------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........................................... $ 307,506 $ 618,278
Cash paid during the year for income taxes....................................... $ 654,919 $ 412,528
Supplemental schedule of noncash investing and financing activities:
Acquisition of property and equipment financed by capital leases................. $ 333,062 $ 619,791
Decrease in accounts payable and accrued expenses relating to the disposal of
property and equipment for store closing costs................................. $ 170,018 $ 121,523
See accompanying notes to consolidated financial statements.
5
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 4, 1997 AND JANUARY 3, 1998
(1) ORGANIZATION
Sweet Factory, Inc. ("SFI") was incorporated on July 12, 1991 in the state
of Delaware through the acquisition of Sweet Factory California Partners, Inc.
(the "Former Company"). SFI was organized to introduce, operate and expand the
Sweet Factory retail program throughout the United States under an exclusive
licensing agreement with Sweet Factory (U.K.) Limited, a corporation organized
under the laws of the United Kingdom. The initial term of the agreement expires
in 2000 and includes options to extend the agreement, which SFI fully intends to
exercise.
In January 1997, SFI formed SF Candy Company, Inc. ("SF Candy") as a
wholly-owned subsidiary to manufacture panned chocolate products to be sold to
third parties.
In September 1997, SFI was restructured into a holding company, Sweet
Factory Group, Inc. (the "Company"), which owns and manages its wholly-owned
subsidiaries Sweet Factory, Inc., its retail operations, SF Candy, and SF
Properties, Inc. ("Property"), its property management company. The Company
charges a management fee to its subsidiaries and charges a sublicensor royalty
fee through Property to SFI. All fees and intercompany transactions are
eliminated in the Company's consolidated financial statements.
(2) SUMMARY OF ACCOUNTING POLICIES
FISCAL YEAR
The Company reports on a 52-53 week fiscal year ending the first Saturday
after December 31. Fiscal year 1996 ended January 4, 1997, and was a 53-week
year. Fiscal year 1997 ended January 3, 1998, and was a 52-week year.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using a method which approximates the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company leases computer
equipment under capital leases which have been capitalized for financial
statement purposes at the present value of the future minimum lease payments.
Depreciation on property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. Leasehold improvements are amortized over the lease term or the
estimated useful life of the improvements, whichever is shorter. Site
acquisition costs are amortized over the lease term. Improvements which add to
the useful life of an asset are capitalized. Expenditures for maintenance and
repairs are charged to operations.
INTANGIBLE ASSETS
Goodwill is amortized on a straight-line basis over twenty years.
Amortization of goodwill for both the years ended January 4, 1997 and January 3,
1998 was approximately $79,500. The Company assesses the recoverability of
goodwill by determining whether the unamortized balance can be recovered through
projected undiscounted future cash flows over its remaining life. Based on these
calculations,
6
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
(2) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
the Company has determined that this intangible asset was not impaired at
January 4, 1997 and January 3, 1998.
The exclusive license agreement is amortized on a straight-line basis over
its estimated useful life of approximately eight years.
INCOME TAXES
The Company accounts for its income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are computed using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities from a
change in tax rates is recognized in income in the period that includes the
enactment date.
STORE PRE-OPENING COSTS
Store pre-opening costs are capitalized and amortized to store operating
expense during the first 18 full months a store is in operation. This period
coincides with the time at which the Company deems a store to be comparable for
financial reporting purposes.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, the Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances warrant measurement. Impairment losses for long-lived assets are
recorded by reducing the carrying value to the fair value of the asset.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less and money market mutual funds to be
cash equivalents.
STOCK OPTION PLAN
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and the Company provides pro forma net income
disclosures for employee stock option grants made as if the Company had adopted
the fair value method under SFAS No. 123, "Accounting for Stock-Based
Compensation."
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations. Advertising expenses amounted to
7
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
(2) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
approximately $907,000 and $1,194,000 for the fiscal years ended January 4, 1997
and January 3, 1998, respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amount of revenue and expenses during the reporting
period to prepare these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that fair values be disclosed for the Company's financial instruments.
The carrying amount of cash and cash equivalents, accounts payable and accrued
expenses, and accrued payroll approximate fair value due to the short-term
nature of these instruments. The carrying amounts reported for notes receivable
approximate fair value because the underlying instruments earn interest at rates
comparable to current rates offered by the Company for similar instruments. The
carrying amount reported for the revolving line of credit approximates fair
value because the underlying instrument bears interest at a rate comparable to
current rates offered to the Company for similar debt instruments.
(4) PROPERTY AND EQUIPMENT
Property and equipment as of January 4, 1997 and January 3, 1998 consist of
the following:
1996 1997
-------------- -------------
Leasehold improvements......................................... $ 27,222,042 $ 32,641,032
Furniture and fixtures......................................... 8,530,502 10,512,194
Machinery and equipment........................................ 4,270,163 5,407,701
Construction in progress....................................... 1,758,115 1,174,144
-------------- -------------
41,780,822 49,735,071
Less accumulated depreciation and amortization................. (12,564,223) (17,736,010)
-------------- -------------
$ 29,216,599 $ 31,999,061
-------------- -------------
-------------- -------------
Equipment recorded under capital leases is included with machinery and
equipment for the fiscal years ended January 4, 1997 and January 3, 1998 at a
cost of $2,031,381 and $1,782,104, respectively, with related accumulated
amortization of $970,114 and $673,415, respectively.
8
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
(5) OTHER ASSETS
Other assets as of January 4, 1997 and January 3, 1998 consist of the
following:
1996 1997
------------- -------------
License......................................................... $ 3,100,000 $ 3,100,000
Goodwill........................................................ 1,587,125 1,587,125
Other........................................................... 680,517 1,220,069
------------- -------------
5,367,642 5,907,194
Less accumulated amortization................................... (2,635,446) (3,578,591)
------------- -------------
$ 2,732,196 $ 2,328,603
------------- -------------
------------- -------------
Amortization of other assets was $701,868 and $658,145 for the fiscal years
ended January 4, 1997 and January 3, 1998, respectively.
(6) REVOLVING LINE OF CREDIT
In June 1997, the Company refinanced its bank revolving line of credit. The
principal amount of the line is $8,000,000, including an amount available for
letters of credit of $500,000. Interest on the line is payable at the bank's
prime rate or LIBOR plus 2%. The effective rate on the Company's revolving lines
of credit at January 3, 1998 was 8.0%. The Company may also borrow an additional
$3,500,000 from September 1st through January 15th at the bank's prime rate plus
1/4% or LIBOR plus 2.25%. Both lines are secured by substantially all of the
Company's tangible assets exclusive of its leased equipment. The lines expire on
June 30, 1999. Approximately $40,000 in letters of credit was outstanding as of
January 3, 1998.
In February 1998, the Company refinanced its debt with the bank. The new
debt structure includes the same amounts for a revolving line of credit and
letters of credit, with an interest rate at the bank's prime rate plus 3/8%, and
expires on June 30, 1999. Additionally, the Company entered into a $1,500,000
note payable, with a maturity of September 1, 1998 at an interest rate of prime
plus 3/4%. The $3,500,000 seasonal note was eliminated.
The above revolving line of credit contains restrictive covenants which,
among other things, require maintenance of certain financial ratios and
restricts the payment of dividends.
(7) STOCKHOLDERS' EQUITY
SERIES A, B AND C CUMULATIVE CONVERTIBLE PREFERRED STOCK
At January 3, 1998, the Company had 12,745,000 shares of Series A, 6,179,566
shares of Series B and 212,859 shares of Series C preferred stock, with par
values of $.001, issued and outstanding. The holders of the preferred stock are
entitled to annual cumulative dividends of $.08 per share for Series A preferred
and $.18 per share for Series B and C preferred, if and when declared by the
Board of Directors. As of January 3, 1998, the Board of Directors had not
declared any dividends on preferred stock. Each share of Series A and B
preferred stock is convertible into the Company's voting common stock, and each
share of Series C preferred stock is convertible into the Company's non-voting
common stock. All preferred stock is convertible at the option of the holder, at
any time, at the
9
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
(7) STOCKHOLDERS' EQUITY (CONTINUED)
established conversion price. The Series A and B preferred stock each have
voting rights equal to the number of common stock shares into which it can be
converted. The conversion price at January 3, 1998 was $1.00 per share for
Series A preferred and $2.25 per share for Series B and C preferred. The holders
of preferred stock have priority as to distribution upon liquidation and
dissolution.
STOCK APPRECIATION RIGHTS
In connection with the July 12, 1991 acquisition, the Company issued to
certain principals of the Former Company stock appreciation rights relating to
110,526 shares of common stock as partial consideration for entering into
covenants not-to-compete. The rights are not exercisable by the holders at any
time unless a liquidating event occurs. In the event of a liquidation, the
holders shall be entitled to receive the same payment, distribution or other
consideration as a holder of common stock. In the event of a public offering,
the Company has the option to purchase all of the holders' rights for a purchase
price equal to the per share price at which the common stock is offered to the
public. If such option is not exercised, the holder may exchange the rights for
the number of common stock shares equal to the rights. The rights expire ten
years from the date of issue.
STOCK OPTIONS
During the year ended January 3, 1993, the Company adopted an incentive
stock option plan for executives and key employees (the 1992 Plan). The 1992
Plan was subsequently amended to increase the number of shares authorized to
2,750,000. The Plan authorizes the granting of options to purchase shares of the
Company's $.001 par value common stock. Options vest evenly over five years from
the date of grant. Options expire ten years after the date of grant, or at the
employee's termination date, if earlier.
During 1996, the Company adopted an incentive stock option plan for
executives and key employees (the 1996 Plan). The 1996 Plan has substantially
the same attributes as the 1992 Plan, but allows for broader eligibility. The
number of shares authorized for this plan at January 3, 1998 was 800,000.
Certain officers had previously exercised stock options in exchange for
notes receivable. The notes receivable are secured by the underlying common
stock, accrue interest annually at 7% of the outstanding principal balance, and
mature on July 31, 2000.
At January 3, 1998, there were 521,771 shares available for grant under the
Plans. Using the prescribed valuation methods of SFAS No. 123, the Company
determined that the per share weighted-average fair value of stock options
granted during fiscal 1997 and 1996 was $0.71 and $0.63, respectively, on the
date of grant. The following weighted-average assumptions were included in this
method for fiscal 1997 and 1996: no expected dividend yield, risk-free interest
rate of 6%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized in the financial
statements for its stock options. Had the Company determined compensation cost
for its stock options based on the fair value at the grant date under
10
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
(7) STOCKHOLDERS' EQUITY (CONTINUED)
SFAS No. 123, the Company's net income (loss) would have been adjusted to the
pro forma amounts indicated below:
1996 1997
------------- -----------
Net income (loss), as reported.................................... $ 1,037,343 $ (587,283)
Pro forma......................................................... 946,199 (680,766)
Pro forma net income (loss) reflects only options granted in fiscal 1996 and
1997. Pro forma net income (loss) stated in accordance with SFAS No. 123 may not
be representative of the effects on reported net income (loss) in future years.
The following is a summary of option activity for the fiscal years ended
January 4, 1997 and January 3, 1998:
NUMBER OF OPTION PRICE PER
SHARES SHARE
------------- ----------------
Outstanding at December 30, 1995............................. 1,463,995 $ .25 -- 1.50
Exercised.................................................... (318,333) .25 -- .75
Canceled..................................................... (123,583) .25 -- 2.00
Granted...................................................... 630,000 1.50 -- 2.50
-------------
Outstanding at January 4, 1997............................... 1,652,079 .25 -- 2.50
-------------
Exercised.................................................... (28,167) .25 -- .75
Canceled..................................................... (62,583) .56 -- 2.75
Granted...................................................... 177,000 2.75 -- 2.75
-------------
Outstanding at January 3, 1998............................... 1,738,329 $ .25 -- 2.75
-------------
-------------
Exercisable at January 3, 1998............................... 1,024,495 $ .25 -- 2.50
-------------
-------------
11
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
The following table summarizes information about options outstanding and
exercisable as of January 3, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- ----------------- ----------- ----------- -----------
$ .25 - .75 965,495 5 $ .42 824,745 $ .38
1.50 - 2.75 772,834 9 1.82 199,750 1.54
(8) COMMITMENTS
The Company rents its administrative and operating facilities and certain
equipment under leases expiring at various dates through 2012. These leases are
subject to certain rent escalations and include renewal provisions at the option
of the Company. Future minimum lease payments under noncancelable capital and
operating leases as of January 3, 1998 are as follows:
CAPITAL OPERATING
---------- -------------
1998............................................................... $ 416,737 $ 12,260,600
1999............................................................... 302,175 12,173,532
2000............................................................... 153,338 12,038,312
2001............................................................... 701 11,677,535
2002............................................................... -- 10,783,759
Thereafter......................................................... -- 22,826,031
---------- -------------
872,951 $ 81,759,769
-------------
-------------
Less interest portion of payments at an average rate of
approximately 12.7%.............................................. (95,634)
----------
Present value of future minimum lease obligations.................. 777,317
Less current portion............................................... (355,411)
----------
Capital lease obligations, excluding current portion............... $ 421,906
----------
----------
Rent expense was approximately $9,289,000 and $11,740,000 for the fiscal
years ended January 4, 1997 and January 3, 1998, respectively.
12
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
(9) INCOME TAXES
Income taxes for the fiscal years ended January 4, 1997 and January 3, 1998
are comprised of the following:
1996 1997
----------- -----------
Current:
Federal........................................................... $ 731,000 $ 324,000
State............................................................. 218,000 101,000
----------- -----------
949,000 425,000
----------- -----------
Deferred:
Federal........................................................... (114,000) (618,000)
State............................................................. (53,000) (147,000)
----------- -----------
(167,000) (765,000)
----------- -----------
Total income tax expense (benefit)............................ $ 782,000 $ (340,000)
----------- -----------
----------- -----------
A reconciliation of total income tax expense (benefit) to the amount
computed by applying the statutory federal income tax rate of 34% to income
(loss) before income tax expense (benefit) for the fiscal years ended January 4,
1997 and January 3, 1998 is as follows:
1996 1997
----------- -----------
Computed at statutory rate.......................................... $ 619,000 $ (315,000)
State taxes, net of federal effect.................................. 109,000 (61,000)
Nondeductible expenses.............................................. 35,000 36,000
Change in valuation allowance....................................... (215,000) --
Adjustments to prior years' tax liabilities......................... 234,000 --
----------- -----------
Total income tax expense (benefit)............................ $ 782,000 $ (340,000)
----------- -----------
----------- -----------
13
SWEET FACTORY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 4, 1997 AND JANUARY 3, 1998
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of January
4, 1997 and January 3, 1998 are as follows:
1996 1997
------------ ------------
Deferred tax assets:
Alternative minimum tax credit carryforwards.................... $ 713,000 $ 885,000
Deferred rent................................................... 540,000 640,000
Store closing, accrued vacation and other accruals for financial
reporting purposes............................................ 479,000 438,000
Other -- 53,000
------------ ------------
Total deferred tax assets................................... 1,732,000 2,016,000
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Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation.................................................. 410,000 206,000
Pre-opening and other construction costs capitalized for
financial reporting purposes.................................. 237,000 165,000
Other........................................................... 113,000 --
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Total deferred tax liabilities.............................. 760,000 371,000
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Net deferred tax asset...................................... $ 972,000 $ 1,645,000
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The Company has alternative minimum tax credit carryforwards for federal and
state reporting purposes totaling approximately $885,000 which do not expire.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the level of historical taxable income
and projections for future taxable income, management believes it is more likely
than not the Company will realize the net deferred tax assets. In fiscal year
1996, the Company recognized a decrease in the valuation allowance of $215,000
related to the expected use of alternative minimum tax credit carryforwards.
There was no valuation allowance established during fiscal year 1997.
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company established a qualified savings plan
under Section 401(k) of the Internal Revenue Code. Employees who have completed
one year of service and are 21 years of age are eligible to participate.
Eligible employees may contribute up to 15% of annual compensation, subject to
limitations. The Company may make discretionary contributions to the plan. The
Company made no contributions to the plan during fiscal years 1996 or 1997.
(11) CONTINGENCIES
The Company is involved at times in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(12) SUBSEQUENT EVENT (UNAUDITED)
On December 7, 1998 the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Archibald Candy Corporation ("Archibald"),
pursuant to which the Company merged with and became a wholly-owned subsidiary
of Archibald. The outstanding shareholders of the Company's preferred and common
stock were paid amounts in cash as prescribed in the Agreement. Also on that
date, the Company's outstanding borrowings on the debt facility were repaid in
full.
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