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

FORM 10-Q

~~/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15~~(d)Mark ~~OF THE SECURITIES EXCHANGE ACT OF 1934.~~One)

~~For~~ý ~~the~~QUARTERLY ~~Quarterly~~REPORT ~~Period~~PURSUANT ~~Ended~~TO ~~November 24,~~SECTION ~~2001~~ 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 23, 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.)
1137 West Jackson Boulevard Chicago, Illinois (Address of principal executive offices)		60607 (zip code)

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

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

As of April 9, 2002, the number of shares outstanding of the registrant's Common Stock was 4,210, all of which were held by Fannie May Holdings, Inc.

ARCHIBALD CANDY CORPORATION

~~Incorporated~~FORM ~~in the State of Illinois IRS Employer Identification No. 36~~10-~~0743280 1137 West Jackson Boulevard Chicago, Illinois 60607 (312) 243-2700~~Q

~~Indicate by~~FOR ~~check~~THE ~~whether~~QUARTER ~~the~~ENDED ~~registrant~~FEBRUARY (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)23, ~~and (2) has been subject to such filings requirements for the past 90 days. Yes /x/ No / /~~ 2002

~~As of~~ ~~January 14, 2002, the number of shares outstanding of the registrant's Common Stock was 4,210, all of which were held by Fannie May Holdings, Inc.~~ INDEX

ARCHIBALD CANDY CORPORATION FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 24, 2001 INDEX

		Page No.
PART I—FINANCIAL INFORMATION:
ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)
	CONSOLIDATED BALANCE SHEETS	1
	CONSOLIDATED STATEMENTS OF OPERATIONS	2
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	3
	CONSOLIDATED STATEMENTS OF CASH FLOWS	4
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	5
ITEM 2—MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS
	OF OPERATIONS	18
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS		25
PART II—OTHER INFORMATION:
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K		26
SIGNATURES		27

		Page No.
PART I—FINANCIAL INFORMATION:
ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)
	CONSOLIDATED BALANCE SHEETS	3
	CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2—MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS		25
PART II—OTHER INFORMATION:
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K		26
SIGNATURES		27

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~~)

			November 24, 2001			August 25, 2001
			February 23, 2002			August 25, 2001
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	32,~~148~~804		$	2,346
	Accounts receivable, net			54,~~698~~720			1,452
	Inventories			3830,~~279~~147			31,840
	Prepaid expenses and other current assets			4,~~099~~110			3,133
Total current assets				5141,~~224~~781			38,771
Property, plant, and equipment, net				2726,~~593~~093			34,398
Goodwill, net				5857,~~029~~594			58,465
Noncompete agreements and other intangibles, net				5045			685
Deferred financing fees, net				5,~~668~~801			6,224
Investment in joint venture				2,~~047~~094			1,988
Other assets				1,~~325~~490			1,580
Total assets			$	~~145~~134,~~936~~898		$	142,111
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
	Revolving line of credit		$	292,~~666~~680		$	19,472
	Senior secured notes			170,000			—
	Accounts payable			2119,~~993~~780			16,821
	Accrued liabilities			34,~~514~~093			3,720
	Payroll and related liabilities			3,~~012~~174			2,466
	Accrued interest			711,~~380~~614			3,002
	Restructuring reserve			—			94
	Current portion of capital lease obligations			4644			47
Total current liabilities				~~235~~211,~~611~~385			45,622
Due to affiliate				40			40
Senior secured notes				—			170,000
Deferred rent				—			885
Pension liability				1,~~173~~308			1,038
Capital lease obligations, less current portion				~~117~~105			130
Shareholder's equity (deficit):
	Common stock, $0.01 par value:
		Authorized—25,000 shares
		Issued and outstanding—4,210 shares		—			—
	Additional paid-in-capital			18,700			18,700
	Accumulated deficit			(~~109~~96,~~542~~482	)		(94,106	)
	Other comprehensive income			(163	)		(198	)
	Other comprehensive loss			(158	)		(198	)
Total shareholder's deficit				(9177,~~005~~940	)		(75,604	)
Total liabilities and shareholder's deficit			$	~~145~~134,~~936~~898		$	142,111

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						Six Months Ended
	November 24, 2001			November 25, 2000
	February 23, 2002			February 24, 2001			February 23, 2002			February 24, 2001
Net sales	$	4281,~~375~~213		$	52102,~~514~~494		$	123,588		$	155,041
Cost of sales, excluding depreciation		1732,~~492~~821			2039,~~445~~097			50,313			59,542
Gross profit		24,883			32,069
Cost of sales, nonrecurring(1)		—			2,439			—			2,439
Selling, general, and administrative expenses		29,551			31,751
Total cost of sales		32,821			41,536			50,313			61,981
Depreciation and amortization expense		2,505			3,313
Gross profit		48,392			60,958			73,275			93,060
Amortization of goodwill and other intangibles		1,030			1,052
Selling, general, and administrative expenses, excluding depreciation and amortization		27,663			37,510			57,214			69,294
Share of loss in joint venture		128			63
Depreciation and amortization expense		1,868			3,296			4,373			6,583
Management fees and other fees		28			131
Amortization of goodwill and other intangibles		1,096			1,052			2,126			2,104
Operating loss		(8,359	)		(4,241	)
Share of loss in joint venture		50			16			178			105
Other (income) and expense:
Management fees and other fees		223			164			251			295
Interest expense		4,797			5,058
Operating income		17,492			18,920			9,133			14,679
Interest income		(5	)		—
Other (income) and expense:
Other income and expense		24			(46	)
Interest expense		4,491			4,874			9,288			9,932
Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries(a)		2,258			—
Interest income		—			(3	)		(5	)		(3	)
Loss before income taxes		(15,433	)		(9,253	)
Other income and expense		(115	)		(67	)		(91	)		(113	)
Provision for income taxes		3			25
Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries(2)		—			—			2,258			—
Net loss	$	(15,436	)	$	(9,278	)
Income (loss) before income taxes		13,116			14,116			(2,317	)		4,863
Provision for income taxes		56			49			59			74
Net income (loss)	$	13,060		$	14,067		$	(2,376	)	$	4,789

(1): These costs relate to the manufacturing start-up of Laura Secord products.
(2): Represents 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 the Company's negative investment balance in SFG and subsidiaries.

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	~~Three Months Ended~~					Six Months Ended
			November 24, 2001			November 25, 2000
		February 23, 2002			February 24, 2001			February 23, 2002			February 24, 2001
Net loss			$	(15,436	)	$	(9,278	)
Net income (loss)		$	13,060		$	14,067		$	(2,376	)	$	4,789
Other comprehensive loss:
Other comprehensive income (loss):
	Foreign currency translation adjustments			35			(249	)
Foreign currency translation adjustment			5			200			40			(49	)
Comprehensive loss			$	(15,401	)	$	(9,527	)
Comprehensive income (loss)		$	13,065		$	14,267		$	(2,336	)	$	4,740

See accompanying notes.

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

			Three Months Ended
			Six Months Ended
			November 24, 2001			November 25, 2000
			February 23, 2002			February 24, 2001
OPERATING ACTIVITIES
Net loss			$	(15,436	)	$	(9,278	)
Net income (loss)			$	(2,376	)	$	4,789
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			36,~~535~~499			48,~~365~~687
	Share of loss in joint venture			~~128~~178			63105
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries			2,258			—
	Changes in operating assets and liabilities:
		Accounts receivable, net		(43,~~246~~268	)		(56,~~857~~496	)
		Inventories		(~~8,626~~494	)		(~~8,300~~915	)
		Prepaid expenses and other current assets		(1,~~097~~392	)		~~(515~~504	)
		Other assets		(~~145~~72	)		(~~102~~255	)
		Accounts payable and accrued liabilities		1518,~~345~~112			134,~~504~~443
Net cash used in operating activities				(8,284	)		(6,120	)
Net cash provided by operating activities				19,445			10,862
INVESTING ACTIVITIES
Purchase of property, plant, and equipment				(~~777~~1,065	)		(13,~~313~~028	)
Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries				(336	)		—
Net cash used in investing activities				(1,~~113~~401	)		(13,~~313~~028	)
FINANCING ACTIVITIES
Net borrowings under revolving line of credit				10,194			9,500
Net repayments under revolving line of credit				(16,793	)		(6,500	)
Principal payments of capital lease obligations				(1326	)		(327	)
Costs related to financing				(17807	)		(72163	)
Net cash provided by financing activities				10,164			9,425
Net cash used in financing activities				(17,626	)		(6,690	)
Effect of exchange rates on cash				3540			(~~249~~49	)
Net increase (decrease) in cash and cash equivalents				802			1,743
Net increase in cash and cash equivalents				458			1,095
Cash and cash equivalents beginning of period				2,346			3,120
Cash and cash equivalents end of period			$	32,~~148~~804		$	4,~~863~~215
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
	Interest		$	~~415~~673		$	~~595~~9,950
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 to Consolidated Financial Statements (Unaudited) ~~November~~ February 2423, ~~2001~~ 2002

~~Note~~ NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Archibald Candy Corporation ("Archibald") and its subsidiaries (collectively, the "Company") are manufacturers and retailers of boxed chocolates and other confectionery items. The Company sells its Fannie May, Fanny Farmer, ~~Sweet Factory~~ and Laura Secord candies in over ~~550~~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 ~~November~~February 2423, ~~2001~~2002 are not necessarily indicative of the results that may be achieved for the entire year.

~~Note~~ NOTE 2. BANKRUPTCY FILING—SWEET FACTORY GROUP, INC. AND SUBSIDIARIES

On November 15, 2001, Sweet Factory Group, Inc. ("SFG") and its three subsidiaries; Sweet Factory, Inc., SF Properties, Inc. and SF ~~Candy~~ Candy Company, filed voluntary petitions in the U.S. Bankruptcy Court for the District of Delaware ("Bankruptcy Court") under Chapter 11 of the U.S. Bankruptcy Code. In connection with the bankruptcy filings, Sweet Factory, Inc. entered into a Post-Petition Credit, Security and Guaranty Agreement (the "Post-Petition Credit Agreement") with The CIT Group/Business Credit, Inc. ("CIT") and SFG, SF Properties, Inc. and SF Candy Company as guarantors. The agreement 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 Post-Petition Credit Agreement is secured by first priority liens on Sweet Factory, Inc.'s accounts receivable and inventory and 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%. The Company and Archibald Candy (Canada) ~~Corporation~~ Corporation have guaranteed all obligations of Sweet Factory, Inc. under the Post-Petition Credit Agreement. Sweet Factory, Inc. is required to pay fees in connection with ~~the~~ the Post-Petition Credit Agreement. On March 4, 2002, SFG and its subsidiaries filed a Plan of Reorganization with the Bankruptcy Court. A confirmation hearing is scheduled for May 24, 2002.

7 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

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 would 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 is: (i) that 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 investment balance, with the remaining $2.3 million recorded as a non-operating expense. 5

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 investment balance, with the remaining $2.3 million recorded as a non-operating expense.

Management has 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 a plan of reorganization is finalized or another transaction is effected.

The condensed consolidated financial information set forth below for SFG and its subsidiaries has been prepared on a going concern basis which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filings of SFG and its subsidiaries and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the financial statements of SFG and its subsidiaries and cause a material decrease in the carrying amount of the net investment.

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

	For the period of Nov. 16, 2001 thru Nov. 24, 2001			For the period of Aug. 26, 2001 thru Nov. 15, 2001			For the quarter ended Nov. 25, 2000
	For the quarter ended Feb. 23, 2002			For the quarter ended Feb. 24, 2001			For the period of Aug. 26, 2001 thru Nov. 15, 2001			For the six months ended Feb. 23, 2002			For the six months ended Feb. 24, 2001
Net sales	$	19,~~068~~619		$	819,~~867~~513		$	138,~~999~~867		$	19,554		$	33,512
Operating loss		(~~470~~372	)		(~~3,172~~513	)		(23,~~311~~172	)		(4,014	)		(2,823	)
Loss before income taxes		(~~470~~380	)		(~~3,175~~513	)		(23,~~313~~175	)		(4,025	)		(2,825	)
Net loss		(~~470~~377	)		(~~3,178~~520	)		(23,~~315~~178	)		(4,025	)		(2,834	)

8 Operating loss includes restructuring expenses of $35 and $910 for the quarter and year-to-date periods ended February 23, 2002, respectively.

The operating loss for the period of November 16, 2001 thru November 24, 2001 includes $375 of restructuring expenses associated with the closing of stores subsequent to the bankruptcy filing.

	Feb. 23, 2002			Nov. 15, 2001			Aug. 25, 2001
Current assets	$	3,042		$	2,620		$	4,174
Property, plant and equipment		4,737			5,316			5,699
Other assets		791			772			892

Total assets	$	8,570		$	8,708		$	10,765
Current liabilities	$	6,685		$	6,079		$	4,069
Payable to Archibald Candy Corporation		19,544			19,383			19,761
Other liabilities		313			371			885
Total stockholder's deficit		(17,972	)		(17,125	)		(13,950	)

Total liabilities & stockholder's deficit	$	8,570		$	8,708		$	10,765

	Nov. 24, 2001			Nov 15, 2001			Aug. 25, 2001
Current assets	$	3,128		$	2,620		$	4,174
Property, plant and equipment		5,266			5,316			5,699
Other assets		770			772			892
Total assets	$	9,164		$	8,708		$	10,765
Current liabilities	$	6,930		$	6,079		$	4,069
Payable to Archibald Candy Corporation		19,463			19,383			19,761
Other liabilities		366			371			885
Total stockholder's deficit		(17,595	)		(17,125	)		(13,950	)
Total liabilities & stockholder's deficit	$	9,164		$	8,708		$	10,765

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 November 24, 2001			For the quarter ended November 25, 2000
	For the quarter ended Feb. 24, 2001			For the six months ended Feb. 23, 2002			For the six months ended Feb. 24, 2001
Net sales	$	3382,~~508~~981		$	38114,~~548~~721		$	121,529
Operating loss		(5,187	)		(1,930	)
Operating income		19,433			12,305			17,503
Loss before income taxes		(12,258	)		(6,940	)
Income before income taxes		14,629			858			7,688
Net loss		(12,258	)		(6,963	)
Net income		14,587			802			7,623

	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~~ NOTE 3. INVENTORIES

Inventories at ~~November~~February 2423, ~~2001~~2002 and August 25, 2001 are comprised of the following:

	November 24, 2001		August 25, 2001
	February 23, 2002		August 25, 2001
Raw materials	$	1513,~~751~~943	$	12,901
Work in process		~~200~~205		225
Finished goods		2215,~~328~~999		18,714
	$	3830,~~279~~147	$	31,840

NOTE 4. DEBT AND LIQUIDITY

Archibald has not made the approximately $8.7 million interest payment that was due on January 2, 2002 on its outstanding $170 million of 10¹/4% senior secured notes due 2004 (the "Senior Notes"), however, Archibald has entered into a forbearance agreement (the "Noteholders' Forbearance Agreement") with holders (the "Consenting Holders") of approximately 88% in aggregate face amount of the Senior Notes. The Senior Notes have been classified as current on Archibald's balance sheet.

Pursuant to the Noteholders' Forbearance Agreement, the Consenting Holders have agreed to forbear until April 30, 2002 (the "Noteholders' Forbearance Period") from exercising their rights under the Senior Notes, the indenture pursuant to which the Senior Notes have been issued (the "Indenture") and applicable law resulting from Archibald's failure to make the approximately $8.7 million interest payment on the Senior Notes that was due on January 2, 2002. The Noteholders' Forbearance Period may be terminated prior to April 30, 2002 if any of the following occurs (other than if due to the Consenting Holders' breach of their obligations under the Noteholders' Forbearance Agreement): (1) any other event of default under the Indenture, (2) the termination of Archibald's forbearance agreement (the "CIT Forbearance Agreement") with The CIT Group/Business Credit, Inc. ("CIT"), the agent and sole lender under Archibald's revolving credit facility (the "CIT Facility"), (3) the termination of Holdings' forbearance agreement (the "Senior Preferred Forbearance Agreement") with the holders of its senior preferred stock (the "Senior Preferred Holders"), (4) any acceleration of the principal and interest under the Senior Notes, (5) any payment or distribution by Archibald to the

holders of Holdings' preferred stock or to Holdings for payment to the holders of its preferred stock, (6) any election by the Senior Preferred Holders of a director having 51% of the total voting power of Holdings' Board of Directors or (7) a breach of any representation, warranty or covenant in the Noteholders' Forbearance Agreement.

Archibald originally entered into the CIT Forbearance Agreement as of December 31, 2001 because (1) Archibald had failed, or expected to fail, to satisfy certain financial covenants in the CIT Facility that required, Archibald to meet minimum levels of net earnings, before interest, income taxes, depreciation and amortization, and net cash flow for periods ending in November and December 2001 and February 2002 and (2) Archibald expected to fail to make the January 2002 interest payment on the Senior Notes. Pursuant to subsequent amendments to the CIT Forbearance Agreement, CIT also agreed to forbear from exercising its rights with respect to certain additional covenant defaults by Archibald under the CIT Facility. CIT has extended the forbearance period under the CIT Forbearance Agreement (the "CIT Forbearance Period") beyond March 1, 2002, its originally scheduled expiration date, until April 30, 2002. Pursuant to the CIT Forbearance Agreement, CIT has allowed Archibald to continue to request borrowings under the CIT Facility for working capital needs, but not in excess of the lesser of a certain specified limit and a borrowing base comprised of a percentage of the eligible accounts receivable and eligible inventory of Archibald and its Canadian subsidiary, Archibald Candy (Canada) Corporation. During the CIT Forbearance Period, Archibald's management expects that Archibald will have sufficient availability under the CIT Facility to meet its working capital needs as they become due; however, there can be no assurance that this will be the case. The CIT Forbearance Period may be terminated prior to April 30, 2002 if any of the following occurs: (1) any acceleration of the Senior Notes, (2) any payment on account of the Senior Notes or Holdings' preferred stock, (3) any other event of default under the CIT Facility or (4) a breach of any representation, warranty or covenant in the CIT Forbearance Agreement.

Pursuant to the Senior Preferred Forbearance Agreement, the Senior Preferred Holders have agreed to forbear until April 30, 2002 (the "Senior Preferred Forbearance Period") from exercising their right to elect a director to Holdings' Board of Directors who would have 51% of the total voting power of Holdings' Board of Directors and from exercising any other right or remedies that they may have as a result of Holdings' failure to make the $3.0 million redemption payment required to be made by it to the Senior Preferred Holders on January 15, 2002 and the $10.5 million in aggregate of remaining redemption payments that automatically accelerated as a result thereof. The Senior Preferred Forbearance Period may be terminated prior to April 30, 2002 if any of the following occurs (other than if due to the Senior Preferred Holders' breach of their obligations under the Senior Preferred Forbearance Agreement): (1) the termination of the CIT Forbearance Agreement, (2) the termination of the Noteholders' Forbearance Agreement or (3) a breach by Holdings of any representation, warranty or covenant in the Senior Preferred Forbearance Agreement. Pursuant to the Senior Preferred Forbearance Agreement, Holdings also has granted to the Senior Preferred Holders the right to designate an individual who is entitled to observe all meetings of the Boards of Directors of Holdings, Archibald and its subsidiaries.

Archibald is continuing discussions with the holders of the Senior Notes, CIT, Holdings' significant stockholders and investment advisors on an overall capital restructuring, including, among other things (1) a restructuring of the Senior Notes through debt for equity exchanges or conversions or repurchases or acquisitions of the Senior Notes on discounted terms, (2) new equity and/or debt from unaffiliated third parties and/or affiliates of Archibald or its directors and officers, (3) extensions of the forbearance periods under the Noteholders' Forbearance Agreement, the CIT Forbearance Agreement and the Senior Preferred Forbearance Agreement or (4) combinations of the foregoing. Archibald has not received any commitments or agreements with respect to any new sources of equity or debt, and there can be no assurance that any such financing will be obtained, particularly if the Senior Notes are not restructured on a satisfactory basis. There can be no assurance that Archibald will succeed in a restructuring on a timely basis or that the terms and conditions of a restructuring would be favorable to Archibald.

In addition to the Senior Preferred Stock, Holdings also has the two following classes of junior preferred stock: Junior Class A PIK Preferred Stock and Junior Class B PIK Preferred Stock. The

Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock were issued in 1991 in the original face amount of $7.0 million and $0.7 million, respectively. As of February 23, 2002, affiliates of TCW Capital owned approximately 64% of the Junior Class A PIK Preferred Stock and affiliates (or parties advised by such affiliates) of The Jordan Company owned approximately 36% of the Junior Class A PIK Preferred Stock and approximately 80% of the Junior Class B PIK Preferred Stock.

In connection with Archibald entering into the CIT Facility, Holdings entered into agreements with the holders of the Junior Class A PIK Preferred Stock and the Junior Class B Preferred Stock extending the mandatory redemption date for each such class of preferred stock from November 1, 2001 to March 15, 2006. The redemption value of the Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock on March 15, 2006 will be approximately $21.2 million and $2.1 million, respectively. The holders of Junior Class A PIK Preferred Stock also have agreed to extend from January 1, 2000 to June 30, 2003 the date on which they have the right to put to Holdings their common stock. In the event that Holdings does not redeem all of the common stock and preferred stock owned by affiliates of TCW Capital within 90 days of any exercise of this put right, affiliates of TCW Capital have the right to take control of a majority of the voting power of Holdings' Board of Directors for purposes of effecting a sale of Holdings.

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 in prior periods.

NOTE 6. 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.

~~Note~~ Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, 4Inc. ~~DEBT~~) Consolidating ~~AND~~Balance ~~LIQUIDITY~~Sheet As of February 23, 2002 (Unaudited) (In thousands)

On January 2, 2002, Archibald did not make the approximately $8.7 million interest payment due on its outstanding $170 million of 101/4% senior secured notes due 2004 (the "Senior Notes"); however, Archibald has a 30-day grace period in which to make such interest payment before it becomes an event of default that would allow acceleration of the Senior Notes by the trustee under the Indenture pursuant to which such notes have been issued (the "Indenture") or by holders of at least 25% in principal amount of the outstanding Senior Notes. As a result, the Senior Notes have been classified as current in the balance sheet as of November 24, 2001. CIT, the agent and sole lender under Archibald's revolving credit facility (the "CIT Facility"), has agreed, as more fully described below, to allow Archibald to continue to request borrowings under the CIT Facility for working capital needs despite Archibald's failure to make the January 2002 interest payment on the Senior Notes and to forbear from exercising its right under the CIT Facility that would arise as a result of Archibald's failure to make such interest payment by the expiration of the grace period. During the forbearance period, Archibald's management expects that Archibald will have sufficient availability under its borrowing base to meet its working capital needs as they become due; however, there can be no assurance that this will be the case.

		Archibald Candy Corporation			Guarantor Subsidiaries(a)		Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents	$	2,302		$	502	$	—		$	2,804
	Accounts receivables, net		3,790			930		—			4,720
	Inventories		26,236			3,911		—			30,147
	Prepaids and other current assets		3,752			358		—			4,110

Total current assets			36,080			5,701		—			41,781
Property, plant, and equipment, net			17,178			8,915		—			26,093
Intercompany			16,719			487		—			17,206
Investment in subsidiaries			(4,109	)		—		(13,016	)		(17,125	)
Other assets			64,836			2,107		—			66,943

Total assets		$	130,704		$	17,210	$	(13,016	)	$	134,898
Liabilities and shareholder's equity (deficit)
Current liabilities:
	Revolving line of credit	$	2,680		$	—	$	—		$	2,680
	Senior secured notes		170,000			—		—			170,000
	Accounts payable		17,866			1,914		—			19,780
	Other current liabilities		16,906			2,019		—			18,925

Total current liabilities			207,452			3,933		—			211,385
Other noncurrent liabilities			1,453			9,303		(9,303	)		1,453
Total shareholder's equity (deficit)			(78,201	)		3,974		(3,713	)		(77,940	)

Total liabilities and shareholder's equity (deficit)		$	130,704		$	17,210	$	(13,016	)	$	134,898

(a): This column does not include the balances of SFG and subsidiaries beginning November 15, 2001 due to their deconsolidation for financial reporting purposes. SFG and its subsidiaries, however, continue to be guarantors on the Senior Notes. Refer to Note 2 for financial information on SFG and its subsidiaries since their deconsolidation.

Archibald has begun to have discussions with the holders of the Senior Notes regarding a possible restructuring of such Notes, including default waivers or forbearances, payment extensions, debt for equity exchanges or conversions, repurchases or acquisitions of the Senior Notes on discounted terms or combination of the foregoing (collectively, a "Restructuring"). There can be no assurance that Archibald will succeed in a Restructuring on a timely basis or that the terms and conditions of a Restructuring would be favorable to Archibald. If by February 1, 2002 Archibald is unable to negotiate a Restructuring or a waiver, forbearance or amendment that effectively waives, forbears or postpones the January 2002 interest payment default, as well as any necessary corresponding amendment of the CIT Facility, events of default will occur under the Indenture and the CIT Facility.

In addition, Archibald has failed, or expects that it will fail, to satisfy certain financial covenants in the CIT Facility that require Archibald to meet minimum levels of net earnings, before interest, income taxes, depreciation and amortization ("EBITDA"), and net cash flow for periods ending in November and December 2001 and February 2002. Archibald has entered into a forbearance agreement with CIT (the "CIT Forbearance Agreement"), pursuant to which CIT has agreed to forbear from exercising its rights and remedies under the CIT Facility that arise as a result of Archibald's failure to meet such financial covenants and to make the January 2002 interest payment on the Senior Notes. In accordance with the CIT Forbearance Agreement, CIT also has agreed to allow Archibald to request revolving loans and letters of credit during the forbearance period, as described below, to satisfy its working capital needs but not to exceed in aggregate amount outstanding the lesser of (i) certain specified amounts and (ii) a borrowing base comprised only of a percentage of the eligible accounts receivable and eligible inventory of Archibald and Archibald Candy (Canada) Corporation. The forbearance period shall terminate on the earliest to occur of the following: March 1, 2002, any acceleration of the Senior Notes, any payment on account of the Senior Notes or the preferred stock of Holdings, any other event of default under the CIT Facility or a breach of any representation, warranty or covenant in the CIT Forbearance Agreement. Archibald has paid a fee to CIT in connection with the CIT Forbearance Agreement. As of January 11, 2002, borrowings of $3.5 million were outstanding under the CIT Facility and $0.2 million of letters of credit were outstanding under the CIT Facility.

Given the terms of the CIT Forbearance Agreement, Archibald will not be able to dividend or otherwise make available to Holdings funds sufficient to allow Holdings to make the $3.0 million redemption payment required to be made by it to the holders of Holdings' Senior Preferred Stock on January 15, 2002. In the event that Holdings fails to make such redemption payment by February 14, 2002, all remaining redemption payments on Holdings' Senior Preferred Stock, which equal $10.5 million in aggregate, shall be accelerated. In addition, if Holdings fails to make a redemption

~~payment~~ ~~in accordance with the terms of the Senior Preferred Stock, the holders of the Senior Preferred Stock may elect a director to the Board of Directors of Holdings who shall have 51% of the total~~ ~~voting~~ ~~power of the Board. Any exercise of such right would constitute a change of control under the Indenture that would obligate~~ Archibald toCandy ~~offer~~Corporation (A toWholly ~~repurchase~~Owned ~~all~~Subsidiary of ~~the~~Fannie ~~Senior~~May ~~Notes at face value and also would constitute an event of default under the CIT Facility~~Holdings, Inc.) Consolidating ~~The~~Balance ~~Senior~~Sheet As ~~Preferred Stock, which was issued by Holdings in 1991 in the original face amount~~ of ~~$10.0~~August ~~million~~25, ~~is held~~2001 (In ~~by the former shareholders of Archibald.~~ thousands)

During the forbearance period, Archibald expects to work with the holders of the Senior Notes, CIT, other creditors, Holdings' significant stockholders and investment advisors on a financial restructuring, including a restructuring of the Senior Notes, as well as seeking new equity and/or debt from unaffiliated third parties and/or affiliates of Archibald or its directors and officers. Archibald has not received any commitments or agreements with respect to any new sources of equity or debt, and there can be no assurances that any such financing will be obtained, particularly if the Senior Notes are not restructured on a satisfactory basis.

		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 (deficit)		$	133,717		$	6,386		$	2,008		$	142,111

In addition to the Senior Preferred Stock, Holdings also has the two following classes of junior preferred stock: Junior Class A PIK Preferred Stock and Junior Class B PIK Preferred Stock. The Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock were issued in 1991 in the original face amount of $7.0 million and $0.7 million, respectively. As of January 14, 2002, affiliates of TCW Capital owned approximately 64% of the Junior Class A PIK Preferred Stock and affiliates (or parties advised by such affiliates) of The Jordan Company owned approximately 36% of the Junior Class A PIK Preferred Stock and approximately 80% of the Junior Class B PIK Preferred Stock.

In connection with Archibald entering into the CIT Facility, Holdings entered into agreements with the holders of each class of its preferred stock to, among other things, extend the mandatory redemption dates for such stock. The terms of the Senior Preferred Stock have been amended to, among other things, eliminate the accrual of dividends on such stock after August 31, 2000 and to change the mandatory redemption date of such stock from a single aggregate redemption payment on August 31, 2001 to a schedule of mandatory redemption payments on January 15th of each year, commencing in 2002 and ending in 2006. Such annual redemption payments are in the amounts of $3.0 million in each of the years 2002 through 2004, $2.0 million in 2005 and $2.5 million in 2006.

The terms of the Junior Class A PIK Preferred Stock and the Junior Class B Preferred Stock have been amended to extend the mandatory redemption date for each such class of preferred stock from November 1, 2001 to March 15, 2006. The redemption value of the Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock on March 15, 2006 will be approximately $21.2 million and $2.1 million, respectively. The holders of Junior Class A PIK Preferred Stock also have agreed to extend from January 1, 2000 to June 30, 2003 the date on which they have the right to put to Holdings their common stock. In the event that Holdings does not redeem all of the common stock and preferred stock owned by affiliates of TCW Capital within 90 days of any exercise of this put right, affiliates of TCW Capital have the right to take control of a majority of the voting power of Holdings' Board of Directors for purposes of effecting a sale of Holdings.

In order for Holdings to make the redemption payments on its preferred stock, Holdings must cause the Company, to the extent permitted by the Indenture, the CIT Facility and law, to advance the necessary funds to Holdings by dividend or otherwise. Such advances, if paid, will reduce the funds available for the Company's operations. To the extent that such funds are not available, whether due to the restrictions set forth in the Indenture, the CIT Facility or otherwise, the failure to make required redemption payments (1) would trigger various provisions of Holdings' preferred and common stock, including provisions providing for a change of control of Holdings' and Archibald's Boards of Directors and (2) with respect only to a failure to make required redemptions of the Senior Preferred Stock,

~~could~~ ~~result~~ in Archibald ~~defaults~~Candy ~~under~~Corporation (A ~~the~~Wholly ~~Indenture~~Owned ~~and~~Subsidiary ~~the~~of ~~CIT~~Fannie ~~Facility~~May ~~and~~Holdings, Inc.) Consolidating anStatement ~~obligation~~of byOperations ~~Archibald~~for ~~under~~ the ~~Indenture~~Three toMonths ~~purchase~~Ended ~~all~~February 23, ~~of the Senior Notes.~~ 2002 (Unaudited) (In thousands)

The Indenture also provides that, except in limited circumstances (including to pay dividends or redeem preferred stock not owned by affiliates of The Jordan Company), Archibald will not, and will not permit any of its subsidiaries to, make dividend payments or other distributions on its outstanding shares of capital stock unless at the time of such distribution: (a) no default under the Indenture has occurred and is continuing or would occur as a consequence, thereof, (b) immediately after such distribution, Archibald would comply with the interest coverage ratios set forth in the Indenture and (c) such distributions do not exceed an amount determined by reference to a formula consisting primarily of prior distributions and payments, prior income and the proceeds from the sale of securities. The Indenture prohibits the incurrence of additional indebtedness unless, among other things, Archibald complies with minimum interest coverage ratios set forth in the Indenture.

		Archibald Candy Corporation			Guarantor Subsidiaries(a)			Eliminations			Consolidated
Net sales		$	61,919		$	19,294		$	—		$	81,213
Cost of sales, excluding depreciation			23,735			9,086			—			32,821

Gross profit			38,184			10,208			—			48,392
Selling, general, and administrative expenses excluding depreciation and amortization			20,858			6,805			—			27,663
Depreciation and amortization expense			1,513			355			—			1,868
Amortization of goodwill and other intangibles			1,096			—			—			1,096
Share of loss in joint venture			—			50			—			50
Management fees and other fees			223			—			—			223

Operating income			14,494			2,998			—			17,492
Other (income) expense:
	Interest expense		4,491			195			(195	)		4,491
	Interest income		(195	)		—			195			—
	Other income and expenses		(72	)		(43	)		—			(115	)
Equity in earnings of subsidiaries			(2,794	)		—			2,794			—

Income before income taxes			13,064			2,846			(2,794	)		13,116
Provision for income taxes			4			52			—			56

Net income		$	13,060		$	2,794		$	(2,794	)	$	13,060

(a): This column does not include the balances of SFG and subsidiaries beginning November 15, 2001 due to their deconsolidation for financial reporting purposes. SFG and its subsidiaries, however, continue to be guarantors on the Senior Notes. Refer to Note 2 for financial information on SFG and its subsidiaries since their deconsolidation.

Note 5. INCOME TAXES

Note 6. 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.

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) Consolidating ~~Balance~~Statement ~~Sheet As~~ of ~~November~~Operations for the Six Months Ended February 2423, ~~2001~~ 2002 (Unaudited) (In thousands)

		Archibald Candy Corporation			Guarantor Subsidiaries(a)			Eliminations			Consolidated
Assets
Net sales		$	86,195		$	37,393		$	—		$	123,588
Current assets:
Cost of sales, excluding depreciation			33,724			16,589			—			50,313
	Cash and cash equivalents	$	2,321		$	827		$	—		$	3,148
Gross profit			52,471			20,804			—			73,275
	Accounts receivables, net		4,966			732			—			5,698
Selling, general, and administrative expenses excluding depreciation and amortization			36,124			21,090			—			57,214
	Inventories		32,734			5,545			—			38,279
Depreciation and amortization expense			3,221			1,152			—			4,373
	Prepaids and other current assets		3,439			660			—			4,099
Amortization of goodwill and other intangibles			2,109			17			—			2,126
Total current assets			43,460			7,764			—			51,224
Share of loss in joint venture			—			178			—			178
Property, plant, and equipment, net			18,480			9,113			—			27,593
Management fees and other fees			251			—			—			251
Intercompany			21,551			(4,426	)		—			17,125
Operating income (loss)			10,766			(1,633	)		—			9,133
Investment in subsidiaries			(6,904	)		—			(10,221	)		(17,125	)
Other (income) expense:
Other assets			65,059			2,060			—			67,119
	Interest expense		9,285			393			(390	)		9,288
Total assets		$	141,646		$	14,511		$	(10,221	)	$	145,936
	Interest income		(395	)		—			390			(5	)
Liabilities and shareholder's equity (deficit)
	Other income and expenses		(115	)		24			—			(91	)
Current liabilities:
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries
	Revolving line of credit	$	29,666		$	—		$	—		$	29,666
	Intercompany Sweet Factory write-off		2,258			—			—			2,258
	Senior secured notes		170,000			—			—			170,000
Equity in loss of subsidiaries			2,105			—			(2,105	)		—
	Accounts payable		19,338			2,655			—			21,993
Loss before income taxes			(2,372	)		(2,050	)		2,105			(2,317	)
	Other current liabilities		12,573			1,379			—			13,952
Provision for income taxes			4			55			—			59
Total current liabilities			231,577			4,034			—			235,611
Net loss		$	(2,376	)	$	(2,105	)	$	2,105		$	(2,376	)
Other noncurrent liabilities			1,330			9,303			(9,303	)		1,330
Total shareholder's equity (deficit)			(91,261	)		1,174			(918	)		(91,005	)
Total liabilities and shareholder's equity (deficit)		$	141,646		$	14,511		$	(10,221	)	$	145,936

(a): This column does not include the balances of SFG and subsidiaries beginning November 15, 2001 due to their deconsolidation for financial reporting purposes. SFG and its subsidiaries, however, continue to be guarantors on the Senior Notes. Refer to Note 2 for financial information on SFG and its subsidiaries since their deconsolidation.

(a) This column does not include the balances of SFG and subsidiaries beginning November 15, 2001 due to their deconsolidation for financial reporting purposes. SFG and subsidiaries, however, continue to be guarantor's on the Company's Senior Notes. Refer to Note 2 for Financial Information on SFG and subsidiaries since their deconsolidation.

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) Consolidating ~~Balance~~Statement ~~Sheet As~~ of ~~August~~Operations for the Three Months Ended February 2524, 2001 (Unaudited) (In thousands)

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Net sales		$	62,219		$	40,275		$	—		$	102,494
Current assets:
Cost of sales, excluding depreciation			20,947			18,150			—			39,097
	Cash and cash equivalents	$	1,116		$	1,230		$	—		$	2,346
Cost of sales, nonrecurring			2,439			—			—			2,439
	Accounts receivables, net		1,350			102			—			1,452
Total cost of sales			23,386			18,150			—			41,536
	Inventories		26,415			5,425			—			31,840
Selling, general, and administrative expenses excluding depreciation and amortization			19,369			18,141			—			37,510
	Prepaids and other current assets		2,213			920			—			3,133
Depreciation and amortization expense			1,780			1,516			—			3,296
Total current assets			31,094			7,677			—			38,771
Amortization of goodwill and other intangibles			963			89			—			1,052
Property, plant, and equipment, net			19,551			14,847			—			34,398
Share of loss in joint venture			—			16			—			16
Intercompany			19,031			(19,031	)		—			—
Management fees and other fees			(31	)		195			—			164
Investment in subsidiaries			(2,008	)		—			2,008			—
Operating income			16,752			2,168			—			18,920
Other assets			66,049			2,893			—			68,942
Other (income) expense:
Total assets		$	133,717		$	6,386		$	2,008		$	142,111
	Interest expense		4,872			197			(195	)		4,874
Liabilities and shareholder's equity (deficit)
	Interest income		(197	)		(1	)		195			(3	)
Current liabilities:
	Other income and expenses		(67	)		—			—			(67	)
	Revolving line of credit	$	19,472		$	—		$	—		$	19,472
Equity in income of subsidiaries			(1,965	)		—			1,965			—
	Accounts payable		11,469			5,352			—			16,821
Income (loss) before income taxes			14,109			1,972			(1,965	)		14,116
	Other current liabilities		7,392			1,937			—			9,329
Provision for income taxes			42			7			—			49
Total current liabilities			38,333			7,289			—			45,622
Net income (loss)		$	14,067		$	1,965		$	(1,965	)	$	14,067
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 (deficit)		$	133,717		$	6,386		$	2,008		$	142,111

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) ~~Consolidating~~ Consolidated ~~Statement~~Statements of ~~Operations~~Cash Flows for the ~~Three~~Six Months Ended ~~November~~ February 24, 2001 (Unaudited) (In thousands)

		Archibald Candy Corporation			Guarantor Subsidiaries~~(a)~~			Eliminations			Consolidated
Net sales		$	2491,~~276~~526		$	1863,~~099~~515		$	—		$	42155,~~375~~041
Cost of sales, excluding depreciation			932,~~989~~876			726,~~503~~666			—			1759,~~492~~542
Gross profit			14,287			10,596			—			24,883
Cost of sales, nonrecurring			2,439			—			—			2,439
Selling, general, and administrative expenses excluding depreciation and amortization			15,266			14,285			—			29,551
Total cost of sales			35,315			26,666			—			61,981
Depreciation and amortization expense			1,708			797			—			2,505
Selling, general, and administrative expenses excluding depreciation and amortization			35,111			34,183			—			69,294
Amortization of goodwill and other intangibles			1,013			17			—			1,030
Depreciation and amortization expense			3,560			3,023			—			6,583
Share of loss in joint venture			—			128			—			128
Amortization of goodwill and other intangibles			1,926			178			—			2,104
Management fees and other fees			28			—			—			28
Share of loss in joint venture			—			105			—			105
Operating loss			(3,728	)		(4,631	)		—			(8,359	)
Management fees and other fees			9			286			—			295
Operating income			15,605			(926	)		—			14,679
Other (income) expense:
	Interest expense		49,~~794~~927			~~198~~410			(~~195~~405	)		49,~~797~~932
	Interest income		(~~200~~407	)		—(1	)		~~195~~405			(53	)
	Other income and expenses		(43112	)		67(1	)		—			24(113	)
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries		2,258			—			—			2,258
Equity in income of subsidiaries			1,343			—			(1,343	)		—
Equity in loss of subsidiaries			4,899			—			(4,899	)		—
Income (loss) before income taxes			4,854			(1,334	)		1,343			4,863
Loss before income taxes			(15,436	)		(4,896	)		4,899			(15,433	)
Provision for income taxes			65			9			—			74
Provision for income taxes			—			3			—			3
Net income (loss)		$	4,789		$	(1,343	)	$	1,343		$	4,789
Loss		$	(15,436	)	$	(4,899	)	$	4,899		$	(15,436	)

			~~Archibald Candy Corporation~~	Archibald Candy Corporation		~~Guarantor Subsidiaries~~	Guarantor Subsidiaries(a)		~~Eliminations~~	Eliminations		~~Consolidated~~	Consolidated
Net sales			$	29,274		$	23,240		$	—		$	52,514
OPERATING ACTIVITIES
Cost of sales, excluding depreciation				11,929			8,516			—			20,445
Net loss				$	(2,376	)	$	(2,105	)	$	2,105		$	(2,376	)
Gross profit				17,345			14,724			—			32,069
Adjustments to reconcile net loss to net cash
Selling, general, and administrative expenses excluding depreciation and amortization				15,709			16,042			—			31,751
	provided by (used in) operating activities:
Depreciation and amortization expense				1,780			1,533			—			3,313
		Depreciation and amortization			5,330			1,169			—			6,499
Amortization of goodwill and other intangibles				963			89			—			1,052
		Equity in loss of subsidiaries			—			—			—			—
~~Share of loss in joint venture~~		Share of loss in joint venture		—	—		63	178		—	—		63	178
Management fees and other fees				40			91			—			131
		Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries			2,258			—			—			2,258
Operating loss				(1,147	)		(3,094	)		—			(4,241	)
Changes in operating assets and liabilities:
Other (income) expense:
		Accounts receivables, net			(2,440	)		(828	)		—			(3,268	)
	Interest expense			5,055			213			(210	)		5,058
		Inventories			179			(673	)		—			(494	)
	Interest income			(210	)		—			210			—
		Prepaid expenses and other current assets			(1,808	)		416			—			(1,392	)
	Other income and expenses			(45	)		(1	)		—			(46	)
		Intercompany			2,101			4			(2,105	)		—
Equity in loss of subsidiaries				3,308			—			(3,308	)		—
		Other assets			(37	)		(35	)		—			(72	)
Income (loss) before income taxes				(9,255	)		(3,306	)		3,308			(9,253	)
		Accounts payable and accrued liabilities			16,184			1,928			—			18,112
Provision for income taxes				23			2			—			25
Net cash provided by operating activities					19,391			54			—			19,445
Net income (loss)			$	(9,278	)	$	(3,308	)	$	3,308		$	(9,278	)
INVESTING ACTIVITIES
Purchase of property, plant, and equipment					(579	)		(486	)		—			(1,065	)
Impact of deconsolidation of Sweet Factory Group, Inc. and subsidiaries					—			(336	)		—			(336	)
Net cash used in investing activities					(579	)		(822	)		—			(1,401	)
FINANCING ACTIVITIES
Net repayments under revolving line of credit					(16,793	)		—			—			(16,793	)
Principal payments of capital lease obligations					(26	)		—			—			(26	)
Costs related to refinancing					(807	)		—			—			(807	)
Net cash provided by financing activities					(17,626	)		—			—			(17,626	)
Effect of exchange rates on cash					—			40			—			40
Net increase (decrease) in cash and cash equivalents					1,186			(728	)		—			458
Cash and cash equivalents beginning of period					1,116			1,230			—			2,346
Cash and cash equivalents end of period				$	2,302		$	502		$	—		$	2,804

(a): This column does not include the balances of SFG and subsidiaries beginning November 15, 2001 due to their deconsolidation for financial reporting purposes. SFG and its subsidiaries, however, continue to be guarantors on the Senior Notes. Refer to Note 2 for financial information on SFG and its subsidiaries since their deconsolidation.

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) ~~Consolidating~~ Consolidated ~~Statement~~Statements of Cash Flows for the ~~Three~~Six Months Ended ~~November~~ February 24, 2001 (Unaudited) (In thousands)

			~~Archibald Candy Corporation~~	Archibald Candy Corporation		~~Guarantor Subsidiaries(a)~~	Guarantor Subsidiaries		~~Eliminations~~	Eliminations		~~Consolidated~~	Consolidated
OPERATING ACTIVITIES
Net loss			$	(15,436	)	$	(4,899	)	$	4,899		$	(15,436	)
Net income (loss)				$	4,789		$	(1,343	)	$	1,343		$	4,789
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash
	Depreciation and amortization			2,721			814			—			3,535
	provided by (used in) operating activities:
	Equity in loss of subsidiaries			4,899			—			(4,899	)		—
		Depreciation and amortization			5,486			3,201			—			8,687
	Share of loss in joint venture			—			128			—			128
		Equity in loss of subsidiaries			1,343			—			(1,343	)		—
	Effect of deconsolidation of Sweet Factory Group, Inc. and subsidiaries			2,258			—			—			2,258
		Share of loss in joint venture			—			105			—			105
Changes in operating assets and liabilities:
	~~Accounts receivables, net~~	Accounts receivables, net		~~(3,616~~	)(5,680	)	~~(630~~	)(816	)	—	—		~~(4,246~~	)(6,496	)
	~~Inventories~~	Inventories		~~(6,319~~	)1,593		~~(2,307~~	)(2,508	)	—	—		~~(8,626~~	)(915	)
	~~Prepaid expenses and other current assets~~	Prepaid expenses and other current assets		~~(1,226~~	)(57	)	~~129~~	561		—	—		~~(1,097~~	)504
	~~Intercompany~~	Intercompany		~~(4,778~~	)(2,592	)	~~4,778~~	2,592		—	—		—	—
	~~Other assets~~	Other assets		~~(249~~	)(255	)	~~104~~	—		—	—		~~(145~~	)(255	)
	~~Accounts payable and accrued liabilities~~	Accounts payable and accrued liabilities		~~13,182~~	6,068		~~2,163~~	(1,625	)	—	—		~~15,345~~	4,443
Net cash provided by (used in) operating activities				~~(8,564~~	)10,695		~~280~~	167		—	—		~~(8,284~~	)10,862
INVESTING ACTIVITIES
Purchase of property, plant, and equipment				~~(395~~	)(2,432	)	~~(382~~	)(596	)	—	—		~~(777~~	)(3,028	)
Impact of deconsolidation of Sweet Factory Group, Inc. and subsidiaries				—			(336	)		—			(336	)
Net cash used in investing activities					(2,432	)		(596	)		—			(3,028	)
Net cash used in investing activities				(395	)		(718	)		—			(1,113	)
FINANCING ACTIVITIES
FINANCING ACTIVITIES
Net borrowings under revolving line of credit					(6,500	)		—			—			(6,500	)
Net borrowings under revolving line of credit				10,194			—			—			10,194
Principal payments of capital lease obligations					(19	)		(8	)		—			(27	)
Principle payments of capital lease obligations				(13	)		—			—			(13	)
Costs related to refinancing					(163	)		—			—			(163	)
Costs related to refinancing				(17	)		—			—			(17	)
Net cash provided by (used in) financing activities					(6,682	)		(8	)		—			(6,690	)
Net cash provided by financing activities				10,164			—			—			10,164
Effect of exchange rates on cash					—			(49	)		—			(49	)
Effect of exchange rates on cash				—			35			—			35
Net increase in cash and cash equivalents					1,581			(486	)		—			1,095
Net increase (decrease) in cash and cash equivalents				1,205			(403	)		—			802
Cash and cash equivalents beginning of period					800			2,320			—			3,120
Cash and cash equivalents beginning of period				1,116			1,230			—			2,346
Cash and cash equivalents end of period				$	2,381		$	1,834		$	—		$	4,215
Cash and cash equivalents end of period			$	2,321		$	827		$	—		$	3,148

NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS

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 assets that have an indefinite useful life. Under this approach, 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 these new standards.

Archibald Candy Corporation (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.) Consolidating Statement of Cash Flows for the Three Months Ended November 25, 2000 (Unaudited) (In thousands)

		Archibald Candy Corporation			Guarantor Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES
Net loss		$	(9,278	)	$	(3,308	)	$	3,308		$	(9,278	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation and amortization		2,743			1,622			—			4,365
	Equity in loss of subsidiaries		3,308			—			(3,308	)		—
	Share of loss in joint venture		—			63			—			63
Changes in operating assets and liabilities:
	Accounts receivables, net		(5,421	)		(436	)		—			(5,857	)
	Inventories		(6,331	)		(1,969	)		—			(8,300	)
	Prepaid expenses and other current assets		(861	)		346			—			(515	)
	Intercompany		(5,019	)		5,019			—			—
	Other assets		(87	)		(15	)		—			(102	)
	Accounts payable and accrued liabilities		14,012			(508	)		—			13,504
Net cash provided by (used in) operating activities:			(6,934	)		814			—			(6,120	)
INVESTING ACTIVITIES
Purchase of property, plant, and equipment			(1,093	)		(220	)		—			(1,313	)
Net cash used in investing activities			(1,093	)		(220	)		—			(1,313	)
FINANCING ACTIVITIES
Net borrowings under revolving line of credit			9,500			—			—			9,500
Principle payments of capital lease obligations			—			(3	)		—			(3	)
Costs related to refinancing			(64	)		(8	)		—			(72	)
Net cash provided by (used in) financing activities			9,436			(11	)		—			9,425
Effect of exchange rates on cash			—			(249	)		—			(249	)
Net increase in cash and cash equivalents			1,409			334			—			1,743
Cash and cash equivalents beginning of period			800			2,320			—			3,120
Cash and cash equivalents end of period		$	2,209		$	2,654		$	—		$	4,863

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

FORWARD-LOOKING STATEMENTS

Some information included in the report may constitute forward-looking statements that involve a number of risks and uncertainties. From time to time, information provided by the Company or statements made by its employees may contain other forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: general economic conditions, including inflation, interest rate fluctuations, trade restrictions, and general debt levels; competitive factors, including price pressures, technological development, and products offered by competitors; inventory risks due to changes in market demand or business strategies; and changes in effective tax rates. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

THREE MONTHS ENDED ~~NOVEMBER 24~~FEBRUARY 23, ~~2001~~2002 COMPARED TO THE THREE MONTHS ENDED ~~NOVEMBER 25~~FEBRUARY 24, ~~2000~~2001.

NET SALES. Consolidated sales for the three months ended ~~November~~February 2423, ~~2001~~2002 were $4281.42 million, a decrease of $1021.13 million, or 1920.28%, from $52102.5 million for the three months ended ~~November~~February 2524, ~~2000~~2001. The bankruptcy filing and subsequent deconsolidation of Sweet Factory accounted for $19.5 million of the decline. Company-operated retail sales excluding Sweet Factory for the three months ended ~~November~~February 2423, ~~2001~~2002 were $3159.42 million, a decrease of $72.07 million, or 184.24%, from $3861.49 million for the three months ended ~~November~~February 2524, ~~2000~~2001. This decrease was due primarily to the bankruptcy filing of Sweet Factory, closing of unprofitable Sweet Factory stores and a decline in Sweet Factory same store sales, which accounted for $5.1 million of the decline. Same store sales decreased 52.13% for Fannie May/Fanny Farmer and 23.97% (0.14% increase in Canadian Dollars) for Laura Secord primarily due to a weak retail environment during the Christmas and Valentine's Day holiday periods. Sales through the Company's third-party retail outlets and non-retail distribution channels ~~declined~~increased $30.19 million, or 224.13%, to $1122.0 million for the three months ended ~~November~~February 2423, ~~2001~~2002 from $1421.1 million for the three months ended ~~November~~February 2524, ~~2000~~ 2001. The ~~decrease~~increase was due primarily to ~~lower~~higher ~~sales in the fundraising channel, which is a low profit margin business. Third~~third-party retail sales to our national chain accounts ~~increased by 15~~.~~3%.~~

GROSS PROFIT. Gross profit for the three months ended ~~November~~February 2423, ~~2001~~2002 was $2448.94 million, a decrease of $712.26 million, or 2220.47%, from $3261.10 million for the three months ended ~~November~~February 2524, ~~2000~~2001. Gross profit asin the prior year included $11.7 million related to Sweet Factory and a ~~percentage~~reduction of ~~net~~$2.4 million ~~sales~~associated ~~decreased~~with costs related to ~~58.7%~~the ~~for~~manufacturing start-up of the ~~three~~Laura ~~months~~Secord ~~ended November~~products beginning in September 242000. After giving effect to these items, ~~2001~~gross ~~from~~profit 61dollars declined $3.3 million versus the prior year, which was primarily due to lower sales negatively impacting margins $1%.1 million; ~~for~~a change in the ~~three~~mix ~~months~~of ~~ended~~outside ~~November~~purchased products sold increasing costs $0.9 ~~25,~~million; ~~2000~~an increase in inventory shrinkage at Laura Secord of $0.9 million, ~~The~~which ~~decrease~~such similar costs were recorded in ~~gross~~the ~~profit~~second ~~dollars~~half ~~was~~of ~~due~~the ~~primarily~~prior year upon a physical inventory count; and an increase of $0.3 million related to ~~lower~~higher ~~sales~~purchase costs at Laura Secord as ~~discussed~~a ~~above~~result ~~and~~of the ~~closing~~decline of ~~Sweet~~ ~~Factory~~the ~~stores~~value of the Canadian dollar versus the U.S dollar.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $2927.67 million for the three months ended ~~November~~ February 2423, ~~2001~~2002, a decrease of $29.28 million, or 626.91%, from $3137.85 million for the three months ended ~~November~~February 2524, ~~2000~~2001. ~~This~~SG&A ~~decrease~~expenses, ~~was~~excluding ~~primarily due to the closing of~~ Sweet Factory, ~~stores~~were ~~and~~$27.7 million ~~expense~~for ~~reductions~~the atthree ~~Fannie~~months ~~May/Fanny~~ended ~~Farmer.~~February 23, As2002, aan increase ~~percentage~~ of ~~net~~$1.2 million ~~sales~~or 4.5%, ~~SG&A~~from ~~expenses increased to 69~~$26.8%5 million for the three months ended ~~November~~February 24, ~~2001~~2002. ~~from~~This ~~60.6% for~~increase ~~the~~was ~~three~~primarily ~~months~~due ~~ended~~to ~~November 25,~~a ~~2000.~~higher ~~This~~healthcare ~~increase~~accrual ~~was~~and ~~due~~increased wrapping ~~primarily~~costs toof ~~the~~which ~~continued~~such ~~sales~~similar ~~decline~~costs atwere ~~Sweet~~recorded ~~Factory~~in ~~and~~the ~~lower~~second ~~Fannie~~half ~~May/Fanny~~of ~~Farmer~~the ~~sales~~prior year upon a physical inventory count.

OTHER (INCOME) AND EXPENSES. Included in other expenses is a charge of $2.3 million associated with the net write-off (for financial reporting purposes) due to SFG's bankruptcy situation of a $19.4 million receivable due from SFG and subsidiaries, after first offsetting $17.1 million of that write-off against the Company's negative investment balance in SFG and subsidiaries. 18

EBITDA. Earnings before interest, income taxes, depreciation and amortization (EBITDA), excluding the effect of the deconsolidation of Sweet Factory was $20.6 million for the three months ended February 23, 2002, as compared to $25.0 million for the three months ended February 24, 2001, excluding the manufacturing start-up costs of $2.4 million and the effect of the deconsolidation of Sweet Factory of $0.7 million. This decrease is primarily due to lower sales, a change in the mix of outside purchased products sold, the timing of Laura Secord inventory shrinkage, and higher healthcare and wrapping costs, as discussed above.

OPERATING INCOME. Operating income was $17.5 million for the three months ended February 23, 2002, a decrease of $1.4 million from income of $18.9 million for the three months ended February 24, 2001. The decrease in operating income was due primarily to the decline in sales, an increase in other costs described above and the deconsolidation of Sweet Factory, which had an operating loss of $0.5 million in the prior year.

NET INCOME. Net income for the three months ended February 23, 2002 was $13.1 million, a decrease of $1.0 million from $14.1 million for the three months ended February 24, 2001.

SIX MONTHS ENDED FEBRUARY 23, 2002 COMPARED TO THE SIX MONTHS ENDED FEBRUARY 24, 2001

NET SALES. Consolidated sales for the six months ended February 23, 2002 were $123.6 million, a decrease of $31.4 million, or 20.3%, from $155.0 million for the six months ended February 24, 2001. Company-operated retail sales for the six months ended February 23, 2002 were $90.6, a decrease of $29.2 million, or 24.4%, from $119.8 million for the six months ended February 24, 2001. This decrease was due primarily to the bankruptcy filing of Sweet Factory and subsequent deconsolidation, the ongoing closing of Sweet Factory stores, and decline in Sweet Factory same store sales, which accounted for $24.6 million of the decline. Same store sales decreased 3.0% for Fannie May/Fanny Farmer and 4.1% (0.3% increase in Canadian Dollars) for Laura Secord. Sales through the Company's third-party retail outlets and non-retail distribution channels decreased $2.2 million to $33.0 million for the six months ended February 23, 2002, from $35.2 million for the six months ended February 24, 2001. The decrease was primarily due to lower fundraising sales, partially offset by increased third-party sales.

GROSS PROFIT. Gross profit for the six months ended February 23, 2002 was $73.3 million, a decrease of $19.8 million, or 21.3%, from $93.1 million for the six months ended February 24, 2001. Gross profit, excluding Sweet Factory and $2.4 million in the prior year associated with costs related to the manufacturing start-up of the Laura Secord products in September 2000, for the six months ended February 23, 2002 was $67.8 million, a decrease of $6.7 million or 8.9%, from $74.5 million. The decrease in gross profit dollars was primarily due to lower sales which negatively impacted gross profit $4.2 million; a change in the mix of outside purchased products sold increasing costs of $1.4 million; an increase in inventory shrinkage at Laura Secord of $1.5 million, which such similar costs were recorded in the second half of the prior year upon a physical inventory count; and an increase of $0.5 million related to higher purchase costs at Laura Secord as a result of the decline in the value of the Canadian dollar versus the U.S. dollar.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $57.2 million for the six months ended February 23, 2002, a decrease of $12.1 million, or 17.5%, from $69.3 million for the six months ended February 24, 2001. SG&A expenses, excluding Sweet Factory, were $49.0 million for the six months ended February 23, 2002, an increase of $1.0 million, or 2.1%, from $48.0 million for the six months ended February 24, 2001. The increase was primarily due to a higher healthcare accrual and increased wrapping costs of which such similar costs were recorded in the second half of the prior year from a physical inventory count partially offset by other cost savings.

~~EBITDA~~ OTHER (INCOME) AND EXPENSES. ~~Earnings~~ ~~before~~Included ~~interest,~~in ~~income~~other ~~taxes,~~expenses ~~depreciation,~~is ~~and~~a ~~the~~charge ~~amortization~~of ~~(EBITDA),~~$2.3 million ~~excluding~~associated with the ~~effect~~net ~~of the~~write-off ~~deconsolidation~~(for offinancial ~~Sweet~~reporting ~~Factory~~purposes) ofdue ~~$2.3 million,~~to ~~was~~SFG's bankruptcy of a $(419.8)4 million ~~for~~receivable ~~the~~due ~~three~~from ~~months~~SFG ~~ended~~and ~~November 24~~subsidiaries, ~~2001,~~after asfirst ~~compared~~offsetting to $017.21 million ~~for~~of that write-off against the ~~three~~Company's ~~months~~negative investment ~~ended~~balance ~~November 25,~~in ~~2000~~SFG and its subsidiaries.

~~OPERATING~~ EBITDA. Earnings ~~LOSS~~before interest, income taxes, depreciation, and amortization (EBITDA), excluding the effect of deconsolidation of Sweet Factory of $2. ~~Operating~~3 million and the Sweet Factory EBITDA loss of $2.7 million was $818.45 million for the ~~three~~six months ended ~~November~~February 2423, ~~2001~~2002, anas ~~increase of~~compared to $426.23 million ~~from~~for athe ~~loss~~six months ended February 24, 2001, excluding manufacturing start-up costs of $4.2.4 million ~~for~~and the ~~three~~Sweet ~~months~~Factory ~~ended~~EBITDA ~~November 25,~~loss ~~2000~~of $0.4 million. ~~The~~This ~~increase~~decrease inis ~~operating~~primarily ~~loss~~due ~~was~~to ~~due~~lower ~~primarily~~sales, toand ~~the~~higher outside ~~decline~~purchased inproduct ~~sales~~costs and the ~~impact~~ timing of ~~the~~Laura ~~bankruptcy~~Secord ~~filing~~packaging ofcosts ~~Sweet~~and ~~Factory~~inventory shrinkage; and higher healthcare and wrapping costs as discussed above.

~~NET LOSS~~ OPERATING INCOME. ~~Net~~ ~~loss~~Operating income was $9.1 million for the ~~three~~six months ended ~~November~~February 2423, ~~2001~~2002, ~~was~~a decrease of $155.46 million, anfrom ~~increase~~income of $614.17 million ~~from~~for the six months ended February 24, 2001. Operating income was $912.3 million for the ~~three~~six months ended ~~November~~February 2523, ~~2000~~2002, excluding Sweet Factory, a decrease of $7.6 million from ~~The~~operating ~~net~~income ~~loss~~of $19.9 million for the ~~three~~six months ended ~~November~~February 24, 2001, ~~includes~~excluding ~~the~~manufacturing ~~effect~~start-up ofcosts ~~the deconsolidation~~and of Sweet Factory. ofThe $2decrease was primarily due to the decline in sales and increase in costs described above.~~3 million.~~

NET INCOME (LOSS). Net loss for the six months ended February 23, 2002 was $2.4 million, a decrease of $7.2 million from net income of $4.8 million for the six months ended February 24, 2001. The net loss for the six months ended February 23, 2002 includes the effect of the deconsolidation of Sweet Factory of $2.3 million.

EFFECT OF BANKRUPTCY FILING

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 ("Bankruptcy Court") under Chapter 11 of the U.S. Bankruptcy Code. In connection with the ~~bankruptcy~~ bankruptcy filings, Sweet Factory, Inc. entered into a Post-Petition Credit, Security and Guaranty Agreement (the "Post-Petition Credit Agreement") with The CIT Group/Business Credit, Inc. and SFG, SF Properties, Inc. and SF Candy Company as guarantors. The agreement 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 Post-Petition Credit Agreement is secured by first priority liens on Sweet Factory, Inc.'s accounts receivable and inventory and 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%. The Company and Archibald Candy (Canada) Corporation have guaranteed all obligations of Sweet Factory, Inc. under the Post-Petition Credit Agreement. Sweet Factory, Inc. is required to pay fees in connection with the Post-Petition Credit Agreement.

~~SFG~~ Company ~~and~~as ~~its~~guarantors. ~~subsidiaries'~~The ~~financial~~agreement ~~results~~is ~~are~~for ~~included~~one inyear ~~the~~and ~~Company's~~provides ~~consolidated~~for ~~results~~revolving ~~through~~loans ~~November 15,~~at ~~2001.~~any ~~Accounting~~time ~~principles~~not ~~generally~~to ~~accepted~~exceed in the ~~United States~~lesser ~~would~~of ~~generally~~(1) $2.0 million ~~require~~and ~~that~~(2) a ~~any~~borrowing base ~~entity~~comprised ~~that~~of ~~files~~a ~~for~~percentage ~~protection~~of ~~under~~Sweet ~~the U~~Factory, Inc.S.'s ~~Bankruptcy~~eligible ~~Code~~inventory ~~whose~~plus ~~financial~~a ~~statements~~$1.0 million ~~were~~overadvance, ~~previously~~subject ~~consolidated~~to ~~with~~certain ~~those~~reserves. ofThe ~~its~~Post-Petition ~~parent~~Credit ~~must~~Agreement beis ~~prospectively~~secured ~~deconsolidated~~by ~~from~~first ~~the~~priority ~~parent~~liens ~~with the investment accounted for using the cost method. The effects~~ on ~~the~~Sweet ~~Company~~Factory, Inc.'s ~~balance~~accounts ~~sheet~~receivable ofand ~~this~~inventory ~~deconsolidation~~ and ~~use~~provides ~~of the cost method is: (i)~~ that ~~the~~borrowings ~~Company's~~thereunder ~~investment~~accrue ininterest ~~SFG~~at ~~is included as~~ a ~~single~~variable ~~amount~~rate ~~and~~equal ~~(ii)~~ to the ~~Company's~~"prime ~~receivable~~rate" announced from ~~SFG~~time isto notime ~~longer~~by ~~eliminated~~J.P. ~~The~~Morgan ~~effect~~Chase & onCo., ~~the~~plus ~~Company's~~1.5%. ~~income~~The ~~statement is~~Company ~~that~~and ~~beginning~~Archibald ~~November 15,~~Candy ~~2001,~~(Canada) ~~the~~Corporation ~~SFG~~have ~~operating~~guaranteed ~~results~~all ~~are~~obligations ~~not~~of ~~included~~Sweet inFactory, Inc. under the Post-Petition ~~consolidated~~Credit ~~results~~Agreement. AtSweet ~~November 15~~Factory, Inc. ~~2001~~is ~~the~~required ~~Company's~~to ~~investment~~pay fees in ~~SFG~~connection ~~was~~with ~~a negative $17.1 million, and~~ the ~~receivable~~Post-Petition ~~had~~Credit aAgreement. ~~balance~~On ~~of $19.4~~March ~~million.~~4, ~~Because~~2002, of SFG's and its subsidiaries ~~bankruptcies,~~filed ita ~~was~~Plan ~~determined~~of ~~that~~Reorganization with the ~~receivable~~Bankruptcy ~~should be reserved for financial reporting purposes~~Court. ~~That~~A ~~write-off~~confirmation ~~was~~hearing ~~first~~is ~~netted~~scheduled ~~against~~for ~~the negative investment balance~~May 24, ~~with the remaining $2~~2002.~~3 million~~ ~~recorded as a non-operating expense.~~

~~Management~~ SFG ~~has~~and ~~assessed~~its subsidiaries' financial results are included in the ~~liquidity~~Company's ~~position~~consolidated ofresults ~~SFG~~through ~~and~~November 15, ~~its~~2001. ~~subsidiaries~~Accounting asprinciples agenerally ~~result~~accepted ofin the ~~bankruptcy~~United States ~~filings~~generally ~~and~~require ~~available~~that ~~debtor~~any inentity ~~possession~~that ~~financing~~files ~~and~~for ~~believes~~protection ~~that~~under ~~SFG~~the ~~and~~ U.S. Bankruptcy Code whose financial statements were previously consolidated with those of its ~~subsidiaries~~parent ~~will~~must be ~~able~~prospectively deconsolidated tofrom ~~fund~~the ~~their~~parent ~~post-petition~~with ~~obligations~~the ~~until~~investment aaccounted ~~plan~~for using the cost method. The effects on the Company's balance sheet of ~~reorganization~~this deconsolidation and use of the cost method are that: (i) the Company's investment in SFG is ~~finalized~~included oras ~~another~~a ~~transaction~~single amount and (ii) the Company's receivable from SFG is ~~effected~~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 investment balance, with the remaining $1.3 million recorded as a non-operating expense.

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

	For the period of Nov. 16, 2001 thru Nov. 24, 2001			For the period of Aug. 26, 2001 thru Nov. 15, 2001			For the quarter ended Nov. 25, 2000
	For the quarter ended Feb. 23, 2002			For the quarter ended Feb. 24, 2001			For the period of Aug. 26, 2001 thru Nov. 15, 2001			For the six months ended Feb. 23, 2002			For the six months ended Feb. 24, 2001
Net sales	$	19,~~068~~619		$	819,~~867~~513		$	138,~~999~~867		$	19,554		$	33,512
Operating loss		(~~470~~372	)		(~~3,172~~513	)		(23,~~311~~172	)		(4,014	)		(2,823	)
Loss before income taxes		(~~470~~380	)		(~~3,175~~513	)		(23,~~313~~175	)		(4,025	)		(2,825	)
Net loss		(~~470~~377	)		(~~3,178~~520	)		(23,~~315~~178	)		(4,025	)		(2,834	)

~~The operating~~ Operating loss ~~for~~includes ~~the~~restructuring ~~period~~expenses of ~~November 16,~~$35 ~~2001~~and ~~thru November 24, 2001 includes~~ $~~375~~910 offor ~~restructuring expenses associated with~~ the ~~closing~~quarter ofand ~~stores~~year-to-date ~~subsequent~~periods toended ~~the~~February 23, ~~bankruptcy~~2002, ~~filing~~respectively.

	Nov. 24, 2001			Nov 15, 2001			Aug. 25, 2001
	Feb. 23, 2002			Nov 15, 2001			Aug. 25, 2001
Current assets	$	3,~~128~~042		$	2,620		$	4,174
Property, plant and equipment		54,~~266~~737			5,316			5,699
Other assets		~~770~~791			772			892
Total assets	$	98,~~164~~570		$	8,708		$	10,765
Current liabilities	$	6,~~930~~685		$	6,079		$	4,069
Payable to Archibald Candy Corporation		19,~~463~~544			19,383			19,761
Other liabilities		~~366~~313			371			885
Total stockholder's deficit		(17,~~595~~972	)		(17,125	)		(13,950	)
Total liabilities & stockholder's deficit	$	98,~~164~~570		$	8,708		$	10,765

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 November 24, 2001			For the quarter ended November 25, 2000
Net sales	$	33,508		$	38,548
Operating loss		(5,182	)		(1,930	)
Loss before income taxes		(12,258	)		(6,940	)
Net loss		(12,258	)		(6,963	)

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 Feb. 24, 2001		For the six months ended Feb. 23, 2002		For the six months ended Feb. 24, 2001
Net sales	$	82,981	$	114,721	$	121,529
Operating income		19,433		12,305		17,503
Income before income taxes		14,629		858		7,688
Net income		14,587		802		7,623

	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

LIQUIDITY AND CAPITAL RESOURCES

Net cash ~~used~~provided inby operating activities was $819.34 million for the ~~three~~six months ended ~~November~~February 2423, ~~2001~~2002 compared to $610.19 million for the ~~three~~six months ended ~~November~~February 2524, ~~2000~~2001. The increase in net cash provided by operating activities was due primarily to the non-payment of the interest due on the senior secured notes on January 2, 2002 totaling $8.7 million and an increase in accounts payable, offset by a decline in net income. Net loss was $152.4 million for the ~~three~~six months ended ~~November~~ February 2423, ~~2001~~2002 compared to net income of $94.38 million for the ~~three~~six months ended ~~November~~ February 2524, ~~2000~~2001. Net loss included non-cash depreciation and amortization charges of $36.5 million for the ~~three~~six months ended ~~November~~February 2423, ~~2001~~2002 and $48.47 million for the ~~three~~six months ended ~~November~~February 2524, ~~2000~~2001. Net loss also included a $2.3 million non-cash charge associated with the deconsolidation of Sweet Factory due to the bankruptcy filing.

Net cash used in investing activities decreased to $1.14 million for the ~~three~~six months ended ~~November~~February 2423, ~~2001~~2002 from $1.3.0 million for the ~~three~~six months ended ~~November~~February 2524, ~~2000~~2001 due to lower capital expenditures.

On Net ~~June 28,~~cash ~~2001,~~used ~~the~~in ~~Company~~financing ~~and~~activities ~~its~~was ~~subsidiary, Sweet Factory, Inc~~$17.~~, entered into a revolving credit facility with The CIT Group/Business Credit,~~6 ~~Inc.~~million ~~("CIT"), as~~for ~~agent (~~the ~~"CIT~~six ~~Facility").~~months ~~The~~ended ~~CIT Facility provides for revolving loans and letter of credit issuances~~February 23, ~~subject~~2002 tocompared ~~certain borrowing conditions, in an aggregate amount at any time not~~ to ~~exceed the lesser of (1)~~ $306.07 million ~~(or~~for ~~specified lower amounts at certain times of~~ the ~~year)~~six ~~and~~months ~~(2) a borrowing base comprised of a percentage of the Company's eligible accounts~~ended ~~receivable and inventory and the Company's owned store locations~~February 24, ~~which~~2001 ~~borrowing~~due ~~base components are subject~~ to ~~certain limits, minus~~ the ~~amount~~repayment of ~~the~~borrowings ~~overadvance~~ under ~~the~~our ~~Post-Petition Credit~~line ~~Agreement. The Company may advance from time to time up to $5.0 million~~ of ~~the CIT Facility borrowings to Archibald Candy (Canada) Corporation~~credit.

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

The CIT Facility provides that borrowings thereunder accrue interest at a variable rate equal to the "prime rate" announced from time to time by JP Morgan Chase & Co., plus 1.0%. The Company is required to pay fees in connection with the CIT Facility.

In The ~~September~~CIT Group/Business Credit, ~~2001~~Inc. ("CIT"), the agent and sole lender under Archibald's Revolving credit facility ("The CIT Facility"), agreed to overadvances under the CIT Facility in an aggregate amount of not more than $3.0 million, which expired on October 3, 2001. On October 3, 2001, the Company and CIT entered into an Overadvance Agreement and First Amendment to Financing Agreement pursuant to which CIT agreed to provide a $5.0 million overadvance to the Company, which expired on December 28, 2001. In connection with the Overadvance Agreement and ~~First Amendment to~~

First Amendment to Financing Agreement, those stockholders of Holdings who are (or who are advised by) affiliates of The Jordan Company entered into a Participation Agreement pursuant to which such stockholders agreed to purchase from CIT a last-out participation in any overadvance under the CIT Facility. The aggregate amount of the participation was equal to the lesser of (1) $2.5 million or (2) 50% of the amount of the outstanding overadvance, if any, under the CIT Facility at the time of the participation. The participating stockholders were required to purchase the participation on the earlier of (a) December 28, 2001, or (b) if all amounts due under the CIT Facility were accelerated, on the fifth business day following notice by CIT but, in each case, only if any overadvance was outstanding on the purchase date. The Participation Agreement expired on December 28, 2001 with no participant having been required to purchase any participation thereunder.

In connection with the November 15, 2001 bankruptcy filings by ~~the~~our ~~Company's~~ Sweet Factory subsidiaries, the CIT Facility was further amended pursuant to the Second Amendment to allow such bankruptcy filings, to eliminate, on a go-forward basis, Sweet Factory, Inc. as a co-borrower and to remove the inventory and accounts receivable of our Sweet Factory subsidiaries from the borrowing base. Concurrently with entering into the Second Amendment, CIT and Sweet Factory, Inc. entered into the Post-Petition Credit Agreement. See "Effect of Bankruptcy Filing". The Company, Holdings and Archibald Candy (Canada) Corporation have guaranteed all obligations of Sweet Factory, Inc. under the Post-Petition Credit Agreement.

~~The~~ Archibald ~~CIT~~has ~~Facility~~not ~~provides~~made ~~that, for~~ the ~~period~~approximately ~~each year from December~~$8.7 31million ~~until~~interest ~~after~~payment ~~the~~that ~~Company~~was ~~makes~~due ~~the~~on ~~scheduled~~January 2, ~~interest~~2002 ~~payment~~ on its outstanding $170 million ~~outstanding~~ of 101/4 % senior secured notes due 2004 (the "Senior Notes") ~~on the following January 1~~, ~~the Company may have no borrowings under the CIT Facility. On January 2, 2002, the Company did not make the approximately $8.7 million interest payment due on its Senior Notes;~~ however, ~~the~~Archibald ~~Company~~ has aentered ~~30-day~~into ~~grace~~a ~~period~~forbearance inagreement ~~which to make such interest payment before it becomes an event of default that would allow acceleration of~~ (the ~~Senior~~"Noteholders' ~~Notes~~Forbearance byAgreement") ~~the~~with ~~trustee~~holders ~~under the Indenture pursuant to which such notes have been issued~~ (the "~~Indenture~~Consenting Holders") ~~or by holders~~ of approximately ~~at least 25~~88% in ~~principal~~aggregate face amount of the ~~outstanding~~ Senior Notes. ~~CIT~~The has agreed, as more fully described below, to allow the Company to continue to request borrowings under the CIT Facility for working capital needs despite the Company's failure to make the January 2002 interest payment on the Senior Notes ~~and~~have tobeen ~~forbear~~classified ~~from exercising its right under the CIT Facility that would arise~~ as acurrent ~~result~~on ~~of the Company~~Archibald's ~~failure~~balance ~~to make such interest payment by the expiration of the grace period~~sheet. During the forbearance period, the Company's management expects that the Company will have sufficient availability under its borrowing base to meet its working capital needs as they become due; however, there can be no assurance that this will be the case.

~~The~~ Pursuant ~~Company~~to ~~has~~the ~~begun~~Noteholders' toForbearance Agreement, the Consenting Holders have ~~discussions~~agreed ~~with~~to forbear until April 30, 2002 (the ~~holders~~"Noteholders' ofForbearance Period") from exercising their rights under the Senior Notes, ~~regarding~~the aindenture ~~possible~~pursuant ~~restructuring~~to ofwhich ~~such~~the Senior Notes, ~~including~~have ~~default~~been ~~waivers~~issued or(the ~~forbearances,~~"Indenture") ~~payment extensions,~~and ~~debt~~applicable ~~for~~law ~~equity~~resulting ~~exchanges~~from orArchibald's ~~conversions,~~failure ~~repurchases~~to ormake ~~acquisitions~~the ofapproximately $8.7 million interest payment on the Senior Notes that was due on ~~discounted~~January 2, ~~terms~~2002. orThe ~~combination~~Noteholders' ofForbearance ~~the~~Period ~~foregoing~~may ~~(collectively~~be terminated prior to April 30, a2002 ~~"Restructuring").~~if ~~The~~any ~~Company~~of the ~~does~~following ~~not~~occurs ~~intend~~(other tothan ~~provide~~if ~~updates~~due as to the ~~status~~Consenting Holders' breach of ~~such~~their ~~discussions.~~obligations ~~There~~under ~~can~~the beNoteholders' noForbearance ~~assurance~~Agreement): ~~that~~(1) any other event of default under the ~~Company~~Indenture, (2) the ~~will~~termination ~~succeed~~of inArchibald's aforbearance ~~Restructuring~~agreement on(the a"CIT ~~timely~~Forbearance ~~basis~~Agreement") orwith ~~that~~The CIT Group/Business Credit, Inc. ("CIT), the ~~terms~~agent and ~~conditions~~sole lender under Archibald's revolving credit facility (the "CIT Facility"), (3) the termination of aHoldings' ~~Restructuring~~forbearance ~~would~~agreement be(the ~~favorable~~"Senior toPreferred Forbearance Agreement") with the ~~Company.~~holders Ifof byits ~~February 1,~~senior ~~2002~~preferred stock (the ~~Company~~"Senior isPreferred ~~unable~~Holders"), to(4) any ~~negotiate~~acceleration aof ~~Restructuring~~the orprincipal aand ~~waiver~~interest under the Senior Notes, ~~forbearance~~(5) any payment or ~~amendment~~distribution ~~that~~by ~~effectively~~Archibald ~~waives,~~to the holders of ~~forbears~~Holdings' preferred stock or ~~postpones~~to ~~the January 2002~~Holdings ~~interest~~for payment ~~default,~~to asthe ~~well~~holders asof its preferred stock, (6) any ~~necessary~~election ~~corresponding~~by ~~amendment~~the Senior Preferred Holders of a director having 51% of the ~~CIT~~total ~~Facility,~~voting ~~events~~power of Holdings' Board of ~~default~~Directors ~~will~~or ~~occur~~(7) a ~~under~~breach ~~the~~of ~~Indenture~~any ~~and~~representation, warranty or covenant in the ~~CIT~~Noteholders' ~~Facility~~Forbearance Agreement.

In Archibald ~~addition,~~originally entered into the ~~Company~~CIT ~~has~~Forbearance ~~failed~~Agreement as of December 31, or2001 ~~expects~~because ~~that~~(1) Archibald ithad ~~will~~failed, or expected to fail, to satisfy certain financial covenants in the CIT Facility that ~~require~~required ~~the~~Archibald ~~Company~~ to meet minimum levels of net earnings, before interest, income taxes, depreciation and amortization ~~("EBITDA")~~, and net cash flow for periods ending in November and December 2001 and February 2002. ~~The Company~~and ~~has~~(2) Archibald ~~entered~~expected ~~into~~to afail ~~forbearance~~to ~~agreement~~make ~~with~~the ~~CIT~~January 2002 (interest payment on the ~~"CIT~~Senior ~~Forbearance~~Notes. ~~Agreement"),~~Pursuant ~~pursuant~~to subsequent amendments to ~~which~~the CIT ~~has~~Forbearance Agreement, CIT also agreed to forbear from exercising its rights ~~and~~with ~~remedies~~respect to certain additional covenant defaults by Archibald under the CIT Facility ~~that~~. ~~arise~~CIT ashas aextended ~~result~~the offorbearance period under the CIT Forbearance Agreement (the "CIT Forbearance Period") beyond March 1, 2002, its originally scheduled expiration

~~the~~date, ~~Company's~~until ~~failure to meet such financial covenants and to make the January~~April ~~2002~~30, ~~interest payment on the Senior Notes~~2002. InPursuant ~~accordance~~to ~~with~~ the CIT Forbearance Agreement, CIT ~~also~~ has ~~agreed to~~allowed ~~allow~~Archibald ~~the~~to ~~Company~~continue to request ~~revolving~~borrowings ~~loans~~under ~~and letters of credit during~~ the ~~forbearance~~CIT ~~period,~~Facility asfor ~~described below, to satisfy its~~ working capital needs, but not ~~to exceed~~ in ~~aggregate amount~~ ~~outstanding~~excess of the lesser of ~~(i)~~ a certain specified ~~amounts~~limit and ~~(ii)~~ a borrowing base comprised ~~only~~ of a percentage of the eligible accounts receivable and eligible inventory of ~~the~~Archibald ~~Company~~ and its Canadian subsidiary, Archibald Candy (Canada) Corporation. The ~~forbearance~~CIT ~~period~~Facility ~~shall~~is ~~terminate~~secured by liens on ~~the~~Archibald's ~~earliest~~and toSweet ~~occur~~Factory, Inc.'s ofaccounts ~~the~~receivable ~~following:~~and ~~March 1~~inventory, ~~2002,~~and ~~any~~the ~~acceleration~~Company's ofowned store locations, and the ~~Senior~~proceeds ~~Notes~~therefrom. The Company's other subsidiaries, ~~any~~including ~~payment~~Archibald ~~on account~~Candy of(Canada) ~~the~~Corporation, ~~Senior~~have ~~Notes~~guaranteed orall ~~the~~obligations ~~preferred~~under ~~stock~~the ofCIT ~~Holdings,~~Facility ~~any~~and ~~other~~granted ~~event~~to ofthe ~~default~~agent under the CIT Facility or a ~~breach~~lien ofon ~~any~~their ~~representation~~accounts receivable, ~~warranty~~inventory, orand ~~covenant in~~ the ~~CIT~~proceeds ~~Forbearance Agreement~~therefrom. ~~The~~In ~~Company~~addition, Holdings has ~~paid~~guaranteed aall ~~fee~~obligations tounder the CIT inFacility ~~connection~~and ~~with~~granted to the ~~CIT~~agent ~~Forbearance~~under ~~Agreement.~~the CIT AsFacility ofa ~~January 11,~~lien ~~2002,~~on ~~borrowings~~all of ~~$3.5 million~~its ~~were~~assets, ~~outstanding~~including ~~under~~all the ~~CIT~~outstanding ~~Facility and~~shares ~~$0.2 million~~ of ~~letters~~common stock of ~~credit were outstanding under~~ the ~~CIT Facility~~Company.

~~Given~~ During the ~~terms of the~~ CIT Forbearance ~~Agreement~~Period, ~~the~~Archibald's ~~Company~~management ~~will~~expects ~~not~~that beArchibald ~~able~~will tohave ~~dividend or otherwise make available to Holdings funds~~ sufficient toavailability ~~allow~~under ~~Holdings to make~~ the ~~$3.0 million~~ ~~redemption~~CIT ~~payment~~Facility ~~required~~ to bemeet ~~made~~its byworking itcapital toneeds ~~the~~as ~~holders~~they ~~of Holdings' Senior Preferred Stock on January 15, 2002. In the event that Holdings fails to make such redemption~~become ~~payment~~due; ~~by February 14~~however, ~~2002,~~there ~~all~~can ~~remaining~~be ~~redemption~~no ~~payments~~assurance onthat ~~Holdings'~~this ~~Senior~~will ~~Preferred Stock, which equal $10.5 million in aggregate, shall~~ be ~~accelerated. In addition, if Holdings fails to make a redemption payment in accordance with~~ the ~~terms~~case. ofThe ~~the~~CIT ~~Senior~~Forbearance ~~Preferred~~Period ~~Stock, the holders of the Senior Preferred Stock~~ may ~~elect~~be aterminated ~~director~~prior to ~~the~~April 30, ~~Board~~2002 ofif ~~Directors~~any of ~~Holdings~~ ~~who shall have 51% of~~ the ~~total~~following ~~voting~~occurs: ~~power~~(1) any acceleration of the ~~Board.~~Senior ~~Any~~Notes, ~~exercise~~(2) any ofpayment ~~such~~on ~~right~~account ~~would constitute a change~~ of ~~control under~~ the ~~Indenture that would obligate the Company to offer to repurchase all of the~~ Senior Notes ator ~~face~~Holdings' ~~value~~preferred ~~and~~stock, ~~also~~(3) any ~~would~~other ~~constitute an~~ event of default under the CIT Facility. ~~The~~or ~~Senior~~(4) a breach ~~Preferred~~of ~~Stock~~any representation, ~~which~~warranty ~~was~~or ~~issued~~covenant ~~by Holdings~~ in ~~1991 in~~ the ~~original face~~CIT ~~amount~~Forbearance ~~of $10~~Agreement.~~0 million,~~ ~~is held by the former shareholders of Archibald.~~

~~During~~ Pursuant to the ~~forbearance~~Senior ~~period~~Preferred Forbearance Agreement, the ~~Company~~Senior ~~expects~~Preferred Holders have agreed to ~~work~~forbear ~~with~~until April 30, 2002 (the ~~holders~~"Senior Preferred Forbearance Period") from exercising their right to elect a director to Holdings' Board of ~~the~~Directors ~~Senior~~who ~~Notes,~~would ~~CIT,~~have ~~other~~51% ~~creditors,~~of the total voting power of Holdings' ~~significant~~Board ~~stockholders~~of Directors and ~~investment~~from ~~advisors~~exercising onany aother right or remedies ~~financial~~that ~~restructuring,~~they ~~including~~may have as a ~~restructuring~~result of Holdings' failure to make the ~~Senior~~$3.0 million ~~Notes,~~redemption aspayment ~~well~~required asto ~~seeking~~be ~~new~~made ~~equity~~by ~~and/or~~it ~~debt~~to ~~from~~the ~~unaffiliated~~Senior ~~third~~Preferred ~~parties~~Holders on January 15, 2002 and~~/or~~ ~~affiliates~~the $10.5 million in aggregate of ~~the~~remaining ~~Company~~redemption orpayments ~~its~~that ~~directors~~automatically ~~and officers~~accelerated as a result thereof. The ~~Company~~Senior ~~has~~Preferred ~~not~~Forbearance ~~received~~Period may be terminated prior to April 30, 2002 if any ~~commitments~~of orthe ~~agreements~~following ~~with~~occurs ~~respect~~(other than if due to ~~any~~the ~~new~~Senior ~~sources~~Preferred Holders' breach of ~~equity~~their obligations under the Senior Preferred Forbearance Agreement): (1) the ortermination ~~debt~~of the CIT Forbearance Agreement, ~~and~~(2) the ~~there~~termination ~~can~~of bethe noNoteholders' ~~assurances~~Forbearance ~~that~~Agreement or (3) a breach by Holdings of any ~~such~~representation, ~~financing~~warranty ~~will~~or becovenant ~~obtained~~in the Senior Preferred Forbearance Agreement. Pursuant to the Senior Preferred Forbearance Agreement, ~~particularly~~Holdings ifalso has granted to the Senior ~~Notes~~Preferred ~~are~~Holders ~~not~~the ~~restructured~~right onto adesignate ~~satisfactory~~an ~~basis~~individual who is entitled to observe all meetings of the Boards of Directors of Holdings, Archibald and its subsidiaries.

In Archibald ~~addition~~is tocontinuing discussions with the holders of the Senior ~~Preferred~~Notes, ~~Stock~~CIT, Holdings' ~~also~~significant ~~has~~stockholders ~~the~~and ~~two~~investment ~~following~~advisors ~~classes~~on ofan ~~junior~~overall ~~preferred~~capital ~~stock:~~restructuring, ~~Junior~~including, among ~~Class~~other things (1) Aa ~~PIK~~restructuring ~~Preferred~~of ~~Stock~~the ~~and~~Senior ~~Junior~~Notes ~~Class~~through debt for equity exchanges or conversions, repurchases or acquisitions of the Senior Notes on discounted terms, (2) Bnew ~~PIK~~equity ~~Preferred~~and/or ~~Stock.~~debt ~~The~~from ~~Junior~~unaffiliated ~~Class A~~third ~~PIK~~parties ~~Preferred~~and/or ~~Stock~~affiliates of Archibald or its directors and officers, (3) extensions of the ~~Junior~~forbearance ~~Class B~~periods ~~PIK~~under ~~Preferred~~the ~~Stock~~Noteholders' ~~were~~Forbearance Agreement, ~~issued~~the inCIT ~~1991~~Forbearance inAgreement and the ~~original~~Senior ~~face~~Preferred ~~amount~~Forbearance Agreement or (4) combinations of $7the foregoing.~~0 million~~ ~~and~~Archibald has not ~~$0.7 million,~~received ~~respectively.~~any Ascommitments or agreements with respect to any new sources of ~~January 14,~~equity ~~2002~~or debt, ~~affiliates~~and ofthere ~~TCW~~can ~~Capital~~be ~~owned~~no ~~approximately~~assurance ~~64%~~that ofany ~~the~~such ~~Junior~~financing ~~Class A~~will ~~PIK~~be ~~Preferred~~obtained, ~~Stock~~particularly ~~and~~if ~~affiliates~~the ~~(or~~Senior ~~parties~~Notes ~~advised~~are bynot ~~such~~restructured ~~affiliates)~~on ofa ~~The~~satisfactory ~~Jordan~~basis. ~~Company~~There ~~owned~~can ~~approximately~~be ~~36%~~no ofassurance ~~the~~that ~~Junior~~Archibald ~~Class A~~will ~~PIK~~succeed ~~Preferred~~in ~~Stock~~a ~~and~~restructuring ~~approximately~~on ~~80%~~a oftimely basis or that the ~~Junior~~terms ~~Class B~~and ~~PIK~~conditions ~~Preferred~~of ~~Stock~~a restructuring would be favorable to Archibald.

In ~~connection~~addition ~~with~~to the ~~Company's~~Senior ~~entering~~Preferred ~~into the CIT Facility~~Stock, Holdings ~~entered~~also ~~into~~has ~~agreements with~~ the ~~holders~~two offollowing ~~each~~classes ~~class~~ of ~~its~~junior preferred stock: ~~to,~~Junior ~~among~~Class A ~~other~~PIK ~~things,~~Preferred ~~extend the~~Stock ~~mandatory~~and ~~redemption~~Junior ~~dates~~Class B ~~for~~PIK Preferred ~~such stock~~Stock. The ~~terms~~Junior ofClass A ~~the~~PIK ~~Senior~~ Preferred Stock ~~have been amended to, among other things, eliminate the accrual of dividends on such stock after August 31, 2000~~ and ~~to change~~ the ~~mandatory~~Junior ~~redemption date of such stock from a single aggregate redemption payment on August~~Class ~~31,~~B ~~2001~~PIK toPreferred aStock ~~schedule~~were ofissued ~~mandatory redemption payments on January 15th of each year, commencing~~ in ~~2002~~1991 ~~and ending~~ in ~~2006.~~the ~~Such~~original ~~annual~~face ~~redemption~~amount ~~payments are in the amounts~~ of $37.0 million ~~in each of the years 2002 through 2004,~~and $2.0.7 million, inrespectively. ~~2005~~As ~~and~~of ~~$2.5~~February ~~million~~23, in2002, ~~2006.~~

~~The~~affiliates ~~terms~~ of ~~the~~TCW ~~Junior~~Capital ~~Class A~~owned ~~PIK~~approximately ~~Preferred~~64% ~~Stock~~of ~~and~~ the Junior Class BA PIK Preferred Stock ~~have~~and ~~been~~affiliates ~~amended~~(or toparties ~~extend~~advised ~~the~~by ~~mandatory redemption date for each~~ such ~~class~~ affiliates) of ~~preferred~~The ~~stock~~Jordan ~~from~~Company ~~November 1,~~owned ~~2001~~approximately ~~to March 15, 2006. The redemption value~~ 36% of the Junior Class A PIK Preferred Stock and ~~the Junior Class B PIK Preferred Stock on March 15, 2006 will be~~ approximately ~~$21.2 million~~80% ~~and $2.1 million, respectively. The holders~~ of the Junior Class AB PIK Preferred Stock ~~also have agreed to extend from January 1, 2000 to June 30, 2003 the date on which they have the right to put to Holdings their common stock~~. In the event that Holdings does not redeem all of the common stock and preferred stock owned by affiliates of TCW Capital within 90 days of any exercise of this put right, affiliates of TCW Capital have the right to take control of a majority of the voting power of Holdings' Board of Directors for purposes of effecting a sale of Holdings.

In ~~order~~connection ~~for~~with ~~Holdings~~Archibald toentering ~~make~~into the ~~redemption~~CIT ~~payments on its preferred stock~~Facility, Holdings ~~must~~entered ~~cause~~into ~~the~~agreements ~~Company,~~with to the ~~extent~~holders ~~permitted~~of by the ~~Indenture,~~Junior ~~the~~Class A ~~CIT~~PIK ~~Facility~~Preferred Stock and ~~law,~~the toJunior ~~advance~~Class B Preferred Stock extending the ~~necessary~~mandatory ~~funds~~redemption todate ~~Holdings~~for byeach ~~dividend~~such orclass ~~otherwise.~~of ~~Such~~preferred ~~advances~~stock from November 1, if2001 ~~paid~~to March 15, ~~will~~2006. ~~reduce~~The redemption value of the ~~funds~~Junior Class A ~~available~~PIK ~~for~~Preferred Stock and the ~~Company's~~Junior ~~operations.~~Class B ToPIK ~~the~~Preferred ~~extent~~Stock ~~that~~on ~~such~~March 15, ~~funds~~2006 ~~are~~will ~~not~~be ~~available~~approximately $21.2 million and $2.1 million, respectively. The ~~whether~~holders ~~due~~of toJunior ~~the~~Class A ~~restrictions~~PIK ~~set~~Preferred ~~forth~~Stock inalso ~~the~~have ~~Indenture,~~agreed ~~the~~to ~~CIT~~extend ~~Facility~~from orJanuary 1, ~~otherwise~~2000 to June 30, 2003 the ~~failure~~date toon ~~make~~which ~~required~~they ~~redemption~~have ~~payments~~the ~~(1) would~~right ~~trigger~~to ~~various~~put ~~provisions~~to of Holdings~~' preferred~~ ~~and~~ their common stock,. ~~including~~In ~~provisions~~the ~~providing~~event ~~for~~that aHoldings ~~change~~does ofnot ~~control~~redeem all of ~~Holdings'~~the common stock and ~~the~~preferred ~~Company's~~stock ~~Boards~~owned by affiliates of ~~Directors~~TCW ~~and~~Capital ~~(2)~~within 90 ~~with~~days ~~respect~~of ~~only~~any toexercise aof ~~failure~~this toput ~~make required~~right, ~~redemptions~~affiliates of ~~the~~TCW ~~Senior~~Capital ~~Preferred~~have ~~Stock,~~the ~~could~~right ~~result~~to intake ~~defaults~~control ~~under~~of ~~the~~a ~~Indenture~~majority ~~and~~of the ~~CIT~~voting ~~Facility~~power ~~and~~of anHoldings' ~~obligation~~Board byof ~~the~~Directors ~~Company~~for ~~under~~purposes ~~the~~of ~~Indenture~~effecting toa ~~purchase~~sale ~~all~~ of ~~the Senior Notes~~Holdings.

The Indenture also provides that, except in limited circumstances (including to pay dividends or redeem preferred stock not owned by affiliates of The Jordan Company), the Company will not, and will not permit any of our subsidiaries to, make dividend payments or other distributions on its outstanding shares of capital stock unless at the time of such distribution: (a) no default under the Indenture has occurred and is continuing or would occur as a consequence, thereof, (b) immediately after such distribution, the Company would comply with the interest coverage ratios set forth in the Indenture and (c) such distributions do not exceed an amount determined by reference to a formula consisting primarily of prior distributions and payments, prior income and the proceeds from the sale of securities. The Indenture prohibits the incurrence of additional indebtedness unless, among other things, we comply with minimum interest coverage ratios set forth in the Indenture.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

PART II—OTHER INFORMATION:

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibit 10.1	Senior Preferred Forbearance Agreement dated as of February 27, 2002 between Fannie May Holdings, Inc. and the holders of Fannie May Holdings, Inc.'s Senior Preferred Stock.	~~Forbearance Agreement dated as of December 31, 2001 among Archibald, Fannie May Holdings, Inc., Archibald Candy (Canada) Corporation, and The CIT Group/Business Credit, Inc.~~
	Exhibit 10.2	Forbearance Agreement dated as of February 28, 2002 between Archibald Candy Corporation and holders of Archibald's senior secured notes.	First Amendment Agreement dated as of January 9, 2002 to the Post-Petition Credit Security and Guaranty Agreement dated as of November 15, 2001 among Sweet Factory, Inc., Sweet Factory Group, Inc., SF Candy Company, SF Properties, Inc. and The CIT Group/Business Credit, Inc.
	Exhibit 10.3	Amendment No. 1 to Forbearance Agreement dated as of February , 2002 among Archibald Candy Corporation, Fannie May Holdings, Inc. and The CIT Group/Business Credit, Inc., as agent and sole lender.	Certificate of Amendment to Certificate of Designation of Junior Class A PIK Preferred Stock of Fannie May Holdings, Inc. filed with the Secretary of State of the State of Delaware on December 18, 2001
	Exhibit 10.4	Amendment No. 2 to Forbearance Agreement dated as of March 1, 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.	Certificate of Amendment to Certificate of Designation of Junior Class B PIK Preferred Stock of Fannie May Holdings, Inc. filed with the Secretary of State of the State of Delaware on December 18, 2001
(b)	Reports on Form 8-K.
	On January 3, 2002, Archibald filed a Current Report on Form 8-K with the Securities and Exchange Commission that provided information under Item 5—Other Events disclosing that on January 2, 2002, Archibald did not make the interest payment required on its outstanding senior secured notes and that Archibald was going to enter into discussions with the holders of such notes regarding a potential restructuring of such notes. The Form 8-K also disclosed that Archibald had entered into a Forbearance Agreement with The CIT Group/Business Credit, Inc.
	On January 3, 2002, Archibald filed a Current Report on Form 8-K with the Securities and Exchange Commission that provided information under Item 5— Other Events disclosing that on January 2, 2002, Archibald did not make the interest payment required on its outstanding senior secured notes and that Archibald was going to enter into discussions with the holders of such notes regarding a potential restructuring of such notes. The Form 8-K also disclosed that Archibald had entered into a Forbearance Agreement with The CIT Group/Business Credit, Inc.
	On November 29, 2001, Archibald filed a Current Report on Form 8-K with the Securities and Exchange Commission that provided information under Item 3—Bankruptcy or Receivership disclosing that on November 15, 2001, Sweet Factory Group, Inc. and its subsidiaries had commenced voluntary bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code.
	On January 17, 2002, Archibald filed a Current Report on Form 8-K with the Securities and Exchange Commission that provided information under Item 9-Regulation FD disclosing that in connection with restructuring discussions with certain holders of Archibald's senior secured notes, Archibald's management had prepared for such holders and Archibald's directors and their affiliates certain earnings forecasts.
	On February 5, 2002, Archibald filed a Current Report on Form 8-K with the Securities and Exchange Commission that provided information under Item 5—Other Events disclosing that Archibald's 30-day grace period for making the interest payment on its senior secured notes had expired and that Archibald did not expect that Fannie May Holdings, Inc. would be able to make the mandatory redemption payment on Holdings' senior preferred stock on the date due.
	On March 5, 2002, Archibald filed a Current Report on Form 8-K with the Securities and Exchange Commission that provided information under Item 5 — Other Events disclosing that Archibald had entered into a forbearance agreement with holders of its senior secured notes and had entered into an extension of its forbearance agreement with The CIT Group/Business Credit, Inc. The Form 8-K also disclosed that Fannie May Holdings, Inc. had entered into a forbearance agreement with the holders of its senior preferred stock.

SIGNATURE

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

	ARCHIBALD CANDY CORPORATION
DATE: JANUARY 14, 2002	BY:	/s/ RICHARD J. ANGLIN RICHARD J. ANGLIN VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
DATE: April 9, 2002	BY:	/s/ RICHARD J. ANGLIN Richard J. Anglin
		VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)