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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2002.
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

ý ~~QUARTERLY~~Commission ~~REPORT~~File ~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~Number 022-28628

For the Quarterly Period Ended May 25, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 333-33751

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

Illinois (State of incorporation)		36-0743280 (IRS Employer Identification No.)
Delaware (State or other jurisdiction of incorporation or organization)		03-0485115 (I.R.S. Employer Identification No.)
1137 West Jackson Boulevard Chicago, Illinois (Address of principal executive offices)		60607 (zip code)
1137 West Jackson Boulevard Chicago, Illinois 60607 (Address of principal executive offices)		60607 (Zip Code)

~~(312) 243-2700 (~~ Registrant's telephone number, including area code): (312) 243-2700

~~Indicate by~~ ~~check~~Securities ~~whether~~registered ~~the~~pursuant ~~registrant (1) has filed all reports required~~ to ~~be filed by~~ Section ~~13 or 15~~12(db) 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 ý No o None

~~As of~~ ~~July 15,~~Securities ~~2002,~~registered ~~the~~pursuant ~~number~~to ofSection 12(g) ~~shares outstanding~~ of the ~~registrant's~~Act: ~~Common Stock was 4,210, all of which were held by Fannie May Holdings, Inc.~~ None

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

~~FORM~~ Indicate by ~~10-Q~~ check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o

~~FOR~~ As of ~~THE~~January 21, ~~QUARTER~~2003, ~~ENDED~~the ~~MAY~~number 25of shares outstanding of the registrant's common stock was 276,157. ~~2002~~

~~INDEX~~ ARCHIBALD CANDY CORPORATION FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2002 INDEX

			Page No.	~~Page No.~~
PART I—FINANCIAL INFORMATION:
ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)
	CONSOLIDATED BALANCE SHEETS	~~CONSOLIDATED BALANCE SHEETS~~	3	1
	CONSOLIDATED STATEMENTS OF OPERATIONS	~~CONSOLIDATED STATEMENTS OF OPERATIONS~~	4	2
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~	5	3
	CONSOLIDATED STATEMENTS OF CASH FLOWS	~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~	6	4
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~	7	5
ITEM 2—MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS
ITEM 2—MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
		OF OPERATIONS		18
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS			32
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS				23
ITEM 4—CONTROLS AND PROCEDURES			32
PART II—OTHER INFORMATION:
ITEM 3—DEFAULTS UPON SENIOR SECURITIES				24
ITEM 1—LEGAL PROCEEDINGS			33
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K				25
ITEM 2—CHANGES IN SECURITIES AND USE OF PROCEEDS			33
SIGNATURES				26
ITEM 3—DEFAULTS UPON SENIOR SECURITIES			33
ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			33
ITEM 5—OTHER INFORMATION			33
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K			34
SIGNATURES			35

PART I—FINANCIAL INFORMATION:

ITEM 1—FINANCIAL STATEMENTS

Archibald Candy Corporation ~~(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)~~ Consolidated Balance Sheets (In thousands, except per share ~~data~~amounts, unaudited)

			May 25, 2002			August 25, 2001
			Reorganized Company			Predecessor Company
			(Unaudited)
			Nov. 30, 2002			Aug. 31, 2002
ASSETS
Assets
Current assets:
	Cash and cash equivalents		$	34,~~396~~986		$	23,~~346~~356
	Accounts receivable, net			1,241			1,452
	Restricted cash			—			500
	Inventories			28,209			31,840
	Accounts receivable, net			4,384			1,074
	Prepaid expenses and other current assets			3,621			3,133
	Inventories, net			41,702			27,848
Total current assets				36,467			38,771
	Prepaid expenses and other current assets			4,353			2,297
Property, plant, and equipment, net				24,908			34,398
Total current assets				55,425			35,075
Goodwill, net				57,159			58,465
Property, plant, and equipment, net				59,971			24,862
Noncompete agreements and other intangibles, net				41			685
Goodwill				—			56,726
Deferred financing fees, net				5,298			6,224
Other intangible assets				17,025			36
Investment in joint venture				2,293			1,988
Reorganization intangible				4,401			—
Other assets				1,734			1,580
Deferred financing fees				1,097			—
Total assets			$	127,900		$	142,111
Investment in joint venture				2,666			2,275
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Other assets				417			1,520
Total assets			$	141,002		$	120,494
Liabilities and shareholders' equity (deficit)
Current liabilities:
	Revolving line of credit		$	1025,~~364~~338		$	1920,~~472~~000
	Senior secured notes			170,000			—
	Accounts payable			18,040			11,159
	Accounts payable			10,712			16,821
	Accrued liabilities			5,381			3,399
	Accrued liabilities			2,933			3,814
	Payroll and related liabilities			2,405			2,091
	Payroll and related liabilities			2,678			2,466
	Accrued interest			623			149
	Accrued interest			15,981			3,002
	Current portion of capital lease obligations			63			61
	Current portion of capital lease obligations			82			47
	Liabilities subject to compromise			—			190,130
Total current liabilities				~~212~~51,~~750~~850			45226,~~622~~989
Due to affiliate				40—			40
Senior secured notes				—			170,000
Deferred taxes				12,768			—
Deferred rent				—			885
Secured subordinated notes				50,000			—
Pension liability				1,378			1,038
Term loan agreement				10,000			—
Capital lease obligations, less current portion				115			130
Pension liability				6,085			4,285
Shareholder's equity (deficit):
Capital lease obligations, less current portion				84			100
Shareholders' equity (deficit):
	Common stock, $0.01 par value:
		Authorized — 25,000 shares
		Authorized—300,000 shares and 25,000 shares, respectively
		Issued and outstanding — 4,210 shares		—			—
		Issued and outstanding—276,157 shares and 4,210 shares, respectively		3			—
	Additional paid-in-capital			1813,~~700~~081			18,700
	Accumulated deficit			(~~105~~2,~~237~~889	)		(94127,~~106~~259	)
	Other comprehensive income (loss)			~~154~~20			(~~198~~2,361	)
Total shareholder's deficit				(86,383	)		(75,604	)
Total shareholders' equity (deficit)				10,215			(110,920	)
Total liabilities and shareholder's deficit			$	127,900		$	142,111
Total liabilities and shareholders' equity (deficit)			$	141,002		$	120,494

See accompanying notes.

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) Consolidated Statements of Operations (Unaudited) (In thousands)

	Three Months Ended						Nine Months Ended
	May 25, 2002			May 26, 2001			May 25, 2002			May 26, 2001
Net sales	$	37,325		$	57,902		$	160,913		$	212,943
Cost of sales, excluding depreciation		16,243			25,706			66,556			85,248
Cost of sales, nonrecurring(1)		—			2,059			—			4,498
Total cost of sales		16,243			27,765			66,556			89,746
Gross profit		21,082			30,137			94,357			123,197
Selling, general, and administrative expenses, excluding depreciation and amortization		20,701			31,508			78,129			100,802
Depreciation and amortization expense		1,973			3,293			6,346			9,876
Amortization of goodwill and other intangibles		1,054			1,202			3,180			3,306
Restructuring expense(2)		1,328			8,100			1,328			8,100
Share of loss in joint venture		159			82			337			187
Management fees and other fees		77			132			114			427
Operating income (loss)		(4,210	)		(14,180	)		4,923			499
Other (income) and expense:
Interest expense		4,487			4,686			13,770			14,617
Interest income		—			—			—			(2	)
Other income and expense		28			13			(63	)		(100	)
Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries(3)		—			—			2,258			—
Loss before income taxes		(8,725	)		(18,879	)		(11,042	)		(14,016	)
Provision for income taxes		30			4			89			78
Net loss	$	(8,755	)	$	(18,883	)	$	(11,131	)	$	(14,094	)

See accompanying notes.

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (In thousands)

	Three Months Ended						Nine Months Ended
	May 25, 2002			May 26, 2001			May 25, 2002			May 26, 2001
Net loss	$	(8,755	)	$	(18,883	)	$	(11,131	)	$	(14,094	)
Other comprehensive income (loss):
Foreign currency translation adjustment		312			(436	)		352			(485	)
Comprehensive income (loss)	$	(8,443	)	$	(19,319	)	$	(10,779	)	$	(14,579	)

See accompanying notes.

~~Archibald~~ ~~Candy~~ ~~Corporation~~ (A ~~Wholly~~ Archibald ~~Owned~~Candy ~~Subsidiary of Fannie May Holdings, Inc.)~~ Corporation Consolidated Statements of ~~Cash Flows~~ Operations (~~Unaudited) (~~In thousands, unaudited)

				Nine Months Ended
			Reorganized Company			Predecessor Company			Predecessor Company
				May 25, 2002			May 26, 2001
			One Month Ended Nov. 30, 2002			Two Months Ended Oct. 31, 2002			Three Months Ended Nov. 24, 2001
OPERATING ACTIVITIES
Net sales			$	12,370		$	20,312		$	42,375
Net loss				$	(11,131	)	$	(14,094	)
Cost of sales, excluding depreciation and amortization				5,126			8,877			17,492
Adjustments to reconcile net loss to net cash provided by operating activities:
Cost of sales, nonrecurring (Note 5)				1,039			—			—
	Depreciation and amortization				9,526			13,182
	Total cost of sales			6,165			8,877			17,492
	Share of loss in joint venture				337			187
Gross profit				6,205			11,435			24,883
	Restructuring expense				—			9,500
Selling, general, and administrative expenses				7,302			13,821			29,551
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries				2,258			—
Depreciation and amortization expense				564			995			2,505
	Changes in operating assets and liabilities:
Amortization of goodwill and other intangibles				72			283			1,030
		Accounts receivable, net			211			(1,542	)
Management fees and other fees				12			9			28
		Inventories			1,444			8,164
Share of loss in joint venture				35			99			128
		Prepaid expenses and other current assets			(1,047	)		332
Operating loss				(1,780	)		(3,772	)		(8,359	)
		Other assets			(312	)		(670	)
Other (income) and expense:
		Accounts payable and accrued liabilities			11,463			328
	Interest expense			613			355			4,797
		Restructuring reserve			—			(1,328	)
	Interest income			(1	)		(3	)		(5	)
Net cash provided by operating activities					12,749			14,059
	Gain on debt discharge (Note 2)			—			124,900			—
INVESTING ACTIVITIES
	Effect of deconsolidation of Sweet Factory Group, Inc. and its subsidiaries (Note 3)			—			—			2,258
Purchase of Property, Plant, and Equipment					(1,987	)		(4,087	)
	Other income (expense)			(6	)		99			(24	)
Disposals of Property, Plant, and Equipment					319
Income (loss) before reorganization costs and income taxes				(2,398	)		120,875			(15,433	)
Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries					(336	)		—
Reorganization costs (Note 4)				407			1,258			—
Net cash used in investing activities					(2,004	)		(4,087	)
Income (loss) before income taxes				(2,805	)		119,617			(15,433	)
FINANCING ACTIVITIES
Provision for income taxes				84			6			3
Net repayments under revolving line of credit					(9,108	)		(7,200	)
Net income (loss)			$	(2,889	)	$	119,611		$	(15,436	)
Principal payments of capital lease obligations					(20	)		(35	)
Costs related to financing					(919	)		(163	)
Net cash used in financing activities					(10,047	)		(7,398	)
Effect of exchange rates on cash					352			(485	)
Net increase in cash and cash equivalents					1,050			2,089
Cash and cash equivalents beginning of period					2,346			3,120
Cash and cash equivalents end of period				$	3,396		$	5,209
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
	Interest			$	788		$	10,271
Non-cash investing and financing activities:
	Capital lease obligations recorded			$	—		$	132

See accompanying notes.

~~Archibald~~ ~~Candy~~ ~~Corporation~~ (A ~~Wholly Owned Subsidiary of Fannie May Holdings, Inc.)~~ ~~Notes~~Archibald toCandy Corporation Consolidated ~~Financial~~ Statements of Comprehensive Income (~~Unaudited~~Loss) ~~May 25~~ (In thousands, ~~2002~~ unaudited)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

		Reorganized Company			Predecessor Company		Predecessor Company
		Period Ended Nov. 30, 2002			Period Ended Oct. 31, 2002		Three Months Ended Nov. 24, 2001
Net income (loss)		$	(2,889	)	$	119,611	$	(15,436	)
Other comprehensive income:
	Foreign currency translation adjustment		20			317		35

Comprehensive income (loss)		$	(2,869	)	$	119,928	$	(15,401	)

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 and Laura Secord candies in over 440 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. ("Holdings").

The accompanying consolidated financial statements include the accounts of Archibald and its subsidiary, Archibald Candy (Canada) Corporation. For the periods prior to November 15, 2001, the consolidated financial statements also include the accounts of Sweet Factory Group, Inc. ("SFG") and its three subsidiaries: Sweet Factory, Inc., SF Properties, Inc. and SF Candy Company—see Note 2 below. All significant intercompany balances and transactions have been eliminated in consolidation.

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 25, 2001. Certain amounts in the 2001 financial statements have been reclassified to conform with the 2002 presentation.

Results of operations for the period from August 25, 2001 to May 25, 2002 are not necessarily indicative of the results that may be achieved for the entire year.

NOTE 2. SUBSEQUENT EVENTS

On June 12, 2002, Archibald and Holdings filed petitions in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") to commence a consolidated voluntary bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). Archibald and Holdings also have filed a Joint Plan of Reorganization (the "Archibald Plan"), with respect to which holders of approximately 83% in aggregate principal amount of Archibald's 101/4% senior secured notes have executed lock-up agreements agreeing to vote in favor of the Archibald Plan. The Archibald Plan, which is subject to the approval of the Bankruptcy Court, contemplates a significant deleveraging of Archibald's balance sheet and the elimination of approximately $17.5 million in annual interest payments. The Archibald Plan will require, among other things, the requisite votes under the Bankruptcy Code and must satisfy the requirements set forth in Section 1129 of the Bankruptcy Code. During the Chapter 11 proceedings, the Company does not currently expect any significant impact on its employees, customers or suppliers. Archibald Candy (Canada) Corporation, the wholly-owned subsidiary of Archibald that operates its Laura Secord business, has not filed a bankruptcy proceeding.

In connection with the Archibald bankruptcy proceeding, Archibald has entered into a Post-Petition Loan and Security Agreement and Guaranty dated as of June 12, 2002 (the "Archibald DIP Credit Facility") with Foothill Capital Corporation, as Arranger and Administrative Agent, the lenders party thereto and Holdings and Archibald Candy (Canada) Corporation as Guarantors. Pursuant to the Archibald DIP Credit Facility, the lenders have agreed to make available to Archibald

a ~~$45.0 million~~ ~~term loan and revolving credit facility. The proceeds of the Archibald DIP Credit Facility were used, in part, to pay-off the indebtedness outstanding under~~ Archibald's ~~revolving~~Candy ~~credit~~Corporation Consolidated ~~facility~~Statements ~~with~~of ~~The~~Cash ~~CIT~~Flows (In ~~Group/Business Credit~~thousands, ~~Inc.~~ ~~("CIT"~~unaudited)~~, and are being used to fund Archibald's working capital and capital expenditure needs during the bankruptcy proceedings.~~

Archibald and Holdings will continue to manage their properties and operate their business in accordance with the applicable provisions of the Bankruptcy Code. The proceeding has been designated as case number 02-11719.

			Reorganized Company			Predecessor Company			Predecessor Company
			One Month Ended Nov. 30, 2002			Two Months Ended Oct. 31, 2002			Three Months Ended Nov. 24, 2001
Operating activities
Net income (loss)			$	(2,889	)	$	119,611		$	(15,436	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Depreciation and amortization			636			1,278			3,535
	Share of loss in joint venture			35			99			128
	Effect of deconsolidation of Sweet Factory Group, Inc. and its subsidiaries			—			—			2,258
	Extraordinary gain			—			(124,900	)		—
Changes in operating assets and liabilities:
		Accounts receivable, net		61			(3,371	)		(4,246	)
		Inventories		(896	)		(6,958	)		(8,626	)
		Prepaid expenses and other current assets		528			(2,805	)		(1,097	)
		Other assets		(25	)		311			(145	)
		Accounts payable and accrued liabilities		1,530			5,587			15,345

Net cash used in operating activities				(1,020	)		(11,148	)		(8,284	)
Investing activities
Purchase of property, plant, and equipment				(385	)		(629	)		(777	)
Effect of deconsolidation of Sweet Factory Group, Inc. and its subsidiaries				—			—			(336	)

Net cash used in investing activities				(385	)		(629	)		(1,113	)
Financing activities
Net increase in revolving line of credit				5,016			10,322			10,194
Payments of capital lease obligations				(14	)		—			(13	)
Costs related to loan agreements				(702	)		(427	)		(17	)

Net cash from financing activities				4,300			9,895			10,164
Effect of exchange rates on cash				20			97			35

Net increase (decrease) in cash and cash equivalents				2,915			(1,785	)		802
Cash and cash equivalents at beginning of period				2,071			3,856			2,346

Cash and cash equivalents at end of period			$	4,986		$	2,071		$	3,148

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest	$	2		$	489		$	415

~~Archibald's~~See ~~management~~accompanying has assessed the liquidity position of Archibald and Archibald Candy (Canada) Corporation in light of the Archibald and Holdings bankruptcy proceedings and the funds available under the Archibald DIP Credit Facility and believes that Archibald and Archibald Candy (Canada) Corporation will be able to fund their post-petition obligations until the Archibald Plan is confirmednotes.

NOTE 3. BANKRUPTCY FILING—SWEET FACTORY GROUP, INC. AND SUBSIDIARIES

On November 15, 2001, SFG and its three subsidiaries, Sweet Factory, Inc., SF Properties, Inc. and SF Candy Company, filed voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code. In connection with the Sweet Factory bankruptcy filings, Sweet Factory, Inc. entered into a Post-Petition Credit, Security and Guaranty Agreement (the "SF DIP Credit Facility") with CIT and SFG, SF Properties, Inc. and SF Candy Company, as guarantors. The SF DIP Credit Facility is for one year and provides for revolving loans at any time not to exceed the lesser of (1) $2.0 million and (2) a borrowing base comprised of a percentage of Sweet Factory, Inc.'s eligible inventory plus a $1.0 million overadvance, subject to certain reserves. The SF DIP Credit Facility provides that borrowings thereunder accrue interest at a variable rate equal to the "prime rate" announced from time to time by J.P. Morgan Chase & Co. plus 1.5%.

On March 4, 2002, SFG and its subsidiaries filed a Plan of Reorganization with the Bankruptcy Court. On June 5, 2002, SFG and its subsidiaries entered into an Asset Purchase Agreement with RDR Group, a California corporation ("RDR"), pursuant to which RDR has agreed to purchase from SFG and its subsidiaries substantially all of the assets used in connection with their business for $4.5 million in cash, subject to the approval of the Bankruptcy Court. As a result of the overbidding procedure conducted by the Bankruptcy Court on June 17, 2002, RDR increased the purchase price to $6.1 million in order to be the winning bidder. The Company's management expects that the sale of the Sweet Factory assets to RDR will be consummated on or about July 30, 2002. Pursuant to SFG's Plan of Reorganization, Archibald expects to receive approximately $3.7 million in cash out of the proceeds of the sale. The remaining $2.4 million in proceeds will be applied to pay-off the SF DIP Credit Facility, to make cure payments to the landlords of those store leases that are to be assumed by RDR, to pay administrative expenses and to make a payment to the unsecured creditors' class. Following the consummation of the sale to RDR, SFG and its subsidiaries will be liquidated. SFG's Plan of Reorganization was confirmed on July 11, 2002 by the Bankruptcy Court.

SFG and its subsidiaries' financial results are included in the Company's consolidated results through November 15, 2001. Accounting principles generally accepted in the United States generally require that any entity that files for protection under the U.S. Bankruptcy Code whose financial statements were previously consolidated with those of its parent must be prospectively deconsolidated from the parent with the investment accounted for using the cost method. The effects on the Company's balance sheet of this deconsolidation and use of the cost method are that: (i) the Company's investment in SFG is included as a single amount and (ii) the Company's receivable from SFG is no longer eliminated. The effect on the Company's income statement is that beginning November 15, 2001, the SFG operating results are not included in the consolidated results. At November 15, 2001, the Company's investment in SFG was a negative $17.1 million, and the receivable had a balance of $19.4 million. Because of SFG's and its subsidiaries' bankruptcies, it was determined that the receivable should be reserved for financial reporting purposes. That write-off was first netted

~~against~~ ~~the~~ ~~negative~~ Archibald ~~investment~~Candy ~~balance,~~Corporation Notes ~~with~~to ~~the~~Consolidated ~~remaining~~Financial ~~$2.3~~Statements November ~~million~~30, ~~recorded as a non-operating expense.~~ 2002

~~Management has~~1. Basis ~~assessed the liquidity position~~ of SFG and its subsidiaries as a result of the bankruptcy filings and available debtor in possession financing and believes that SFG and its subsidiaries will be able to fund their post-petition obligations until the sale to RDR is consummated and SFG and its subsidiaries are liquidated. Presentation

~~The condensed~~Archibald ~~consolidated~~Candy ~~financial~~Corporation, ~~information~~a ~~set~~Delaware ~~forth~~corporation ~~below~~("Archibald") ~~for SFG~~ and its subsidiaries ~~has~~(collectively, ~~been~~the ~~prepared~~"Company") onare amanufacturers ~~going~~and ~~concern~~retailers ~~basis which contemplates continuity~~ of ~~operations,~~boxed ~~realization~~chocolates ~~of assets,~~ and ~~liquidation~~other ofconfectionery ~~liabilities~~items. inThe ~~the~~Company ~~ordinary~~sells ~~course~~its ofFannie ~~business.~~May, AsFanny aFarmer ~~result~~and ofLaura ~~the~~Secord ~~bankruptcy~~candies ~~filings~~in of446 ~~SFG~~Company-operated ~~and~~stores ~~its subsidiaries~~ and ~~related~~in ~~events~~approximately 10,000 ~~there~~third-party isretail ~~no assurance~~outlets ~~that~~as ~~the~~well ~~carrying~~as ~~amounts~~through ofcorporate ~~assets~~gift, ~~will~~mail beorder ~~realized~~and orfundraising ~~that~~programs ~~liabilities~~in ~~will~~the beUnited ~~liquidated~~States orand ~~settled~~Canada. ~~for~~The ~~the~~Company ~~amounts~~is ~~recorded.~~the Insuccessor ~~addition,~~in ainterest ~~plan~~to ofArchibald ~~reorganization~~Candy Corporation, oran ~~rejection~~Illinois ~~thereof, could~~corporation ~~change~~("Archibald ~~the~~Illinois" ~~amounts~~or ~~reported in~~ the ~~financial~~"Predecessor ~~statements~~Company"). ofArchibald ~~SFG~~Illinois ~~and~~was ~~its subsidiaries and cause~~ a ~~material~~wholly ~~decrease~~owned insubsidiary ~~the carrying amount~~ of ~~the~~Fannie ~~net~~May ~~investment~~Holdings, Inc. ("Holdings").

On June 12, 2002, Archibald Illinois and Holdings filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and, on November 1, 2002, their Second Amended Joint Plan of Reorganization (the "Archibald Plan") became effective (see Note 2 to the Consolidated Financial Statements). Accordingly, the consolidated financial statements of the Company during the bankruptcy proceedings are presented in accordance with American Institute of Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").

Due to the reorganization and implementation of fresh-start reporting, consolidated financial statements for the Company (period starting November 1, 2002) are not comparable to those of the Predecessor Company. The statements reported for the Company relate to all operations post-emergence from bankruptcy and the statements reported for Predecessor Company relate to all operations pre-emergence from bankruptcy.

The accompanying consolidated financial statements include the accounts of Archibald and its subsidiaries, Laura Secord Holdings Corp. and Archibald Candy (Canada) Corporation. For the periods prior to November 15, 2001, the consolidated financial statements also include the accounts of Sweet Factory Group, Inc. ("SFG") and its three subsidiaries: Sweet Factory, Inc., SF Properties, Inc. and SF Candy Company—see Note 3 below. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company's results of operations for the period from November 1, 2002 to November 30, 2002 are not necessarily indicative of the results that may be achieved for the entire year.

2. Reorganization—Archibald

On June 12, 2002, Holdings and Archibald Illinois filed petitions with the U.S. Bankruptcy Court for the District of Delaware to commence a consolidated voluntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, Holdings and Archibald Illinois continued to manage their properties and operate their businesses in accordance with the applicable provisions of the Bankruptcy Code. In connection with the bankruptcy proceeding, Holdings and Archibald Illinois filed the Archibald Plan, which was confirmed by the bankruptcy court on September 25, 2002 and became effective as of November 1, 2002. Pursuant to the Archibald Plan, (i) all of the outstanding equity interests of Holdings and Archibald Illinois were cancelled; (ii) Holdings merged with and into Archibald Illinois; and (iii) Archibald Illinois merged with and into a newly-formed Delaware corporation, renamed Archibald Candy Corporation. As a result, Archibald acquired all of the assets of Holdings and Archibald Illinois. As part of the Archibald Plan, Archibald entered into a new $50 million term loan and revolving credit facility with Foothill Capital Corporation, as administrative agent, to finance its working capital and capital expenditures and to pay the costs of the reorganization. The proceeds of the credit facility also were used, in part, to pay-off the indebtedness outstanding under Archibald Illinois' debtor-in-possession facility.

~~Following~~In ~~are~~addition, pursuant to the ~~condensed~~Archibald ~~consolidated~~Plan, ~~statements~~all of ~~operations~~the $170 million outstanding principal amount of 101/4% senior secured notes due 2004 issued by Archibald Illinois, together with the accrued and ~~balance~~unpaid ~~sheet~~interest ~~data~~thereon, ~~for~~were ~~SFG~~cancelled and ~~its~~Archibald ~~subsidiaries~~issued ($50 million of 10% secured subordinated notes due 2007 to the holders of the cancelled notes. Also, pursuant to the Archibald Plan, in ~~thousands~~consideration of the cancellation of the claims of the holders of the cancelled notes and certain general unsecured creditors of Archibald Illinois, Archibald issued (or expects to issue upon completion of the Archibald Plan): to such claimants an aggregate of 276,290 shares of Archibald's common stock, par value $.01 per share, which represents 100% of Archibald's issued and outstanding common stock.

	For the quarter ended May 25, 2002			For the quarter ended May 26, 2001			For the period of Aug. 26, 2001 thru Nov. 15, 2001			For the nine months ended May 25, 2002			For the nine months ended May 26, 2001
Net sales	$	7,718		$	14,204		$	8,867		$	27,272		$	47,716
Operating loss		(1,196	)		(11,796	)		(3,172	)		(5,210	)		(14,618	)
Loss before income taxes		(1,208	)		(11,782	)		(3,175	)		(5,233	)		(14,607	)
Net loss		(1,211	)		(11,788	)		(3,178	)		(5,236	)		(14,622	)

In accordance with SOP 90-7, the Company adopted "fresh-start accounting" as of November 1, 2002. In adopting fresh-start reporting, the Company was required to determine its enterprise value, which represents the fair value of the entity before considering its interest bearing debt. The financial advisors to the Company determined that the Company's enterprise value as of November 1, 2002 was $93.4 million and the reorganization equity value was $13.1 million.

~~Operating~~The ~~loss~~adjustments ~~includes~~to ~~restructuring~~reflect ~~expenses~~the adoption of ~~$701~~fresh-start ~~and $1~~accounting,~~611~~ ~~for~~including the ~~quarter~~adjustments to record (i) inventories, (ii) prepaid expenses and ~~year-to-date~~other ~~periods~~current ~~ended~~assets, (iii) property, ~~May~~plant and equipment, (iv) 25other assets, ~~2002~~(v) intangible assets, ~~respectively.~~and ~~Operating~~(vi) pension ~~loss~~liability ~~includes~~at ~~$8,100~~their ~~of restructuring~~fair ~~expenses~~market values, and (vii) and the establishment of $~~1,400~~4.4 million of ~~cost~~reorganization value in excess of ~~sales~~amounts allocable to net identifiable assets ("reorganization intangible"), ~~nonrecurring~~have ~~for~~been reflected in the ~~quarter~~following ~~and~~consolidated balance ~~year~~sheet reconciliation as of November 1, 2002 as fresh-start adjustments. In addition, the Company's consolidated balance sheet was further adjusted to~~-date~~ ~~periods~~eliminate ~~ended~~existing ~~May~~liabilities subject to compromise and equity and to reflect the aforementioned $93.4 ~~26,~~million ~~2001~~enterprise value.

	May 25, 2002			Nov 15, 2001			Aug. 25, 2001
Current assets	$	3,103		$	2,620		$	4,174
Property, plant and equipment		4,183			5,316			5,699
Other assets		749			772			892
Total assets	$	8,035		$	8,708		$	10,765
Current liabilities	$	7,107		$	6,079		$	4,069
Payable to Archibald Candy Corporation		19,838			19,383			19,761
Other liabilities		273			371			885
Total stockholder's deficit		(19,183	)		(17,125	)		(13,950	)
Total liabilities & stockholder's deficit	$	8,035		$	8,708		$	10,765

The Company's emergence from bankruptcy did not create a new tax reporting entity. Accordingly, the adjustments required to adopt fresh start accounting are not applicable for tax reporting. The reorganization of the Company will result in a discharge of debt under the tax code. The Company believes the discharge will substantially reduce or eliminate outstanding net operating loss carryforwards by the conclusion of the August 30, 2003 fiscal year. If any net operating loss carryforwards are remaining, they will be subject to annual limitations in accordance with section 382 of the tax code due to the change in control. The deferred tax liability recorded of $12.8 million is based on the estimated impact of the reorganization. This estimate is subject to change upon completion of our analysis and the filing of all related tax returns.

Following are the condensed pro forma consolidated statement of operations and balance sheet data of the Company, assuming the deconsolidation of SFG and its subsidiaries (in thousands):

	For the quarter ended May 26, 2001			For the nine months ended May 25, 2002			For the nine months ended May 26, 2001
Net sales	$	43,698		$	152,046		$	165,227
Operating income (loss)		(2,384	)		8,095			15,117
Income (loss) before income taxes		(7,097	)		(7,867	)		591
Net income (loss)		(7,095	)		(7,953	)		528

	August 25, 2001
Current assets	$	34,598
Property, plant and equipment		28,699
Investment in and amounts due from SFG		5,811
Other assets		68,050
Total assets	$	137,158
Current liabilities	$	41,553
Other liabilities		171,209
Total stockholder's deficit		(75,604	)
Total liabilities & stockholder's deficit	$	137,158

~~NOTE~~ Below is 4.an ~~INVENTORIES~~ unaudited balance sheet as of November 1, 2002 showing the adjustments thereto to give effect to the reorganization and fresh-start adjustments (in thousands):

Inventories are stated at the lower of cost or market. Inventories are valued primarily at first in, first out (FIFO).

		Predecessor Company Nov. 1, 2002			Reorganization			Fresh-Start Adjustments			Reorganized Company Nov. 1, 2002
Assets
Current Assets:
	Cash and cash equivalents	$	2,071		$	—		$	—		$	2,071
	Accounts receivable, net		4,445			—			—			4,445
	Inventories, net		34,806			—			6,000	(5)		40,806
	Prepaid expenses and other current assets		5,023			—			(102	)(6)		4,921

Total current assets			46,345			—			5,898			52,243
Property, plant, equipment, net			24,576						35,535	(5)		60,111
Goodwill			56,446			—			(56,446	)(7)		—
Other intangibles			33			—			17,031	(7)		17,064
Reorganization intangible			—			—			4,401	(9)		4,401
Deferred financing fees			427			701	(4)		—			1,128
Investment in joint venture			2,529			—			—			2,529
Other assets			1,210			—			(816	)		394

Total Assets		$	131,566		$	701		$	5,603		$	137,870

Liabilities and shareholder's equity (deficit)
Current Liabilities:
	Revolving line of credit	$	30,322		$	(10,000	)(3)	$	—		$	20,322
	Accounts payable		17,323			—			—			17,323
	Accrued liabilities		2,884			3,136	(1)		—			6,020
	Payroll and related liabilities		2,177			—			—			2,177
	Accrued interest		12			—			—			12
	Current portion of capital lease obligations		74			—			—			74
	Liabilities subject to compromise		190,419			(190,419	)(1)		—			—

Total current liabilities			243,211			(197,283	)		—			45,928
Due to affiliate			39			—			(39	)(6)		—
Secured subordinated notes			—			50,000	(2)		—			50,000
Term loan agreement			—			10,000	(3)		—			10,000
Pension liability			4,351			—			1,651	(5)		6,002
Deferred taxes			—			—			12,768	(10)		12,768
Capital lease obligations, less current portions			88			—			—			88
Shareholder's equity (deficit):
	Common Stock		—			3	(2)		—			3
	Additional paid-in-capital		18,700			13,081	(2)		(18,700	)(8)		13,081
	Accumulated deficit		(132,558	)		124,900	(1)(2)		7,658	(8)		—
	Other Comprehensive income (loss)		(2,265	)		—			2,265	(5)(8)		—

Total shareholder's equity (deficit)			(116,123	)		137,984			(8,777	)		13,084

Total liabilities and shareholder's equity (deficit)		$	131,566		$	701		$	5,603		$	137,870

Inventories at May 25, 2002 and August 25, 2001 are comprised of the following:

	May 25, 2002		August 25, 2001
Raw materials	$	12,703	$	12,901
Work in process		267		225
Finished goods		15,239		18,714
	$	28,209	$	31,840

NOTE 5. INCOME TAXES

The provision for income taxes differs from the amount of income tax benefit computed by applying the United States federal income tax rate due to the benefit of the net operating losses that were not recognized.

NOTE 6. CONTINGENT LIABILITY

On January 15, 2002, the Company retained an investment banking firm to assist in the development of a plan to restructure its debt. As part of the Chapter 11 bankruptcy filing, a $2.0 million claim relating to the investment banking firm has been classified as disputed and unsecured. The Company has not recorded a liability associated with this claim.

NOTE 7. GUARANTOR SUBSIDIARIES

The Company's obligations under the Senior Notes are fully and unconditionally guaranteed on a senior secured, joint and several basis by each of the Company's subsidiaries (collectively, the "Guarantor Subsidiaries"). The Company, directly or indirectly, wholly owns each of the Guarantor Subsidiaries. None of Archibald's subsidiaries is subject to any restriction on its ability to pay dividends or make distributions to Archibald. The following consolidating financial information illustrates the composition of Archibald 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 Archibald's management has determined that such additional information would not be useful in assessing the financial composition of the Guarantor Subsidiaries.

(1): To reflect the discharge of the senior secured notes and accrued interest thereon and other unsecured claims.
(2): To reflect the issuance of new common stock and additional paid-in capital of $13.1 million and new secured subordinated notes of $50.0 million.
(3): To reflect the refinancing of the debtor-in-possession facility with a revolving credit and term loan facility.
(4): To reflect deferred debt issuance costs related to the new revolving credit and term loan facility and new secured subordinated notes.
(5): To adjust inventories, property, plant and equipment and pension liability to fair market value.
(6): To write-off affiliate related receivables and payables.
(7): To write-off intangibles and establish new intangibles.
(8): To reflect the cancellation of the old common stock and additional paid-in capital and to reflect the elimination of the accumulated deficit.
(9): To record a reorganization intangible in an amount equal to the excess of reorganization equity value of the Company over net assets.
(10): To reflect the recording of deferred taxes associated with the net increase in the basis of assets for financial reporting versus tax purposes.

As a result ~~Archibald~~of ~~Candy~~the ~~Corporation (A~~bankruptcy ~~Wholly~~filing, ~~Owned~~no ~~Subsidiary~~principal ofor ~~Fannie~~interest ~~May~~payments ~~Holdings, Inc~~were made on any pre-petition debt.~~) Consolidating~~ ~~Balance~~Contractual ~~Sheet As~~interest ofexpense ~~May~~not recorded on certain pre-petition debt totaled $2.9 25million for the period from September 1, 2002 ~~(Unaudited) (In~~ ~~thousands)~~ to October 31, 2002.

		Archibald Candy Corporation			Guarantor Subsidiaries(a)		Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents	$	3,033		$	363	$	—		$	3,396
	Accounts receivables, net		1,088			153		—			1,241
	Inventories		25,047			3,162		—			28,209
	Prepaids and other current assets		2,781			840		—			3,621
Total current assets			31,949			4,518		—			36,467
Property, plant, and equipment, net			16,115			8,793		—			24,908
Intercompany			26,101			782		(9,303	)		17,580
Investment in subsidiaries			(13,771	)		—		(3,354	)		(17,125	)
Other assets			63,763			2,307		—			66,070
Total assets		$	124,157		$	16,400	$	(12,657	)	$	127,900
Liabilities and shareholder's equity (deficit)
Current liabilities:
	Revolving line of credit	$	10,364		$	—	$	—		$	10,364
	Senior secured notes		170,000			—		—			170,000
	Accounts payable		8,927			1,785		—			10,712
	Other current liabilities		20,289			1,385		—			21,674
Total current liabilities			209,580			3,170		—			212,750
Other noncurrent liabilities			1,533			9,303		(9,303	)		1,533
Total shareholder's equity (deficit)			(86,956	)		3,927		(3,354	)		(86,383	)
Total liabilities and shareholder's equity		$	124,157		$	16,400	$	(12,657	)	$	127,900

The gain recognized by the Predecessor Company prior to emergence from bankruptcy is as follows (in thousands):

Liabilities subject to compromise:
	Senior secured notes	$	169,500
	Accrued interest		16,775
	Accounts payable		4,144

	Total		190,419
Less:
	Payments of liabilities subject to compromise		2,435
	Value of secured subordinated notes		50,000
	Value of common stock		13,084

Gain on debt discharge		$	124,900

The accounts payable amount above may be subject to further adjustment depending on further development with respect to the reconciliation of claims and the resolution of disputed claims.

~~Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc~~ 3.~~) Consolidating~~ Bankruptcy ~~Balance~~Filing—Sweet ~~Sheet~~Factory ~~As of August 25, 2001 (In thousands)~~

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents	$	1,116		$	1,230		$	—		$	2,346
	Accounts receivables, net		1,350			102			—			1,452
	Inventories		26,415			5,425			—			31,840
	Prepaids and other current assets		2,213			920			—			3,133
Total current assets			31,094			7,677			—			38,771
Property, plant, and equipment, net			19,551			14,847			—			34,398
Intercompany			19,031			(19,031	)		—			—
Investment in subsidiaries			(2,008	)		—			2,008			—
Other assets			66,049			2,893			—			68,942
Total assets		$	133,717		$	6,386		$	2,008		$	142,111
Liabilities and shareholder's equity (deficit)
Current liabilities:
	Revolving line of credit	$	19,472		$	—		$	—		$	19,472
	Accounts payable		11,469			5,352			—			16,821
	Other current liabilities		7,392			1,937			—			9,329
Total current liabilities			38,333			7,289			—			45,622
Long-term debt, less current portion			170,130			9,303			(9,303	)		170,130
Other noncurrent liabilities			1,078			885			—			1,963
Total shareholder's equity (deficit)			(75,824	)		(11,091	)		11,311			(75,604	)
Total liabilities and shareholder's equity		$	133,717		$	6,386		$	2,008		$	142,111

On November 15, 2001, Sweet Factory Group, Inc. ("SFG") and its three subsidiaries; Sweet Factory, Inc., SF Properties, Inc. and SF Candy Company, filed voluntary petitions in the U.S. Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code. On August 6, 2002, the assets of SFG and its subsidiaries were sold for $6.6 million to RDR Group, a California corporation. The proceeds of the sale were applied to pay-off the debtor-in-possession financing provided by The CIT Group/Business Credit, Inc. ("CIT"), to pay Archibald Illinois' secured claim, to make cure payments to the landlords under the assumed store leases that were assumed by RDR Group, to pay administrative expenses, to make a payment to the holders of Archibald Illinois' 10¹/4% senior secured notes and to make a payment to the unsecured creditors' class. On October 29, 2002, SFG and its subsidiaries were dissolved.

SFG and its subsidiaries' financial results are included in the Predecessor Company's consolidated results through November 15, 2001. Accounting principles generally accepted in the United States generally require that any entity that files for protection under the U.S. Bankruptcy Code whose financial statements were previously consolidated with those of its parent must be prospectively deconsolidated from the parent with the investment accounted for using the cost method. The effects on the Predecessor Company's balance sheet of this deconsolidation and use of the cost method are that: (i) the Predecessor Company's investment in SFG is included as a single amount and (ii) the Predecessor Company's receivable from SFG is no longer eliminated. The effect on the Predecessor Company's income statement is that beginning November 15, 2001, the SFG operating results are not included in the consolidated results. At November 15, 2001, the Predecessor Company's investment in SFG was a negative $17.1 million, and the receivable had a balance of $19.4 million. Because of SFG's and its subsidiaries' bankruptcies, it was determined that the receivable should be reserved for financial reporting purposes. That write-off was first netted against the negative investment balance, with the remaining $2.3 million recorded as a non-operating expense. Upon the sale of SFG and its subsidiaries, the Predecessor Company received net proceeds of $1.6 million.

Following are the condensed consolidated statements of operations and balance sheet data for SFG and its subsidiaries (in thousands):

	For the period of August 26, 2001 through November 15, 2001
Net sales	$	8,867
Operating loss		(3,172	)
Loss before income taxes		(3,175	)
Net loss		(3,178	)

Following are the condensed pro forma consolidated statement of operations dat a for the Predecessor Company, assuming the deconsolidation of SFG and its subsidiaries (in thousands):

	For the three months ended Nov. 24, 2001
Net sales	$	33,508
Operating loss		(5,187	)
Loss before income taxes		(12,258	)
Net loss		(12,258	)

4. Reorganization Costs

Although Archibald has emerged from Chapter 11 bankruptcy, reorganization costs are still being incurred related primarily to professional fees associated with establishing the new corporate structure and resolving all claims filed against the Predecessor Company.

5. Inventories

Inventories are stated at the lower of cost or market. Inventories are valued primarily at either average or first in, first out (FIFO) cost. Supply inventories are relieved monthly based on an estimated gross margin and adjusted to actual upon the taking of an annual physical inventory at the end of July. In fiscal 2002, we recorded a

reserve for ~~Archibald~~supply ~~Candy~~inventories ~~Corporation (A~~of ~~Wholly~~approximately ~~Owned~~$3.0 million. ~~Subsidiary~~This ofreserve ~~Fannie~~relates ~~May~~primarily ~~Holdings, Inc.) Consolidating~~to ~~Statement~~the discontinuance of ~~Operations~~certain product lines for ~~the~~which ~~Three~~we ~~Months~~had ~~Ended~~unique ~~May 25~~packaging, ~~2002 (Unaudited) (In~~and ~~thousands)~~other slow-moving and obsolete packaging and supply inventories. We will write-off those items which are deemed obsolete and periodically monitor the inventories for other potential slow moving and obsolete items. Inventories are comprised of the following:

			Archibald Candy Corporation			Guarantor Subsidiaries(a)			Eliminations			Consolidated
		Reorganized Company			Predecessor Company
Net sales			$	24,571		$	12,754		$	—		$	37,325
		November 30, 2002			August 31, 2002
Cost of sales, excluding depreciation				9,956			6,287			—			16,243
Raw materials		$	11,831		$	9,145
Gross profit				14,615			6,467			—			21,082
Work-in process			152			134
Selling, general, and administrative expenses excluding depreciation and amortization				14,685			6,016			—			20,701
Finished goods			29,719			18,569
Depreciation and amortization expense				1,611			362			—			1,973
		$	41,702		$	27,848
Amortization of goodwill and other intangibles				1,054			—			—			1,054
Share of loss in joint venture				—			159			—			159
Restructuring Expense				1,328			—			—			1,328
Management fees and other fees				77			—			—			77
Operating income				(4,140	)		(70	)		—			(4,210	)
Other (income) expense:
	Interest expense			4,487			195			(195	)		4,487
	Interest income			(195	)		—			195			—
	Other income and expenses			(64	)		92			—			28
Equity in earnings of subsidiaries				357			—			(357	)		—
Loss before income taxes				(8,725	)		(357	)		357			(8,725	)
Provision for income taxes				30			—			—			30
Net loss			$	(8,755	)	$	(357	)	$	357		$	(8,755	)

In accordance with fresh-start reporting, the Company adjusted inventories to fair value representing the estimated selling prices less the sum of the costs of disposal and a reasonable profit margin for the selling effort. As a result, the Company increased the basis of inventories by $6.0 million as of November 1, 2002. The cost of sales recorded as a result of this increase was $1.0 million for the one month ended November 30, 2002 and has been reflected as cost of sales, nonrecurring in the consolidated financial statements.

6. New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets" ("the Statements"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer being amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

In connection with the fresh-start accounting adjustments, the Company has applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003. Intangible assets were recorded based on the new valuation of the Company. As such all remaining goodwill from the Predecessor Company was written-off.

The pro forma impact of eliminating goodwill amortization on the consolidated statements of income is as follows:

	Three months ended November 24, 2001
Reported net loss	$	(15,436	)
Goodwill amortization		421

Adjusted net loss	$	(15,015	)

Other intangibles assets are comprised of the following:

		Reorganized Company		Predecessor Company
		November 30, 2002		August 31, 2002
Trademarks		$	15,400	$	—
Other			1,625		36

	Total	$	17,025	$	36

In connection with its fresh-start accounting adjustments, the Company has recorded new intangible assets based on the revised valuation of the Company. Trademarks and reorganization intangible will be subject to the annual impairment tests in accordance with the Statements. Other intangibles are amortized over their useful lives.

~~Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc~~7.~~) Consolidating~~ Property, ~~Statement~~Plant ofand ~~Operations for the Nine Months Ended May 25, 2002~~Equipment ~~(Unaudited) (In thousands)~~

		Archibald Candy Corporation			Guarantor Subsidiaries(a)			Eliminations			Consolidated
Net sales		$	110,766		$	50,147		$	—		$	160,913
Cost of sales, excluding depreciation			43,680			22,876			—			66,556
Gross profit			67,086			27,271			—			94,357
Selling, general, and administrative expenses excluding depreciation and amortization			51,023			27,106			—			78,129
Depreciation and amortization expense			4,832			1,514			—			6,346
Amortization of goodwill and other intangibles			3,163			17			—			3,180
Share of loss in joint venture			—			337			—			337
Restructuring Expense			1,328			—			—			1,328
Management fees and other fees			114			—			—			114
Operating income (loss)			6,626			(1,703	)		—			4,923
Other (income) expense:
	Interest expense		13,767			588			(585	)		13,770
	Interest income		(585	)		—			585			—
	Other income and expenses		(179	)		116			—			(63	)
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries		2,258			—			—			2,258
Equity in loss of subsidiaries			2,462			—			(2,462	)		—
Loss before income taxes			(11,097	)		(2,407	)		2,462			(11,042	)
Provision for income taxes			34			55			—			89
Net loss		$	(11,131	)	$	(2,462	)	$	2,462		$	(11,131	)

Property, plant and equipment are comprised of the following:

	Reorganized Company			Predecessor Company
	November 30, 2002			August 31, 2002
Machinery and equipment	$	10,259		$	32,146
Land and buildings		34,789			18,253
Furniture and fixtures		2,897			4,098
Leasehold improvements		12,547			25,568

		60,492			80,065
Less: Accumulated depreciation		(521	)		(55,203	)

	$	59,971		$	24,862

In connection with its fresh-start accounting adjustments, the Company's property, plant and equipment were adjusted to fair market value as of November 1, 2002. The assets are depreciated on a straight line basis over their useful lives, which are 5 years for machinery & equipment, 20 years for buildings, 7 years for furniture & fixtures and over the life of the lease for leasehold improvements.

8. Debt

CIT Facility

On June 28, 2001, Archibald Illinois and its subsidiary, Sweet Factory, Inc. ("Sweet Factory"), entered into a revolving credit facility with CIT, as agent (the "CIT Facility"). The initial borrowings under the CIT Facility were used, in part, to pay all outstanding obligations under Archibald Illinois' revolving credit facility with Bank One, NA, as agent, which facility was then terminated. The CIT Facility provided for revolving loans and letter of credit issuances, subject to certain borrowing conditions, in an aggregate amount at any time not to exceed the lesser of (1) $30.0 million (or specified lower amounts at certain times of the year) and (2) a borrowing base comprised of a percentage of eligible accounts receivable and inventory and owned store locations.

The CIT Facility was secured by first priority liens on Archibald Illinois' and Sweet Factory's accounts receivable, and inventory, and the Company-owned store locations, and the proceeds therefrom. The subsidiaries of Archibald Illinois and Sweet Factory, including Archibald Candy (Canada) Corporation, a Canadian corporation ("Archibald Canada"), guaranteed all obligations under the CIT Facility and granted to the agent under the CIT Facility a first priority lien on their accounts receivable, inventory, and the proceeds therefrom. In addition, Holdings guaranteed all obligations under the CIT Facility and granted to CIT a first priority lien on all of its assets, including all the outstanding shares of common stock of Archibald Illinois.

As of June 14, 2002, there was an aggregate of $13.9 million outstanding under the CIT Facility. On June 14, 2002, proceeds from borrowings under the Archibald DIP Credit Facility (defined below) were used to pay all outstanding obligations under the CIT Facility and the CIT Facility was then terminated.

Sweet Factory DIP Credit Facility

In connection with the Sweet Factory Bankruptcy, on November 15, 2001, CIT and Sweet Factory entered into a post-petition credit, security and guaranty agreement (the "SF DIP Credit Facility"). Archibald Illinois, Holdings and Archibald Canada and SFG's other subsidiaries guaranteed all obligations of Sweet Factory under the SF DIP Credit Facility. The guaranty by Archibald Illinois was secured by a $1.0 million cash collateral account held by CIT. The SF DIP Credit Facility was for one year and provided for revolving loans at any time not to exceed the lesser of (1) $2.0 million and (2) a borrowing base comprised of a percentage of Sweet Factory's eligible inventory plus a $1.0 million overadvance, subject to certain reserves.

As of August 6, 2002, an aggregate of $0.5 million of revolving loans were outstanding under the SF DIP Credit Facility. Proceeds from the August 6, 2002, sale of assets of Sweet Factory and its subsidiaries were used to pay all outstanding obligations under the SF DIP Credit Facility and the $1.0 million cash collateral account held by CIT as security for the Archibald Illinois guaranty was released. The SF DIP Facility was then terminated.

Archibald ~~Candy~~DIP ~~Corporation (A~~Credit ~~Wholly Owned Subsidiary of Fannie May Holdings, Inc.)~~Facility ~~Consolidating Statement of Operations for the Three Months Ended May 26, 2001 (Unaudited) (In thousands)~~

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales		$	29,912		$	27,990		$	—		$	57,902
Cost of sales, excluding depreciation			14,109			11,597			—			25,706
Cost of sales, nonrecurring			(146	)		2,205			—			2,059
Total cost of sales			13,963			13,802			—			27,765
Gross profit			15,949			14,188			—			30,137
Selling, general, and administrative expenses excluding depreciation and amortization			15,183			16,325			—			31,508
Depreciation and amortization expense			1,779			1,514			—			3,293
Amortization of goodwill and other intangibles			1,113			89			—			1,202
Restructuring expense			—			8,100			—			8,100
Share of loss in joint venture			—			82			—			82
Management fees and other fees			10			122			—			132
Operating loss			(2,136	)		(12,044	)		—			(14,180	)
Other (income) expense:
	Interest expense		4,686			195			(195	)		4,686
	Interest income		(195	)		—			195			—
	Other income and expenses		(35	)		48			—			13
Equity in income of subsidiaries			12,293			—			(12,293	)		—
Income (loss) before income taxes			(18,885	)		(12,287	)		12,293			(18,879	)
Provision for income taxes			(2	)		6			—			4
Net income (loss)		$	(18,883	)	$	(12,293	)	$	12,293		$	(18,883	)

In connection with the Archibald Illinois Reorganization, on June 14, 2002, Archibald Illinois entered into a post-petition loan and security agreement and guaranty (the "Archibald DIP Credit Facility") with Foothill Capital Corporation, as the arranger and administrative agent, the lenders party thereto and Holdings and Archibald Canada, as guarantors. Under the Archibald DIP Credit Facility, the lenders agreed to make available to Archibald Illinois (a) a $25.0 million revolving credit facility, pursuant to which Archibald Illinois could borrow up to the lesser of (i) $25.0 million and (ii) a borrowing base comprised of certain percentages of eligible accounts receivable and inventory, subject to certain reserves, and (b) an aggregate of $20.0 million in term loans. Initial borrowings under the Archibald DIP Credit Facility were used to pay-off in full the CIT Facility. As of August 31, 2002, $20.0 million of borrowings and $0.2 million of letters of credit were outstanding under the Archibald DIP Credit Facility.

As of November 1, 2002, an aggregate of $30.3 million was outstanding under the Archibald DIP Credit Facility. In connection with the Archibald Plan effective November 1, 2002, all outstanding amounts under the Archibald DIP Credit Facility were repaid in full from proceeds of the initial borrowings under Archibald's New Credit Facility (defined below) and the Archibald DIP Credit Facility was terminated.

New Credit Facility

On November 1, 2002, Archibald entered into a loan and security agreement and guaranty with the financial institutions signatory thereto and Foothill Capital Corporation ("Foothill"), as administrative agent (the "New Credit Facility"). The New Credit Facility was extended to Archibald in connection with its emergence from bankruptcy and replaced the financing provided pursuant to the Archibald DIP Credit Facility, which was terminated pursuant to the Archibald Plan.

The New Credit Facility provides up to $50 million in credit, which is comprised of a revolving loan facility, a term loan A, a term loan B and letter of credit issuances. Under the revolving loan facility, Archibald may, subject to certain borrowing conditions, incur revolving loans in an amount up to the lesser of (1) $30.0 million and (2) a borrowing base comprised of a percentage of eligible accounts receivable and eligible inventory, which borrowing base components are subject to certain limits, minus a reserve of $2.5 million (as such amount may be reduced in accordance with the provisions of the loan agreement) and minus certain additional reserves which may from time to time be imposed by Foothill. Revolving loans are due and payable in full on November 1, 2005 (the "Maturity Date").

Subject to certain conditions, the term loan A will be made available to Archibald from July 1 through December 31 of each calendar year, with any outstanding obligations under such term loan to be repaid in full on December 31 of each year. Subject to any applicable reserves, in 2002, term loan A shall not exceed the lesser of (1) $10.0 million and (2) a specified percentage of the value of Archibald's equipment and real property. In 2003, term loan A shall not exceed the lesser of (1) $9.0 million and (2) a specified percentage of the value of Archibald's equipment and real property. In 2004, term loan A shall not exceed the lesser of (1) $7.0 million and (2) a specified percentage of the value of Archibald's equipment and real property and between July 1, 2005 and the Maturity Date, term loan A shall not exceed $5.0 million. In addition to the term loan A, on November 1, 2002, term loan B was extended to Archibald in an amount equal to $10.0 million. The outstanding principal amount of term loan B is due and payable in full on the Maturity Date; provided, that if at any time the outstanding principal amount of term loan B shall be less than $5.0 million as a result of mandatory or voluntary prepayments, the remaining amount of term loan B shall be immediately due and payable (subject to certain exceptions).

The New Credit Facility provides the various interest rates which are applicable to the revolving loans and term loans thereunder. At Archibald's election, revolving loan advances will bear interest at either (a) a variable per annum rate equal to the "prime rate" announced from time to time by Wells Fargo Bank, National Association (the "Prime Rate"), plus 0.50% or (b) a variable per annum rate equal to the "LIBOR" rate determined by Foothill in accordance with its customary procedures, plus 2.75%. Term loan A bears interest at the Prime Rate, plus 2.0%. Term loan B bears interest at a per annum rate equal to (A) the greater of (x) the Prime Rate plus 3.0% and (y) 7.75%, plus (B) 4.75% (the "PIK Amount"), which PIK Amount shall be paid in kind by

being added ~~Archibald~~to ~~Candy~~the ~~Corporation (A~~principal ~~Wholly~~amount ~~Owned Subsidiary~~ of ~~Fannie~~term ~~May~~loan ~~Holdings, Inc~~B.~~) Consolidating~~ ~~Statement~~The ofPIK ~~Operations~~Amount ~~for~~is ~~the~~subject ~~Nine~~to ~~Months~~reduction ~~Ended~~in ~~May 26,~~calendar ~~2001 (Unaudited) (In~~year ~~thousands)~~2003 if there shall not exist any default or event of default under the New Credit Facility.

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales		$	121,438		$	91,505		$	—		$	212,943
Cost of sales, excluding depreciation			46,985			38,263			—			85,248
Cost of sales, nonrecurring			2,293			2,205			—			4,498
Total cost of sales			49,278			40,468			—			89,746
Gross profit			72,160			51,037			—			123,197
Selling, general, and administrative expenses excluding depreciation and amortization			50,294			50,508			—			100,802
Depreciation and amortization expense			5,339			4,537			—			9,876
Amortization of goodwill and other intangibles			3,039			267			—			3,306
Restructuring expense			—			8,100			—			8,100
Share of loss in joint venture			—			187			—			187
Management fees and other fees			19			408			—			427
Operating income (loss)			13,469			(12,970	)		—			499
Other (income) expense:
	Interest expense		14,613			605			(601	)		14,617
	Interest income		(602	)		(1	)		601			(2	)
	Other income and expenses		(147	)		47			—			(100	)
Equity in loss of subsidiaries			13,636			—			(13,636	)		—
Income (loss) before income taxes			(14,031	)		(13,621	)		13,636			(14,016	)
Provision for income taxes			63			15			—			78
Net income (loss)		$	(14,094	)	$	(13,636	)	$	13,636		$	(14,094	)

The New Credit Facility is secured by first priority liens on all of Archibald's assets and all of the proceeds therefrom. Archibald's wholly-owned subsidiaries, Laura Secord Holdings Corp. and Archibald Canada (together, the "Guarantor Subsidiaries") have guaranteed all of Archibald's obligations under the New Credit Facility and granted a first priority lien in all of their respective assets and the proceeds therefrom as security for such guarantees.

The New Credit Facility contains various business and financial covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock, limitations on the incurrence of and payments in respect of indebtedness, limitations on asset dispositions, limitations on capital expenditures and requirements to maintain certain targeted EBITDA amounts. The New Credit Facility also requires Archibald to make prepayments of the loans in certain circumstances, including, among other things, from Archibald's excess cash flow, as defined, and from proceeds of certain asset sales, insurance and condemnation proceeds (unless Archibald is permitted to repair or replace the applicable collateral as provided in the loan agreement), and in the event that certain financial tests are not met. These loan restrictions could restrict corporate activities, including Archibald's ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities.

Based on the Company's performance during the December holidays, it is unlikely that it will satisfy the EBITDA covenant of the New Credit Facility for the second fiscal quarter of 2003. The Company has begun discussions with Foothill regarding a waiver or amendment of this potential default. However, there can be no assurance that it will be successful in negotiating such a waiver or amendment.

As of November 30, 2002, $35.3 million of borrowings and $0.6 million of letters of credit were outstanding under the New Credit Facility.

Secured Subordinated Notes

In connection with the Archibald Plan, concurrently with the execution and delivery of the New Credit Facility, pursuant to an Indenture dated November 1, 2002 (the "Indenture") between Archibald, the Guarantor Subsidiaries and BNY Midwest Trust Company, as trustee (the "Trustee"), Archibald issued $50.0 million in aggregate principal amount of Archibald's 10% Secured Subordinated Notes due 2007 (the "Notes") in a transaction exempt from registration under the Securities Act of 1933, as amended. The Notes were issued in replacement of those certain 10¹/4% senior secured notes totaling $170.0 million due 2004 issued by Archibald Illinois pursuant to the Indenture dated July 2, 1997 (as amended and supplemented) between Archibald Illinois and The Bank of New York, as trustee, which indenture (and the notes issued thereunder) was terminated pursuant to the Archibald Plan.

Interest is payable under the Notes at the rate of 10% per annum and interest payments are to be made semi-annually on January 1 and July 1 of each year, and on the maturity date, commencing on January 1, 2003. On or prior to November 1, 2005, Archibald may elect, in the judgment of its Board of Directors, to make all or a portion of each such interest payment in cash or by issuing new promissory notes (each a "PIK Note") with a principal amount, in each case, equal to the amount of interest that each holder of a Note was due on the interest payment date and which Archibald has elected to pay by issuance of the PIK Note; provided, however, unless certain conditions are satisfied, the New Credit Facility requires that interest accrued under the Notes be paid by the issuance of PIK Notes.

The Notes are secured by a second priority lien on all of Archibald's assets and all of the proceeds therefrom. The Guarantor Subsidiaries have guaranteed all of Archibald's obligations under the Indenture (including the Notes) and granted a second priority lien in all of their respective assets and the proceeds therefrom as security for such guarantees. The liens in favor of the Trustee are subordinate to the liens granted by Archibald and the Guarantor Subsidiaries in favor of Foothill under the New Credit Facility. The manner and terms under which the liens granted to the Trustee under the Indenture are subordinated to the liens in favor of Foothill under the New Credit Facility are as set forth in the Indenture.

The Indenture contains ~~Archibald~~various ~~Candy~~business ~~Corporation (A~~covenants ~~Wholly~~including, ~~Owned~~among ~~Subsidiary~~other ofthings, ~~Fannie~~limitations ~~May~~on ~~Holdings~~dividends, ~~Inc.) Consolidating~~ ~~Statement~~redemptions and repurchases of ~~Cash~~capital ~~Flows~~stock, ~~for~~limitations on the ~~Nine~~incurrence ~~Months~~of indebtedness ~~Ended~~and ~~May 25~~limitations on asset dispositions. The Indenture also requires Archibald to make an offer to repurchase Notes in certain circumstances, ~~2002~~ including, among other things, to the extent net cash proceeds from asset sales exceed a certain threshold amount (~~Unaudited) (In~~but ~~thousands~~only to the extent such proceeds are not reinvested or used to repay certain other indebtedness). These restrictions could restrict corporate activities, including Archibald's ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities.

		Archibald Candy Corporation			Guarantor Subsidiaries(a)			Eliminations			Consolidated
OPERATING ACTIVITIES
Net loss		$	(11,131	)	$	(2,462	)	$	2,462		$	(11,131	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization		7,995			1,531			—			9,526
	Share of loss in joint venture		—			337			—			337
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries		2,258			—			—			2,258
Changes in operating assets and liabilities:
	Accounts receivables, net		262			(51	)		—			211
	Inventories		1,368			76			—			1,444
	Prepaid expenses and other current assets		(972	)		(75	)		—			(1,047	)
	Intercompany		2,462			—			(2,462	)		—
	Other assets		15			(327	)		—			(312	)
	Accounts payable and accrued liabilities		10,658			805			—			11,463
Net cash provided by operating activities			12,915			(166	)		—			12,749
INVESTING ACTIVITIES
Purchase of Property, Plant, and Equipment			(1,223	)		(764	)		—			(1,987	)
Disposals of Property, Plant, and Equipment			272			47			—			319
Impact of deconsolidation of Sweet Factory Group, Inc. and subsidiaries			—			(336	)		—			(336	)
Net cash used in investing activities			(951	)		(1,053	)		—			(2,004	)
FINANCING ACTIVITIES
Net repayments under revolving line of credit			(9,108	)		—			—			(9,108	)
Principal payments of capital lease obligations			(20	)		—			—			(20	)
Costs related to refinancing			(919	)		—			—			(919	)
Net cash provided by financing activities			(10,047	)		—			—			(10,047	)
Effect of exchange rates on cash			—			352			—			352
Net increase (decrease) in cash and cash equivalents			1,917			(867	)		—			1,050
Cash and cash equivalents beginning of period			1,116			1,230			—			2,346
Cash and cash equivalents end of period		$	3,033		$	363		$	—		$	3,396

9. Contingencies

Under various federal, state, provincial and local laws, ordinances and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, in or migrating from such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. A number of properties owned by Archibald were formerly operated by others as gasoline stations. Archibald has conducted subsurface investigations at these owned properties and based on these investigations, Archibald has determined that some contamination exists at certain of these sites. Archibald is unaware of any remediation required with respect to such contamination that would have a material impact on its financial condition. However, Archibald cannot assure you that no additional remediation will be required at these sites or that no additional environmental liabilities will arise with respect to these sites. An accrual has not been recorded as of November 30, 2002 in the financial statements.

10. Guarantor Subsidiaries

The Company's obligations under its secured subordinated notes due 2007 are fully and unconditionally guaranteed on a secured, joint and several basis by the Guarantor Subsidiaries. None of the Company's subsidiaries was subject to any restrictions on its ability to pay dividends or make distributions to the Company. The following condensed consolidating financial data illustrates the composition of the Company and its subsidiaries. Separate financial statements of the respective Guarantor Subsidiaries have not been provided because the Company's management determined that such additional information would not be useful in assessing the financial composition of the Guarantor Subsidiaries.

Reorganized ~~Archibald Candy Corporation~~Company ~~(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) Consolidating Statement of Cash Flows for the Nine Months Ended May 26, 2001 (Unaudited) (In thousands)~~

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES
Net income (loss)		$	(14,094	)	$	(13,636	)	$	13,636		$	(14,094	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization		8,378			4,804			—			13,182
	Restructuring expense		—			9,500			—			9,500
	Equity in loss of subsidiaries		13,636			—			(13,636	)		—
	Share of loss in joint venture		—			187			—			187
Changes in operating assets and liabilities:
	Accounts receivables, net		(1,064	)		(478	)		—			(1,542	)
	Inventories		8,758			(594	)		—			8,164
	Prepaid expenses and other current assets		(21	)		353			—			332
	Intercompany		(3,513	)		3,513			—			—
	Other assets		(670	)		—			—			(670	)
	Accounts payable and accrued liabilities		(19	)		347			—			328
	Restructuring reserve		—			(1,328	)		—			(1,328	)
Net cash provided by operating activities			11,391			2,668			—			14,059
INVESTING ACTIVITIES
Purchase of property, plant, and equipment			(2,878	)		(1,209	)		—			(4,087	)
Net cash used in investing activities			(2,878	)		(1,209	)		—			(4,087	)
FINANCING ACTIVITIES
Net borrowings under revolving line of credit			(7,200	)		—			—			(7,200	)
Principal payments of capital lease obligations			(22	)		(13	)		—			(35	)
Costs related to refinancing			(163	)		—			—			(163	)
Net cash used in financing activities			(7,385	)		(13	)		—			(7,398	)
Effect of exchange rates on cash			—			(485	)		—			(485	)
Net increase in cash and cash equivalents			1,128			961			—			2,089
Cash and cash equivalents beginning of period			800			2,320			—			3,120
Cash and cash equivalents end of period		$	1,928		$	3,281		$	—		$	5,209

Condensed Consolidating Balance Sheet

~~NOTE~~ ~~8. NEW~~November 30, ~~ACCOUNTING PRONOUNCEMENT~~2002

In July 2001, the FASB issued SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires the use of non-amortization approach to account for purchased goodwill and for separately recognized (~~non-goodwill) intangible~~In ~~assets that have an indefinite useful life. Under this approach~~thousands, goodwill and intangibles will not be amortized, but will periodically be reviewed for impairment and expensed against earnings only in periods in which the recorded value exceeds the fair value. The Company is currently evaluating the potential effects of the implementation of this new standard. unaudited)

		Archibald Candy Corporation		Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents	$	4,181	$	805		$	—		$	4,986
	Accounts receivables, net		3,357		1,027			—			4,384
	Inventories, net		35,130		6,572			—			41,702
	Prepaids and other current assets		3,361		992			—			4,353

Total current assets			46,029		9,396			—			55,425
Property, plant, and equipment, net			55,764		4,207			—			59,971
Intangible assets			12,602		4,423			—			17,025
Reorganization intangible			1,317		3,084			—			4,401
Investment in joint venture			—		2,666			—			2,666
Deferred financing fees			1,097		—			—			1,097
Intercompany			14,146		(5,202	)		(8,944	)		—
Investment in subsidiaries			5,901		—			(5,901	)		—
Other assets			402		15			—			417

Total assets		$	137,258	$	18,589		$	(14,845	)	$	141,002

Liabilities and shareholder's equity (deficit)
Current liabilities:
	Revolving line of credit	$	25,338	$	—		$	—		$	25,338
	Accounts payable		16,039		2,001			—			18,040
	Other current liabilities		7,266		1,206			—			8,472

Total current liabilities			48,643		3,207			—			51,850
Term loan			10,000		—			—			10,000
Secured subordinated notes			50,000		—			—			50,000
Intercompany note payable			—		8,944			(8,944	)		—
Other noncurrent liabilities			18,420		517			—			18,937
Total shareholder's equity (deficit)			10,195		5,921			(5,901	)		10,215

Total liabilities & shareholder's equity (deficit)		$	137,258	$	18,589		$	(14,845	)	$	141,002

Predecessor ~~ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ Company

~~FORWARD-LOOKING~~ ~~STATEMENTS~~Condensed Consolidating Balance Sheet

~~Some~~ ~~information included in the report may constitute forward-looking statements that involve a number of risks and uncertainties. From time to time~~August 31, 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. 2002

~~THREE~~ ~~MONTHS~~(In ~~ENDED MAY 25~~thousands, ~~2002 COMPARED TO THE THREE MONTHS ENDED MAY 26, 2001.~~unaudited)

NET SALES. Consolidated sales for the three months ended May 25, 2002 were $37.3 million, a decrease of $20.6 million from $57.9 million for the three months ended May 26, 2001. The bankruptcy filing and subsequent deconsolidation of the Company's Sweet Factory subsidiaries accounted for $14.2 million of the decline. Company-operated retail sales, excluding Sweet Factory, for the three months ended May 25, 2002 were $31.9 million, a decrease of $2.4 million, or 7.0% from $34.3 million for the three months ended May 26, 2001. Same store sales decreased 4.5% for Fannie May/Fanny Farmer and 5.6% (2.5% decrease in Canadian Dollars) for Laura Secord primarily due to a weak retail environment during the Easter holiday period. In addition, the Company had 14 fewer stores as of May 25, 2002 as compared to May 26, 2001. Sales through the Company's third-party retail outlets and non-retail distribution channels decreased $4.0 million to $5.4 million for the three months ended May 25, 2002 from $9.4 million for the three months ended May 26, 2001. The decrease was due primarily to a promotion offered to the Company's card and gift business customers, which was not repeated during the current year.

		Archibald Candy Corporation			Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents	$	2,521		$	835	$	—		$	3,356
	Restricted cash		500			—		—			500
	Accounts receivables, net		1,021			53		—			1,074
	Inventories, net		24,886			2,962		—			27,848
	Prepaids and other current assets		1,953			344		—			2,297

Total current assets			30,881			4,194		—			35,075
Property, plant, and equipment, net			16,290			8,572		—			24,862
Intercompany			8,789			514		(9,303	)		—
Investment in subsidiaries			2,527			—		(2,527	)		—
Other assets			58,268			2,289		—			60,557

Total assets		$	116,755		$	15,569	$	(11,830	)	$	120,494

Liabilities and shareholder's equity (deficit)
Current liabilities:
	Revolving line of credit	$	20,000		$	—	$	—		$	20,000
	Liabilities subject to compromise		190,130			—		—			190,130
	Accounts payable		9,485			1,674		—			11,159
	Other current liabilities		4,502			1,198		—			5,700

Total current liabilities			224,117			2,872		—			226,989
Intercompany note payable			—			9,303		(9,303	)		—
Other noncurrent liabilities			4,425			—		—			4,425
Total shareholder's equity (deficit)			(111,787	)		3,394		(2,527	)		(110,920	)

Total liabilities & shareholder's equity (deficit)		$	116,755		$	15,569	$	(11,830	)	$	120,494

GROSS PROFIT. Gross profit for the three months ended May 25, 2002 was $21.1 million, a decrease of $9.0 million from $30.1 million for the three months ended May 26, 2001. Gross profit in the prior year included $9.1 million related to Sweet Factory and a reduction of $2.1 million associated with costs related to the closing of unprofitable Sweet Factory stores and the manufacturing start-up of the Laura Secord products beginning in September 2000. After giving effect to these items, gross profit dollars decreased $2.0 million versus the prior year, which was primarily due to lower sales. Gross profit as a percentage of net sales, after giving effect to these items, was 56.6% for the three months ended May 25, 2002 versus 52.9% for the three months ended May 26, 2001. This increase was primarily due to retail sales, which have a higher gross profit rate than other distribution channels in general, being a higher proportion of total sales this year versus the prior year, as well as lower manufacturing costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $20.7 million for the three months ended May 25, 2002, a decrease of $10.8 million from $31.5 million for the three months ended May 26, 2001. SG&A expenses, excluding Sweet Factory, were $20.7 million for the three months ended May 25, 2002, a decrease of $0.7 million or 3.3%, from $21.4 million for the three months ended May 26, 2001.

RESTURCTURING EXPENSE. Restructuring expense of $1.3 million for the three months ended May 25, 2002 relates to professional fees associated with the restructuring of the Company's

~~balance~~Reorganized ~~sheet. See "Effect of Bankruptcy Filings" below. Restructuring expense of $8.1 million for the three months ended May 26, 2001 relates to the closing of unprofitable Sweet Factory stores.~~ Company

~~EBITDA. Earnings before~~ ~~interest,~~Condensed ~~income~~Consolidating ~~taxes,~~Statement ~~depreciation and amortization (EBITDA) was $(1.2) million for the three months ended May 25, 2001 as compared to $(9.7) million for the three months ended May 26, 2001. EBITDA, excluding the effect~~ of the deconsolidation of Sweet Factory and restructuring expense was $0.1 million for the three months ended May 25, 2002, as compared to $1.5 million for the three months ended May 26, 2001, excluding the manufacturing start-up costs and the closing of unprofitable Sweet Factory stores of $2.1 million, restructuring expense of $8.1 million and the effect of the deconsolidation of Sweet Factory of $2.3 million. This decrease is primarily due to lower sales, offset by an improved gross profit rate. Operations

~~OPERATING LOSS. Operating~~ ~~loss~~One ~~was~~Month ~~$4.2 million~~Ended ~~for the three months ended May~~November 2530, 2002, a decrease of $10.0 million from a loss of $14.2 million for the three months ended May 26, 2001. The decrease in operating loss was due primarily to the deconsolidation of Sweet Factory, which had an operating loss of $11.8 million in the prior year, offset by restructuring expense of $1.3 million in the current year.

~~NET LOSS. Net~~ ~~loss~~(In ~~for the three months ended May 25~~thousands, ~~2002 was $8.8 million, a decrease of $10.1 million from $18.9 million for the three months ended May 26, 2001.~~ unaudited)

NINE MONTHS ENDED MAY 25, 2002 COMPARED TO THE NINE MONTHS ENDED MAY 26, 2001

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales		$	8,922		$	3,448		$	—		$	12,370
Cost of sales, excluding depreciation and amortization			3,629			1,497			—			5,126
Cost of sales, nonrecurring			837			202			—			1,039

	Total cost of sales		4,466			1,699			—			6,165
Selling, general, and administrative expenses excluding depreciation and amortization			5,384			1,918			—			7,302
Depreciation, amortization and other			513			170			—			683

Operating income (loss)			(1,441	)		(339	)		—			(1,780	)
Interest expense, net			547			65			—			612
Other income (expense)			7			(13	)		—			(6	)
Equity interest in losses of subsidiaries			420			—			(420	)		—

Loss before reorganization costs and income taxes			(2,401	)		(417	)		420			(2,398	)
Reorganization costs			407			—			—			407

Loss before income taxes			(2,808	)		(417	)		420			(2,805	)
Provision for income taxes			81			3			—			84

Net loss		$	(2,889	)	$	(420	)	$	420		$	(2,889	)

NET SALES. Consolidated sales for the nine months ended May 25, 2002 were $160.9 million, a decrease of $52.0 million from $212.9 million for the nine months ended May 26, 2001. The bankruptcy filing and subsequent deconsolidation of the Company's Sweet Factory subsidiaries accounted for $38.8 million of the decline. Company-operated retail sales, excluding Sweet Factory, for the nine months ended May 25, 2002 were $113.6 million a decrease of $7.0 million, or 5.8% from $120.6 million for the nine months ended May 26, 2001. Same store sales decreased 3.3% for Fannie May/Fanny Farmer and 4.5% (1.1% decrease in Canadian Dollars) for Laura Secord, primarily due to a weak retail environment. In addition, the Company had 14 fewer stores as of May 25, 2002 as compared to May 26, 2001. Sales through the Company's third-party retail outlets and non-retail distribution channels decreased $6.2 million to $38.4 million for the nine months ended May 25, 2002, from $44.6 million for the nine months ended May 26, 2001. The decrease was primarily due to lower fundraising sales and an offered promotion to the Company's card and gift business customers, which was not repeated during the current year.

GROSS PROFIT. Gross profit for the nine months ended May 25, 2002 was $94.4 million, a decrease of $28.8 million from $123.2 million for the nine months ended May 26, 2001. Gross profit, excluding Sweet Factory and $4.5 million in the prior year associated with costs related to the manufacturing start-up of the Laura Secord products beginning in September 2000 and the closing of unprofitable Sweet Factory stores, for the nine months ended May 25, 2002 was $88.8 million, a decrease of $8.9 million or 9.1%, from $97.7 million. The decrease in gross profit dollars was primarily due to lower sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. SG&A expenses were $78.1 million for the nine months ended May 25, 2002, a decrease of $22.7 million from $100.8 million for the nine months ended May 26, 2001. SG&A expenses, excluding Sweet Factory, were $69.9 million for the nine months ended May 25, 2002, an increase of $0.5 million, or 1.0%, from $69.4 million for the nine months ended May 26, 2001. The increase was primarily due to higher healthcare costs.

RESTURCTURING EXPENSE. Restructuring expense of $1.3 million for the three months ended May 25, 2002 relates to professional fees associated with the restructuring of the Company's

~~balance~~Predecessor ~~sheet. See "Effect of Bankruptcy Filings" below. Restructuring expense of $8.1 million for the three months ended May 26, 2001 relates to the closing of unprofitable Sweet Factory stores.~~ Company

~~OTHER (INCOME)~~ ~~AND~~Condensed ~~EXPENSE. Included~~Consolidating inStatement ~~other expenses is a charge~~ of $2.3 million associated with the net write-off (for financial reporting purposes) due to the Sweet Factory bankruptcy of a $19.4 million receivable due from the Sweet Factory subsidiaries, after first offsetting $17.1 million of that write-off against the Company's negative investment balance in Sweet Factory Group, Inc. ("SFG"). Operations

~~EBITDA. Earnings before~~ ~~interest,~~Two ~~income~~Months ~~taxes,~~Ended ~~depreciation, and amortization (EBITDA), was $12.3~~October ~~million for the nine months ended May 25~~31, 2002 as compared to $13.8 million for the nine months ended May 26, 2001. EBITDA, excluding the effect of deconsolidation of Sweet Factory of $2.3 million, the Sweet Factory EBITDA loss of $2.7 million and restructuring expense of $1.3 million, was $18.7 million for the nine months ended May 25, 2002, as compared to $27.9 million for the nine months ended May 26, 2001, excluding restructuring expense of $8.1 million, manufacturing start-up costs and the closing of unprofitable Sweet Factory stores of $4.5 million and the Sweet Factory EBITDA loss of $1.4 million. This decrease is primarily due to lower sales.

~~OPERATING INCOME~~ (~~LOSS). Operating~~In ~~income was $4.9 million for the nine months ended May 25~~thousands, 2002, an increase of $4.4 million from income of $0.5 million for the nine months ended May 26, 2001. Operating income was $9.4 million for the nine months ended May 25, 2002, excluding Sweet Factory and restructuring expense which is a decrease of $8.8 million from operating income of $18.2 million for the nine months ended May 26, 2001, excluding restructuring expense, manufacturing start-up costs and Sweet Factory. The decrease was primarily due to the decline in sales and increase in healthcare costs described above. unaudited)

NET INCOME (LOSS). Net loss for the nine months ended May 25, 2002 was $11.1 million, a decrease of $3.0 million from net income of $14.1 million for the nine months ended May 26, 2001. The net loss for the nine months ended May 25, 2002 includes the effect of the deconsolidation of Sweet Factory of $2.3 million.

	Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	14,131		$	6,181		$	—		$	20,312
Cost of sales, excluding depreciation and amortization		5,945			2,932			—			8,877
Selling, general, and administrative expenses excluding depreciation and amortization		10,173			3,648			—			13,821
Depreciation, amortization and other		1,018			368			—			1,386

Operating income (loss)		(3,005	)		(767	)		—			(3,772	)
Interest expense, net		225			127			—			352
Gain on debt discharge		124,900			—			—			124,900
Other income (expense)		54			45			—			99
Equity interest in losses of subsidiaries		855			—			(855	)		—

Loss before reorganization costs and income taxes		120,869			(849	)		855			120,875
Reorganization costs		1,258			—			—			1,258

Loss before income taxes		119,611			(849	)		855			119,617
Provision for income taxes		—			6			—			6

Net income (loss)	$	119,611		$	(855	)	$	855		$	119,611

EFFECT OF BANKRUPTCY FILINGS

On June 12, 2002, Archibald Candy Corporation ("Archibald") and Fannie May Holdings, Inc. ("Holdings"), its sole shareholder, filed petitions in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") to commence a consolidated voluntary bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). Archibald and Holdings also have filed a Joint Plan of Reorganization (the "Archibald Plan"), with respect to which holders of approximately 83% in aggregate principal amount of Archibald's 101/4% senior secured notes have executed lock-up agreements agreeing to vote in favor of the Archibald Plan. The Archibald Plan, which is subject to the approval of the Bankruptcy Court, contemplates a significant deleveraging of Archibald's balance sheet and the elimination of approximately $17.5 million in annual interest payments. The Archibald Plan will require, among other things, the requisite votes under the Bankruptcy Code and must satisfy the requirements set forth in Section 1129 of the Bankruptcy Code. During the Chapter 11 proceeding, Archibald does not currently expect any significant impact on its employees, customers or suppliers. Archibald Candy (Canada) Corporation, the wholly-owned subsidiary of Archibald that operates its Laura Secord business, has not filed a bankruptcy proceeding.

In connection with the Archibald bankruptcy proceeding, Archibald has entered into a Post-Petition Loan and Security Agreement and Guaranty dated as of June 12, 2002 (the "Archibald DIP Credit Facility") with Foothill Capital Corporation, as Arranger and Administrative Agent, the lenders party thereto and Holdings and Archibald Candy (Canada) Corporation, as Guarantors. Pursuant to the Archibald DIP Credit Facility, the lenders have agreed to make available to Archibald a $45.0 million term loan and revolving credit facility. The proceeds of the Archibald DIP Credit

~~Facility~~Predecessor were used in part, to pay-off the indebtedness outstanding under Archibald's revolving credit facility (the "CIT Facility") with The CIT Group/Business Credit, Inc. ("CIT"), and are being used to fund Archibald's working capital and capital expenditure needs during the bankruptcy proceedings. Company

~~Archibald and~~ ~~Holdings~~Condensed ~~will~~Consolidating ~~continue~~Statement ~~to manage their properties and operate their business in accordance with the applicable provisions~~ of ~~the Bankruptcy Code. The proceeding has been designated as case number 02-11719.~~ Operations

~~Archibald's management~~ ~~has~~Three ~~assessed~~Months ~~the~~Ended ~~liquidity~~November 24, position of Archibald and Archibald Candy (Canada) Corporation in light of the Archibald and Holdings bankruptcy proceedings and the funds available under the Archibald DIP Credit Facility and believes that Archibald and Archibald Candy (Canada) Corporation will be able to fund their post-petition obligations until the Archibald Plan is confirmed. 2001

~~On November 15,~~ ~~2001, SFG and its three subsidiaries, Sweet Factory, Inc., SF Properties, Inc. and SF Candy Company, filed voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code.~~ (In ~~connection with the Sweet Factory bankruptcy filings~~thousands, ~~Sweet Factory, Inc. entered into a Post-Petition Credit, Security and Guaranty Agreement (the "SF DIP Credit Facility"~~unaudited) with CIT and SFG, SF Properties, Inc. and SF Candy Company, as guarantors. The SF DIP Credit Facility is for one year and provides for revolving loans at any time not to exceed the lesser of (1) $2.0 million and (2) a borrowing base comprised of a percentage of Sweet Factory, Inc.'s eligible inventory plus a $1.0 million overadvance, subject to certain reserves.

		Archibald Candy Corporation			Guarantor(a) Subsidiaries			Eliminations			Consolidated
Net sales		$	24,276		$	18,099		$	—		$	42,375
Cost of sales, excluding depreciation			9,989			7,503			—			17,492

Gross profit			14,287			10,596			—			24,883
Selling, general, and administrative expenses excluding depreciation and amortization			15,266			14,285			—			29,551
Depreciation, amortization and other			2,749			942			—			3,691

Operating loss			(3,728	)		(4,631	)		—			(8,359	)
Other (income) expense:
	Interest expense		4,794			198			(195	)		4,797
	Interest income		(200	)		—			195			(5	)
	Other income (expenses)		43			(67	)		—			(24	)
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries		2,258			—			—			2,258
Equity in losses of subsidiaries			4,899			—			(4,899	)		—

Loss before income taxes			(15,436	)		(4,896	)		4,899			(15,433	)
Provision for income taxes			—			3			—			3

Net loss		$	(15,436	)	$	(4,899	)	$	4,899		$	(15,436	)

(a): This column does not include the balances of SFG and subsidiaries beginning November 15, 2001 due to their deconsolidation for financial reporting purposes. Refer to Note 3 for Financial Information on SFG and subsidiaries since their deconsolidation.

~~Management has~~Reorganized assessed the liquidity position of SFG and its subsidiaries as a result of the bankruptcy filings and available debtor in possession financing and believes that SFG and its subsidiaries will be able to fund their post-petition obligations until the sale to RDR is consummated and SFG and its subsidiaries are liquidated. Company

~~See Note 3~~ toCondensed ~~the~~Consolidating ~~Financial~~Statement ~~Statements for financial information for SFG and subsidiaries and pro forma financial information for the Company, assuming the deconsolidation~~ of ~~SFG and~~Cash ~~its subsidiaries.~~ Flows

~~LIQUIDITY~~ ~~AND~~One ~~CAPITAL~~Month ~~RESOURCES~~Ended November 30, 2002

~~Net~~ ~~cash~~(In ~~provided by operating activities was $12.7 million for the nine months ended May 25~~thousands, 2002 compared to $14.1 million for the nine months ended May 26, 2001. The decrease in net cash provided by operating activities was due primarily to the decrease in operating income and the significant decline in inventories in the prior year, offset by the non-payment of interest on the senior secured notes. Net loss was $11.1 million for the nine months ended May 25, 2002 compared to net loss of $14.1 million for the nine months ended May 26, 2001. Net loss included non-cash depreciation and amortization charges of $9.5 million for the nine months ended May 25, 2002 and $13.2 million for the nine months ended May 26, 2001. Net loss also included a $2.3 million non-cash charge associated with the deconsolidation of Sweet Factory due to the Sweet Factory bankruptcy filing. unaudited)

Net cash used in investing activities decreased to $2.0 million for the nine months ended May 25, 2002 from $4.1 million for the nine months ended May 26, 2001 due to lower capital expenditures.

	Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations		Consolidated
Operating activities
Cash flows provided by (used in) operating activities	$	(1,461	)	$	441		$	—	$	(1,020	)
Investing activities
Purchase of property and equipment		(247	)		(138	)		—		(385	)

Net cash provided by (used in) investing activities		(247	)		(138	)		—		(385	)
Financing activities
Net increase in revolving line of credit		5,016			—			—		5,016
Cost related to loan agreements		(702	)		—			—		(702	)
Principal payment of capital lease obligations		(14	)		—			—		(14	)

Net cash provided by (used in) financing activities		4,300			—			—		4,300
Effect of exchange rates on cash		—			20			—		20

Net decrease in cash and cash equivalents		2,592			323			—		2,915
Cash and cash equivalents at beginning of year		1,589			482			—		2,071

Cash and cash equivalents at end of year	$	4,181		$	805		$	—	$	4,986

Net cash used in financing activities was $10.0 million for the nine months ended May 25, 2002 compared to $7.4 million for the nine months ended May 26, 2001 due to the repayment of borrowings under the CIT facility and increased debt financing costs.

In connection with Archibald's and Holdings' bankruptcy case, Archibald entered into the Post-Petition Loan and Security Agreement and Guaranty (the "Archibald DIP Credit Facility") with Foothill Capital Corporation, as the Arranger and Administrative Agent, the lenders party thereto and Holdings and Archibald Candy (Canada) Corporation, as Guarantors. Under the Archibald DIP Credit Facility, the lenders have agreed to make available to Archibald (a) a $25.0 million revolving credit facility, pursuant to which Archibald may borrow up to the lesser of (i) $25.0 million and (ii) a borrowing base comprised of certain percentages of eligible accounts receivable and inventory, subject to certain reserves, and (b) two $10.0 million term loans ("Term Loan A" and "Term Loan B") for an aggregate of $20.0 million. Funds borrowed on June 14, 2002 under the Archibald DIP Credit Facility were used to pay-off in full the CIT Facility. Term Loan B and the revolving credit facility under the Archibald DIP Credit Facility mature on the earliest of (i) June 12, 2003, (ii) emergence through a confirmed plan of reorganization approved by the Bankruptcy Court and (iii) other events set forth in the Archibald DIP Credit Facility. Term Loan A under the Archibald DIP Credit Facility matures on the earliest of (A) December 31, 2002, (B) emergence through a confirmed plan of reorganization approved by the Bankruptcy Court and (C) other events set forth in the Archibald DIP Credit Facility.

The Archibald DIP Credit Facility provides that borrowings under the revolver accrue interest at a rate equal to the "prime rate" announced from time to time by Wells Fargo plus 0.75%: that borrowings under Term Loan A accrue interest at a rate equal to the greater of (i) 8.25% and the (ii) "prime rate" announced from time to time by Wells Fargo plus 3.50%; and the borrowings under Term Loan B accrue interest at a rate equal to the greater of (A) 9.0% and (B) the "prime rate" announced from time to time by Wells Fargo plus 4.25%. The Company is required to pay fees in connection with the Archibald DIP Credit Facility.

In connection with the Sweet Factory bankruptcy case, CIT and Sweet Factory, Inc. entered into the Post-Petition Credit, Security and Guaranty Agreement (the "SF DIP Credit Facility"). The Company, Holdings and Archibald Candy (Canada) Corporation have guaranteed all obligations of

~~Sweet~~Predecessor Factory, Inc. under the SF DIP Credit Facility. The guaranty by Archibald Candy Corporation is secured by a $1.0 million cash collateral account held by CIT. The SF DIP Credit Facility provides that borrowings thereunder accrue interest at a variable rate equal to the "prime rate" announced from time to time by J.P. Morgan Chase & Co. plus 1.5%. Company

~~Upon the~~ ~~consummation~~Condensed ofConsolidating ~~the~~Statement ~~sale~~ of ~~substantially~~Cash all of the assets of the Sweet Factory business to RDR Group, Archibald expects to receive approximately $3.7 million in cash and the SF DIP Credit Facility will be paid in full out of the proceeds of the sale. Also, Archibald's guaranty of the SF DIP Credit Facility will be terminated upon the repayment of the SF DIP Credit Facility and the $1.0 million cash collateral account held by CIT as security for the Archibald guaranty will be released to Archibald. Flows

~~Archibald has~~ ~~not~~Two ~~made~~Months ~~the~~Ended ~~approximately $8.7~~October ~~million interest payment that was due on January 2~~31, 2002 on its outstanding $170 million of 101/4% senior secured notes due 2004 (the "Senior Notes"), however, holders of approximately 83% in aggregate principal amount of such notes have executed lock-up agreements agreeing to vote in favor of the joint plan or reorganization that Archibald and Holdings have filed in connection with the Archibald bankruptcy. The Senior Notes have been classified as current on Archibald's balance sheet.

(In ~~ITEM 3—QUANTITATIVE~~thousands, ~~AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~ unaudited)

The Company's operations are not currently subject to market risks of a material nature for interest rates, foreign currency rates, commodity prices or other market price risks.

	Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations		Consolidated
Operating activities
Cash flows provided by (used in) operating activities	$	(10,747	)	$	(401	)	$	—	$	(11,148	)
Investing activities
Purchase of property and equipment		(580	)		(49	)		—		(629	)

Net cash provided by (used in) investing activities		(580	)		(49	)		—		(629	)
Financing activities
Net increase in revolving line of credit		10,322			—			—		10,322
Costs related to loan agreements		(427	)		—			—		(427	)

Net cash provided by (used in) financing activities		9,895			—			—		9,895
Effect of exchange rates on cash		—			97			—		97

Net decrease in cash and cash equivalents		(1,432	)		(353	)		—		(1,785	)
Cash and cash equivalents at beginning of year		3,021			835			—		3,856

Cash and cash equivalents at end of year	$	1,589		$	482		$	—	$	2,071

The following is the cash contractual obligations of the Company (in millions) as of May 25, 2002.

	Payments Due by Period
Contractual Obligations			Less than 1 year				After 5 years
	Total				1-3 years	4-5 years
Senior Secured Notes	$	185,937	$	185,937
Revolving Line of Credit		10,408		10,408
Capital Lease Obligations		158		54	104
Operating Leases		39,099		2,899	23,622	5,893	6,685
Total Contractual Cash Obligations		235,602		199,298	23,726	5,893	6,685

Predecessor ~~PART II—OTHER INFORMATION:~~ Company

~~ITEM 1—LEGAL~~Condensed ~~PROCEEDINGS~~ Consolidating Statement of Cash Flows

On ~~June 12,~~Three ~~2002,~~Months ~~Archibald~~Ended ~~and Holdings filed voluntary petitions in the Bankruptcy Court for protection under Chapter 11 of the Bankruptcy Code (See Part I~~November 24, Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations). Archibald and Holdings are operating their business as debtors and debtors in possession. All civil litigation commenced against the Company and Holdings prior to that date has been stayed by operation of law. 2001

~~On November 15,~~ 2001, Sweet Factory Group, Inc. and its subsidiaries, all of which are wholly owned subsidiaries of Archibald, filed voluntary petitions in the Bankruptcy Court for protection under Chapter 11 of the Bankruptcy Code (~~See~~In ~~Part I~~thousands, ~~Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations~~unaudited). Sweet Factory Group and its subsidiaries are operating their business as debtors and debtors in possession. All civil litigation commenced against Sweet Factory Group and its subsidiaries prior to that date has been stayed by operation of law.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

	Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations		Consolidated
Operating activities
Cash flows provided by (used in) operating activities	$	(8,564	)	$	280		$	—	$	(8,284	)
Investing activities
Purchase of property and equipment		(395	)		(382	)		—		(777	)
Sweet Factory deconsolidation		—			(336	)		—		(336	)

Net cash provided by (used in) investing activities		(395	)		(718	)		—		(1,113	)
Financing activities
Net increase in revolving line of credit		10,194			—			—		10,194
Principal payments of capital lease obligations		(13	)		—			—		(13	)
Costs related to loan agreements		(17	)		—			—		(17	)

Net cash provided by (used in) financing activities		10,164			—			—		10,164
Effect of exchange rates on cash		—			35			—		35

Net decrease in cash and cash equivalents		1,205			(403	)		—		802
Cash and cash equivalents at beginning of year		1,116			1,230			—		2,346

Cash and cash equivalents at end of year	$	2,321		$	827		$	—	$	3,148

Archibald is in default under the Indenture pursuant to which it has issued its 101/4% senior secured notes as a result of the Archibald Bankruptcy and Archibald's failure to pay the $8.7 million in interest due on such notes on January 1, 2002. Archibald also has failed to make the $8.7 million interest payment due on the notes on July 1, 2002. As of July 15, 2002, the total amount of past due interest on the notes is approximately $18.4 million.

ITEM 62—~~EXHIBITS~~MANAGEMENT'S DISCUSSION AND ~~REPORTS~~ANALYSIS ONOF ~~FORM 8-K~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Exhibit 4.1	Amendment No. 1 to Forbearance Agreement dated as of April 30, 2002 between Archibald Candy Corporation and holders of Archibald's senior secured notes.
Exhibit 4.2	Amendment No. 2 to Forbearance Agreement dated as of May 30, 2002 between Archibald Candy Corporation and holders of Archibald's senior secured notes.
Exhibit 4.3	Lock-Up Agreement dated as of June 12, 2002 between Archibald Candy Corporation and holders of Archibald's senior secured notes.
Exhibit 10.1	Amendment No. 3 to Forbearance Agreement dated as of April 30, 2002 among Archibald Candy Corporation, Fannie May Holdings, Inc., Archibald Candy (Canada) Corporation, and The CIT Group/Business Credit, Inc., as agent and sole lender.
Exhibit 10.2	Amendment No. 4 to Forbearance Agreement dated as of May 30, 2002 between Archibald Candy Corporation, Fannie May Holdings, Inc., Archibald Candy (Canada) Corporation and The CIT Group/Business Credit, Inc., as agent and sole lender.
Exhibit 10.3	Post-Petition Loan and Security Agreement and Guaranty dated as of June 12, 2002 among Archibald Candy Corporation, Foothill Capital Corporation, as Arranger and Administrative Agent, the lenders party thereto and Fannie May Holdings, Inc. and Archibald Candy (Canada) Corporation, as Guarantors.
Exhibit 10.4	Joint Plan of Reorganization of Archibald Candy Corporation and Fannie May Holdings, Inc.
Exhibit 10.5	Asset Purchase Agreement dated as of June 5, 2002 between RDR Group and Sweet Factory Group, Inc. Sweet Factory, Inc., SF Candy Company and SF Properties, Inc.
Exhibit 10.6	Second Amended Plan of Liquidation of Sweet Factory Group, Inc., et al., as modified pursuant to Support Agreement dated May 23, 2002.
Exhibit 10.7	Certificate of Amendment to Certificate of Designation of Junior Class A PIK Preferred Stock of Fannie May Holdings, Inc., as filed on December 18, 2001
Exhibit 10.8	Certificate of Amendment to Certificate of Designation of Junior Class B PIK Preferred Stock of Fannie May Holdings, Inc., as filed on December 18, 2001.

Overview

OnWe ~~March 5,~~are ~~2002,~~a ~~Archibald~~manufacturer ~~filed~~and amarketer ~~Current~~of ~~Report~~quality onboxed ~~Form~~chocolates ~~8-K~~and ~~with~~other ~~the~~confectionery ~~Securities~~items. ~~and~~We ~~Exchange~~manufacture ~~Commission~~a ~~that~~variety ~~provided~~of ~~information~~candies ~~under~~and ~~Item 5—~~operate ~~Other~~confectionery ~~Events~~retail chains ~~disclosing~~under ~~that~~the ~~Archibald~~Fannie ~~has~~May, ~~entered~~Fanny ~~into~~Farmer aand ~~forbearance~~Laura ~~agreement~~Secord ~~with~~brand ~~holders~~names. As of ~~its~~November 30, ~~senior~~2002, ~~secured~~we ~~notes~~sold ~~and~~our ~~had~~products ~~entered~~through ~~into~~446 anCompany-operated ~~extension~~stores ofand ~~its~~approximately ~~forbearance~~10,000 ~~agreement~~third party ~~with~~retail ~~The~~outlets ~~CIT~~in ~~Group/Business Credit,~~17 ~~Inc.~~states ~~The~~and ~~Form~~the ~~8-K~~District ~~also~~of ~~disclosed~~Columbia ~~that~~in ~~Fannie~~the ~~May~~United States and 9 ~~Holdings~~provinces in Canada, ~~Inc.~~ ~~had~~as ~~entered~~well ~~into~~as athrough ~~forbearance~~corporate ~~agreement~~gift, ~~with~~mail ~~the~~order ~~holders~~and offundraising ~~its~~programs ~~senior~~in the ~~preferred~~United ~~stock~~States and Canada.

~~On May 8~~Historically, Company-operated ~~2002,~~retail ~~Archibald~~has ~~filed~~represented athe ~~Current~~most ~~Report~~significant ondistribution ~~Form~~channel ~~8-K~~for ~~with~~our ~~the~~products, ~~Securities~~accounting ~~and~~for ~~Exchange~~$21.9 million, ~~Commission~~or ~~that~~67.0%, ~~provided~~of ~~information~~net ~~under~~sales ~~Item~~for 5—the quarterly ~~Other~~period ~~Events disclosing~~ended ~~that~~November 30, ~~Archibald~~2002. ~~had~~Our ~~entered~~third-party ~~into~~retail ~~extensions~~and ~~from~~non-retail ~~April~~businesses collectively accounted for $10.8 30million, ~~2002~~or ~~until~~33.0%, ~~May~~of net sales for the quarterly period ended November 30, 2002. ofWe ~~the~~are ~~forbearance~~currently ~~periods~~focusing ~~under~~on ~~its~~growing ~~forbearance~~sales ~~agreements~~and ~~with~~earnings ~~The~~by ~~CIT~~building ~~Group/Business Credit~~on our Fannie May, ~~Inc.~~ Fanny Farmer and ~~holders~~Laura Secord brand names by increasing same store sales and increasing points of ~~Archibald's~~availability ~~senior~~for ~~secured~~our ~~notes~~products.

OnOur ~~June 19,~~costs ~~2002,~~of ~~Archibald~~sales ~~filed~~include acosts ~~Current~~associated ~~Report~~with onour ~~Form~~manufactured ~~8-K~~products and costs associated with ~~the~~product ~~Securities~~purchased from third parties and ~~Exchange~~resold ~~Commission~~by ~~that~~us. ~~disclosed~~The ~~the~~principal ~~Chapter~~elements 11of ~~bankruptcy~~our manufactured ~~filings~~product bycosts ~~Archibald~~are raw materials, labor and ~~Fannie May Holdings~~manufacturing overhead. Raw materials consist primarily of chocolate, ~~Inc~~ 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 and ~~Archibald's~~incentives ~~entering~~based ~~into~~on ~~the~~achieving ~~debtor-in-possession~~operating ~~financing~~efficiencies. Manufacturing ~~with~~overhead ~~Foothill~~generally ~~Capital~~includes ~~Corporation~~employee benefits, asutilities, ~~Arranger~~rents and ~~Administrative~~manufacturing ~~Agent~~supplies. Historically, ~~and~~we generally have been able to raise the ~~lenders~~prices ~~party~~of our products equal to or in ~~thereto~~excess of any increases in cost of sales; however, there can be no assurance that we will be able to continue to do so in the future.

Selling, general and administrative costs include: (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 catalog expenses and direct wages and (3) general overhead expenses, which consist primarily of non-allocable wages, professional fees and administrative and management overhead.

To facilitate a meaningful comparison of the Company's quarterly operating performance in fiscal years 2003 and 2002, the following discussion of results of operations is presented on a traditional comparative basis for both periods. Accordingly, the results of operations for the quarter ended November 30, 2002 represents the mathematic addition of the historical amounts for the predecessor company period, September 1 through October 31, 2002, and the reorganized company period, November 1 through November 30, 2002. Consequently, the current year's information presented below does not comply with accounting requirements for companies upon emergence from bankruptcy which calls for separate reporting for the newly reorganized company and the predecessor company. Management believes that a combined discussion of predecessor and reorganized company periods is reasonable and appropriate because there were no material adjustments to the presented items (other than cost of sales, depreciation, amortization and interest expense) resulting from the adoption of fresh-start reporting.

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 us or statements made by our 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Effect of ~~SIGNATURE~~ Bankruptcy Filings

~~PURSUANT~~Archibald TOIllinois ~~THE~~and ~~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.~~ Holdings

		ARCHIBALD CANDY CORPORATION
DATE: July 15, 2002		By:		/s/ RICHARD J. ANGLIN Richard J. Anglin VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

On June 12, 2002, Holdings and Archibald Illinois filed petitions with the United States Bankruptcy Court for the District of Delaware to commence a joint voluntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, Holdings and Archibald Illinois continued to manage their properties and operate their businesses in accordance with the applicable provisions of the Bankruptcy Code. In connection with the bankruptcy proceeding, Holdings and Archibald Illinois filed the Archibald Plan, which was confirmed by the bankruptcy court on September 25, 2002 and became effective as of November 1, 2002. Pursuant to the Archibald Plan, (i) all of the outstanding equity interests of Holdings and Archibald Illinois were cancelled; (ii) Holdings merged with and into Archibald Illinois; and (iii) Archibald Illinois merged with and into us. As a result, we acquired all of the assets of Holdings and Archibald Illinois. As part of the Archibald Plan, we entered into a new $50 million term loan and revolving credit facility with Foothill Capital Corporation, as administrative agent, to finance our working capital and capital expenditures and to pay the costs of the reorganization. The proceeds of the credit facility also were used, in part, to pay-off the indebtedness outstanding under Archibald Illinois' debtor-in-possession facility. In addition, pursuant to the Archibald Plan, all of the $170 million outstanding principal amount of 10¹/4% senior secured notes due 2004 issued by Archibald Illinois, together with the accrued and unpaid interest thereon, were cancelled and we issued $50 million of 10% secured subordinated notes due 2007 to the holders of the cancelled notes. Also, pursuant to the Archibald Plan, in consideration of the cancellation of the claims of the holders of the cancelled notes and the claims of certain general unsecured creditors of Archibald Illinois, we issued (or expect to issue upon completion of the Archibald Plan) to such claimants an aggregate of 276,290 shares of our common stock, par value $.01 per share, which represents 100% of our issued and outstanding common stock.

As a result of the effectiveness of the Archibald Plan, we have adopted "fresh-start" reporting as of November 1, 2002 and created a new reporting entity. "Fresh-start" reporting has resulted in the recording of assets at reorganization value and liabilities at the present value of amounts to be paid.

The Archibald Illinois reorganization has had a material impact on our liquidity. See "—Liquidity and Capital Resources" for more information regarding the impact of the Archibald Illinois reorganization on our liquidity.

Sweet Factory

On November 15, 2001, Sweet Factory Group, Inc. ("SFG") and its three subsidiaries, Sweet Factory, Inc., SF Candy Company and SF Properties, Inc., filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code. Through the bankruptcy proceedings, the leases for 90 Sweet Factory stores were rejected and the employment of approximately 100 full-time and 400 part-time employees was terminated. On August 6, 2002, we sold the assets of SFG and its subsidiaries for $6.6 million to RDR Group, a California corporation. The proceeds of the sale were applied to pay off the debtor-in-possession financing provided by The CIT Group/Business Credit, Inc. ("CIT"), to pay Archibald Illinois' secured claim, to make cure payments to the landlords under the assumed store leases, to pay administrative expenses, to make a payment to the holders of Archibald Illinois' senior secured notes due 2004 and to make a payment to SFG's unsecured creditors' class. On October 29, 2002, we dissolved SFG and its subsidiaries.

SFG and its subsidiaries' financial results are included in our consolidated results through November 15, 2001. Accounting principles generally accepted in the United States generally require that any entity that files for protection under the U.S. Bankruptcy Code whose financial statements were previously consolidated with those of its parent must be prospectively deconsolidated from the parent with the investment accounted for using the cost method. The effects on our balance sheet of this deconsolidation and use of the cost method are that: (i) our investment in SFG is included as a single amount and (ii) our receivable from SFG is no longer eliminated. The effect on our income statement is that beginning November 15, 2001, SFG's operating results are not included in the consolidated results. At November 15, 2001, our investment in SFG was a negative $17.1 million, and the receivable had a balance of $19.4 million. Because of SFG's and its subsidiaries' bankruptcies, we determined that the receivable should be reserved for financial reporting purposes. That write-off was first netted against the negative investment balance, with the remaining $2.3 million recorded as a non-operating expense. See Note 3 "Bankruptcy Filing—Sweet Factory" of the notes to the financial statements included in this report for more information regarding the SFG bankruptcy.

Three Months Ended November 30, 2002 Compared to Three Months Ended November 24, 2001

Net Sales. Consolidated sales for the three months ended November 30, 2002 were $32.7 million, a decrease of $9.7 million from $42.4 million for the three months ended November 24, 2001. The bankruptcy filing and subsequent deconsolidation of Sweet Factory and its subsidiaries accounted for $8.9 million of the decline. Company-operated retail sales, excluding Sweet Factory, for the three months ended November 30, 2002 were $21.9 million, a decrease of $0.6 million, or 2.7%, from $22.5 million for the three months ended November 24, 2001. Sales for the three months ended November 30, 2002 were positively impacted by the shift of one week in the reporting calendar as a result of the 53rd week in fiscal 2002. As a result of this shift, the quarter ended one week later than the prior year, which has higher seasonal sales. Same store sales, adjusted for the 53rd week in fiscal 2002, decreased 6.6% for Fannie May/Fanny Farmer and 5.2% (4.1% decrease in Canadian dollars) for Laura Secord, primarily due to a weak retail environment. Sales through our third-party retail outlets and non-retail distribution channels decreased $0.2 million to $10.8 million for the three months ended November 30, 2002, from $11.0 million for the three months ended November 24, 2001. The decrease was primarily due to lower mass market and specialty market sales, offset by increased corporate gift sales. Mass market sales were lower due primarily to the loss of a significant customer. The specialty market channel was eliminated in fiscal 2002 upon the expiration of a contract with Hallmark. Specialty market sales for the quarter ended November 24, 2001 were $1.1 million.

Gross Profit. Gross profit for the three months ended November 30, 2002 was $17.6 million, a decrease of $7.3 million from $24.9 million for the three months ended November 24, 2001. Gross profit, excluding $1.0 million in the current year associated with the write-up of inventories to fair market value for fresh-start accounting (see Note 5 to the financial statements) and $5.5 million in the prior year for Sweet Factory, for the three months ended November 30, 2002 was $18.6 million, a decrease of $0.8 million or 4.1%, from $19.4 million for the three months ended November 24, 2001. The decrease in gross profit dollars was primarily due to lower sales.

Selling, General and Administrative. SG&A expenses were $21.1 million for the three months ended November 30, 2002, a decrease of $8.5 million from $29.6 million for the three months ended November 24, 2001. SG&A expenses, excluding Sweet Factory, were $21.4 million for the three months ended November 24, 2001 for a decrease of $0.3 million. This decrease was primarily due to lower healthcare costs and professional fees.

Operating Loss. Operating loss was $5.6 million for the three months ended November 30, 2002, an improvement of $2.8 million from operating loss of $8.4 million for the three months ended November 24, 2001. Operating loss, excluding Sweet Factory, was $5.2 million for the three months ended November 24, 2001 for a decrease of $0.4 million. This decrease was primarily due to the additional $1.0 million in cost of sales associated with the write-up of inventories for fresh-start accounting and lower sales, offset by lower depreciation expense and intangible amortization expense of $1.2 million and lower SG&A expenses.

Interest Expense. Interest expense for the three months ended November 30, 2002 was $1.0 million, a decrease of $3.8 million from $4.8 million for the three months ended November 24, 2001. This decrease was primarily due to no longer recording interest expense on the $170 million of senior secured notes due 2004 issued by Archibald Illinois upon commencement of the Archibald bankruptcy proceedings on June 12, 2002 for the period of September 1, 2002 to October 31, 2002. In addition, for the period of November 1, 2002 to November 30, 2002, interest was accrued at a rate of 10% on the newly issued $50 million secured subordinated notes as compared to 10¹/4% on $170 million of senior notes last year for a savings of approximately $1.1 million. On an annual basis, interest expense has been reduced by $12.4 million.

Other (Income) and Expenses. Included in other income in the current year is the gain of $124.9 million associated with the debt discharge in connection with the reorganization. Included in other expenses in the prior year is a charge of $2.3 million associated with SFG's bankruptcy and the net write-off (for financial reporting purposes) of a $19.4 million receivable due from SFG and subsidiaries, after first offsetting $17.1 million of that write-off against our negative investment balance in SFG and subsidiaries.

Reorganization Costs. On June 12, 2002, our predecessor companies, Archibald Illinois and Holdings, filed petitions in the United States Bankruptcy Court for the District of Delaware to commence a consolidated voluntary bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code. In connection with these proceedings, we incurred $1.7 million in professional fees and other expenses for the three months ended November 30, 2002. Although we have emerged from Chapter 11 bankruptcy, reorganization costs are still being

incurred related primarily to professional fees associated with the establishing of a new corporate structure and resolving all claims filed against Archibald Illinois.

EBITDA. Earnings before interest, income taxes, depreciation and amortization, excluding the effect of the nonrecurring cost of sales of $1.0 million, reorganization costs of $1.7 million and the gain on debt discharge of $124.9 million, was a loss of $2.6 million for the three months ended November 30, 2002 as compared to a loss of $2.1 million for the three months ended November 24, 2001, excluding the Sweet Factory EBITDA loss of $2.7 million and the effect of the deconsolidation of Sweet Factory of $2.3 million. The decrease was due primarily to the lower sales offset by the decrease in SG&A expenses.

Net Income (Loss). Net income for the three months ended November 30, 2002 was $116.7 million, as compared to a loss of $15.4 million for the three months ended November 24, 2001.

Liquidity and Capital Resources

Operating Activities

The Archibald Illinois reorganization and the SFG bankruptcy and sale have had a material impact on our liquidity. As a result of the Archibald Plan effective as of November 1, 2002, $170.0 million in principal of Archibald Illinois' 10¹/4% senior secured notes due 2004 has been extinguished and we have issued and have outstanding $50.0 million of 10% secured subordinated notes due 2007. We expect this will generate annual interest savings of approximately $12.4 million. In addition, approximately $13.5 million in mandatory redemption payments that were owed by Holdings on its senior preferred stock have been eliminated and approximately $23.3 million in mandatory redemption payments that would have been owed by Holdings on its junior preferred stock in March 2006 also have been eliminated. We have also terminated unprofitable store leases and renegotiated certain leases and contracts with favorable terms, which we expect will generate annual savings of approximately $0.2 million. The cash costs of the Archibald Illinois reorganization are expected to total approximately $7.0 million.

Our liquidity requirements have arisen principally from the Archibald Illinois and Sweet Factory reorganizations and from various capital expenditures, seasonal and general working capital requirements and debt service obligations. We have satisfied these requirements during the past three fiscal years primarily with (1) term and revolver borrowings and (2) cash generated by operating activities.

Net cash used in operating activities was $12.2 million for the three months ended November 30, 2002 compared to $8.3 million for the three months ended November 24, 2001. The decrease in net cash provided by operating activities for the three months ended November 30, 2002 was due primarily to lower accounts payable and accrued liabilities increase offset by lower interest expense associated with the reorganization.

Investing Activities

Net cash used in investing activities was $1.0 million for the three months ended November 30, 2002 compared to $1.1 million for the three months ended November 24, 2002.

Financing Activities

CIT Facility

On June 28, 2001, our predecessor company Archibald Illinois and its subsidiary, Sweet Factory Inc. ("Sweet Factory"), entered into a revolving credit facility with CIT, as agent (the "CIT Facility"). The initial borrowings under the CIT Facility were used, in part, to pay all outstanding obligations under Archibald Illinois' revolving credit facility with Bank One, NA, as agent, which facility was then terminated. The CIT Facility provided for revolving loans and letter of credit issuances, subject to certain borrowing conditions, in an aggregate amount at any time not to exceed the lesser of (1) $30.0 million (or specified lower amounts at certain times of the year) and (2) a borrowing base comprised of a percentage of eligible accounts receivable and inventory and owned store locations.

proceeds therefrom. In addition, Holdings guaranteed all obligations under the CIT Facility and granted to CIT a first priority lien on all of its assets, including all the outstanding shares of common stock of Archibald Illinois.

Sweet Factory DIP Credit Facility

As of August 6, 2002, an aggregate of $0.5 million of revolving loans were outstanding under the SF DIP Credit Facility. Proceeds from the August 6, 2002 sale of assets of SFG and its subsidiaries were used to pay all outstanding obligations under the SF DIP Credit Facility and the $1.0 million cash collateral account held by CIT as security for the Archibald Illinois guaranty was released. The SF DIP Facility was then terminated.

Archibald DIP Credit Facility

As of November 1, 2002, an aggregate of $30.3 million was outstanding under the Archibald DIP Credit Facility. In connection with the Archibald Plan effective November 1, 2002, all outstanding amounts under the Archibald DIP Credit Facility were repaid in full from proceeds of the initial borrowings under our New Credit Facility (defined below) and the Archibald DIP Credit Facility was terminated.

New Credit Facility

On November 1, 2002, we entered into a loan and security agreement and guaranty with the financial institutions signatory thereto and Foothill Capital Corporation ("Foothill"), as administrative agent (the "New Credit Facility"). The New Credit Facility was extended to us in connection with our emergence from bankruptcy and replaced the financing provided pursuant to the Archibald DIP Credit Facility, which was terminated pursuant to the Archibald Plan.

The New Credit Facility provides up to $50 million in credit, which is comprised of a revolving loan facility, a term loan A, a term loan B and letter of credit issuances. Under the revolving loan facility, we may, subject to certain borrowing conditions, incur revolving loans in an amount up to the lesser of (1) $30.0 million and (2) a borrowing base comprised of a percentage of eligible accounts receivable and eligible inventory, which borrowing base components are subject to certain limits, minus a reserve of $2.5 million (as such amount may be reduced in accordance with the provisions of the loan agreement) and minus certain additional reserves which may from time to time be imposed by Foothill. Revolving loans are due and payable in full on November 1, 2005 (the "Maturity Date").

Subject to certain conditions, the term loan A will be made available to us from July 1 through December 31 of each calendar year, with any outstanding obligations under such term loan to be repaid in full on December 31 of each year. Subject to any applicable reserves, in 2002, term loan A shall not exceed the lesser of (1) $10.0 million and (2) a specified percentage of the value of our equipment and real property. In 2003, term loan A shall not exceed the lesser of (1) $9.0 million and (2) a specified percentage of the value of our equipment and real property. In 2004, term loan A shall not exceed the lesser of (1) $7.0 million and (2) a specified

percentage of the value of our equipment and real property and between July 1, 2005 and the Maturity Date, term loan A shall not exceed $5.0 million. In addition to the term loan A, on November 1, 2002, term loan B was extended to us in an amount equal to $10.0 million. The outstanding principal amount of term loan B is due and payable in full on the Maturity Date; provided, that if at any time the outstanding principal amount of term loan B shall be less than $5.0 million as a result of mandatory or voluntary prepayments, the remaining amount of term loan B shall be immediately due and payable (subject to certain exceptions).

The New Credit Facility provides the various interest rates which are applicable to the revolving loans and term loans thereunder. At our election, revolving loan advances will bear interest at either (a) a variable per annum rate equal to the "prime rate" announced from time to time by Wells Fargo Bank, National Association (the "Prime Rate"), plus 0.50% or (b) a variable per annum rate equal to the "LIBOR" rate determined by Foothill in accordance with its customary procedures, plus 2.75%. Term loan A bears interest at the Prime Rate, plus 2.0%. Term loan B bears interest at a per annum rate equal to (A) the greater of (x) the Prime Rate plus 3.0% and (y) 7.75%, plus (B) 4.75% (the "PIK Amount"), which PIK Amount shall be paid in kind by being added to the principal amount of term loan B. The PIK Amount is subject to reduction in calendar year 2003 if there shall not exist any default or event of default under the New Credit Facility.

The New Credit Facility is secured by first priority liens on all of our assets and all of the proceeds therefrom. Our wholly-owned subsidiaries, Laura Secord Holdings Corp. and Archibald Canada (together, the "Guarantor Subsidiaries") have guaranteed all of our obligations under the New Credit Facility and granted a first priority lien in all of their respective assets and the proceeds therefrom as security for such guarantees.

The New Credit Facility contains various business and financial covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock, limitations on the incurrence of and payments in respect of indebtedness, limitations on asset dispositions, limitations on capital expenditures and requirements to maintain of certain targeted EBITDA amounts. The New Credit Facility also requires us to make prepayments of the loans in certain circumstances, including, among other things, from our excess cash flow, as defined, and from proceeds of certain asset sales, insurance and condemnation proceeds (unless we are permitted to repair or replace the applicable collateral as provided in the loan agreement), and in the event that certain financial tests are not met. These loan restrictions could restrict corporate activities, including our ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities.

Based on our performance during the December holidays, it is unlikely we will satisfy the EBITDA covenant of the New Credit Facility for the second fiscal quarter of 2003. We have begun discussions with Foothill regarding a waiver or amendment of this potential default. However, there can be no assurance that we will be successful in negotiating such a waiver or amendment.

Secured Subordinated Notes

In connection with the Archibald Plan, concurrently with the execution and delivery of the New Credit Facility, pursuant to an Indenture dated November 1, 2002 (the "Indenture") between us, the Guarantor Subsidiaries and BNY Midwest Trust Company, as trustee (the "Trustee"), we issued $50.0 million in aggregate principal amount of our 10% Secured Subordinated Notes due 2007 (the "Notes") in a transaction exempt from registration under the Securities Act of 1933, as amended. The Notes were issued in replacement of those certain 10¹/4% senior secured notes totaling $170.0 million due 2004 issued by Archibald Illinois pursuant to the Indenture dated July 2, 1997 (as amended and supplemented) between Archibald Illinois and The Bank of New York, as trustee, which indenture (and the notes issued thereunder) was terminated pursuant to the Archibald Plan.

Interest is payable under the Notes at the rate of 10% per annum and interest payments are to be made semi-annually on January 1 and July 1 of each year, and on the maturity date, commencing on January 1, 2003. On or prior to November 1, 2005, we may elect, in the judgment of our Board of Directors, to make all or a portion of each such interest payment in cash or by issuing new promissory notes (each a "PIK Note") with a principal amount, in each case, equal to the amount of interest that each holder of a Note was due on the interest payment date and which we have elected to pay by issuance of the PIK Note; provided, however, unless certain conditions are satisfied, the New Credit Facility requires that interest accrued under the Notes be paid by the issuance of PIK Notes. The interest payment due on January 1, 2003 will be made in the form of PIK Notes.

The Notes are secured by a second priority lien on all of our assets and all of the proceeds therefrom. The Guarantor Subsidiaries have guaranteed all of our obligations under the Indenture (including the Notes) and

granted a second priority lien in all of their respective assets and the proceeds therefrom as security for such guarantees. The liens in favor of the Trustee are subordinate to the liens granted by us and the Guarantor Subsidiaries in favor of Foothill under the New Credit Facility. The manner and terms under which the liens granted to the Trustee under the Indenture are subordinated to the liens in favor of Foothill under the New Credit Facility are as set forth in the Indenture.

The Indenture contains various business covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock, limitations on the incurrence of indebtedness and limitations on asset dispositions. The Indenture also requires us to make an offer to repurchase Notes in certain circumstances, including, among other things, to the extent net cash proceeds from asset sales exceed a certain threshold amount (but only to the extent such proceeds are not reinvested or used to repay certain other indebtedness). These restrictions could restrict corporate activities, including our ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities.

Critical Accounting Policies and Estimates

Financial Reporting Release No. 60, issued by the Securities and Exchange Commission, requires all registrants to discuss "critical" accounting policies or methods used in the preparation of financial statements. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, and require management's most difficult, subjective or complex judgments, as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Inventories. Inventories are stated at the lower of cost or market. Inventories are valued primarily at either average or first in, first out (FIFO) cost. Supply inventories are relieved monthly based on an estimated gross margin and adjusted to actual upon the taking of an annual physical inventory at the end of July. In fiscal 2002, we recorded a reserve for supply inventories of approximately $3.0 million. This reserve relates primarily to the discontinuance of certain product lines for which we had unique packaging, and other slow-moving and obsolete packaging and supply inventories. We will write-off those items which are deemed obsolete and periodically monitor the inventories for other potential slow moving and obsolete items.

Inflation

Inflationary factors such as increases in the costs of ingredients, purchased product, labor and corporate overhead may adversely affect our operating profit. In addition, store operating costs, including most of our retail store leases which require us to pay additional rent based on a percentage of sales as well as taxes, insurance and maintenance expenses, are subject to inflation. Although our recent results have not been significantly affected by inflation, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on our operating results.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

Our operations are not currently subject to market risks of a material nature for interest risks, foreign currency rates, commodity prices or other market price risks. During fiscal year 2003, we have experienced an increase in the cost of chocolate, our largest raw material, as a result of higher cocoa bean prices, which has been influenced by events in the Ivory Coast.

The following is a chart of our cash contractual obligations (in thousands) as of November 30, 2002:

			Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Secured subordinated notes	$	75,000	$	3,333	$	15,000	$	56,667	$	—
Revolving line of credit		25,338		25,338		—		—		—
Term loan agreement		10,000		—		10,000		—		—
Capital lease obligations		147		63		84		—		—
Operating leases		40,273		8,295		20,644		7,448		3,886

Total contractual cash obligations	$	150,758	$	37,029	$	45,728	$	64,115	$	3,886

ITEM 4—CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our president, chief executive officer and secretary and our vice president, chief financial officer, treasurer and assistant secretary have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and are operating in an effective manner.

Changes in internal controls

There have been no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation.

PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

On June 12, 2002, our predecessor companies, Archibald Illinois and Holdings, filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware for protection under Chapter 11 of the Bankruptcy Code.

On November 15, 2001, SFG and its subsidiaries, all of which were wholly owned subsidiaries of Archibald Illinois, filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware for protection under Chapter 11 of the Bankruptcy Code.

From time to time, we are involved in routine litigation incidental to our business. We are not a party to any pending or threatened legal proceeding which we believe would have a material adverse effect on our results of operations or financial condition. Also, except as otherwise discussed above, we were not a party to any such legal proceeding that terminated during the first quarter of fiscal 2003.

ITEM 2—CHANGES IN SECURITIES AND USE OF PROCEEDS

Prior to November 1, 2002, Archibald Illinois had 4,210 issued and outstanding shares of common stock, par value $.01, all of which were owned by Holdings. Prior to November 1, 2002, Holdings had four classes of authorized common stock. There were seven holders of record of Holdings' Class A common stock, no outstanding shares of Holdings' Class B common stock, twelve holders of record of Holdings' Class C common stock and one holder of record of Holdings' Class D common stock. There was no established trading market for Archibald Illinois' or Holdings' common stock.

In connection with the Archibald Plan effective November 1, 2002, Holdings merged with and into Archibald Illinois and Archibald Illinois merged with and into us. Under the terms of the Archibald Plan, in exchange for extinguishing certain claims against Archibald Illinois and Holdings, we issued to the holders of Archibald Illinois' 10¹/4% senior secured notes due 2004 (and, upon completion of the Archibald Plan, we expect to issue to certain general unsecured creditors of Archibald Illinois) an aggregate of 276,290 shares of our common stock, par value $.01 per share, which represents 100% of our issued and outstanding common stock. As of November 1, 2002, our common stock was held by 31 participants of The Depository Trust Company System. The issuance of shares of our common stock pursuant to the Archibald Plan was exempt from registration under the Securities Act of 1933, as amended, as a result of the exemption set forth in Section 1145(a)(1) of the Bankruptcy Code. No person acted as an underwriter of the shares of common stock and except for the extinguishment of claims, we did not receive any cash proceeds or other cash consideration from the issuance of such common stock. There is no established public trading market for our common stock.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

None.

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

On or about August 14, 2002, Robert L. Berger & Associates, Archibald Illinois' balloting agent, sent to all of Archibald Illinois' creditors, including the holders of Archibald Illinois' 10¹/4% senior notes due 2004, a solicitation package for voting on the Archibald Plan pursuant to which each creditor could vote to either reject or accept the Archibald Plan. The deadline for voting on the Archibald Plan was September 16, 2002. As of the deadline, forty-six ballots were received from the creditors. Of those ballots, 100% (totaling $91,780,000 in dollar amount) were cast in favor of the Archibald Plan.

ITEM 5—OTHER INFORMATION

None.

ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits

Exhibit Number		Description of Exhibit
99.1		Section 906 CEO Certification
99.2		Section 906 CFO Certification

(b): Reports on Form 8-K

The following reports on Form 8-K were filed during the fiscal quarter ended November 30, 2002:

Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized, on January 21, 2003.

	ARCHIBALD CANDY CORPORATION
	By:		/s/ RICHARD J. ANGLIN Richard J. Anglin Vice President and Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer)

Certifications

I, Ted A. Shepherd, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Archibald Candy Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: January 21, 2003

/s/ TED A. SHEPHERD

Ted A. Shepherd
President, Chief Executive Officer and Secretary

Certifications

I, Richard J. Anglin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Archibald Candy Corporation;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: January 21, 2003

/s/ RICHARD J. ANGLIN

Richard J. Anglin
Vice President, Chief Financial Officer, Treasurer and Assistant Secretary

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INDEX
PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

ITEM 4—CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS