<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: OCTOBER 3, 1998
or
[_] 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: 333-45179
MRS. FIELDS' ORIGINAL COOKIES, INC.
-----------------------------------
(Exact name of registrant specified in its charter)
<TABLE>
<S> <C>
DELAWARE 87-0552899
- --------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
2855 EAST COTTONWOOD PARKWAY, SUITE 400
SALT LAKE CITY, UTAH 84121-7050
- --------------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(801) 736-5600
--------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X yes _____ no
-----
The Company had 400 shares of common stock outstanding at NOVEMBER 11, 1998.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of October 3, 1998 and January 3, 1998.. 3
Condensed Consolidated Statements of Operations for the 13 Weeks
Ended October 3, 1998 and September 27, 1997................................. 5
Condensed Consolidated Statements of Operations for the 39 Weeks
Ended October 3, 1998 and September 27, 1997................................. 6
Condensed Consolidated Statements of Cash Flows for the 39 Weeks
Ended October 3, 1998 and September 27, 1997................................. 7
Notes to Condensed Consolidated Financial Statements............................. 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 19
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings................................................................ 29
ITEM 5. Other Information................................................................ 29
ITEM 6. Exhibits and Reports on Form 8-K................................................. 29
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,146 $ 16,287
Accounts receivable, net of allowance for doubtful accounts of $40 and $32,
respectively 1,896 1,535
Amounts due from franchisees and licensees, net of allowance for doubtful
accounts of $979 and $582, respectively 5,616 2,176
Inventories 4,790 3,100
Prepaid rent and other 4,312 2,960
Current portion of deferred income tax assets 2,765 2,765
-------- --------
Total current assets 24,525 28,823
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 32,856 21,099
Equipment and fixtures 18,143 14,100
Land 368 128
-------- --------
51,367 35,327
Less accumulated depreciation and amortization (16,364) (6,125)
-------- --------
Net property and equipment 35,003 29,202
-------- --------
DEFERRED INCOME TAX ASSETS, net of current portion 734 734
-------- --------
GOODWILL, net of accumulated amortization of $9,233 and $4,980, respectively 134,531 68,501
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $2,027
and $1,409, respectively 14,625 15,193
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of $720 and
$70, respectively 10,263 5,906
-------- --------
OTHER ASSETS 2,976 1,325
-------- --------
$222,657 $149,684
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
-3-
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 384 $ 472
Current portion of capital lease obligations 174 142
Accounts payable 8,669 3,805
Accrued liabilities 6,365 2,826
Current portion of store closure reserve 2,475 3,664
Accrued salaries, wages and benefits 3,045 1,891
Accrued interest payable 4,859 1,082
Sales taxes payable 512 937
Current portion of deferred credits 318 871
-------- --------
Total current liabilities 26,801 15,690
LONG-TERM DEBT, net of current portion and discount 139,465 100,284
STORE CLOSURE RESERVE, net of current portion 4,648 1,802
CAPITAL LEASE OBLIGATIONS, net of current portion 133 183
-------- --------
Total liabilities 171,047 117,959
-------- --------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI (a majority
owned subsidiary), aggregate liquidation preference of $1,481 and
$1,437, respectively 1,171 902
-------- --------
MINORITY INTEREST 308 58
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 1,000 shares authorized and 400 shares
outstanding -- --
Additional paid-in capital 59,899 30,843
Accumulated deficit (9,768) (78)
-------- --------
Total stockholders' equity 50,131 30,765
-------- --------
$222,657 $149,684
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
-4-
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
October 3, 1998 September 27, 1997
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store and batter sales $33,291 $29,920
Franchising, net 1,671 833
Licensing, net 398 397
Other, net 473 138
------- -------
Total revenues 35,833 31,288
------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 18,449 16,902
Food cost of sales 8,229 6,559
General and administrative 4,423 3,500
Depreciation and amortization 3,510 2,373
------- -------
Total operating costs and expenses 34,611 29,334
------- -------
Income from operations 1,222 1,954
------- -------
OTHER INCOME (EXPENSE), net:
Interest expense (3,355) (1,979)
Interest income 113 25
Other expense (112) (218)
------- -------
Total other expense, net (3,354) (2,172)
------- -------
Loss before provision for income taxes, preferred stock accretion
and dividends of subsidiaries and minority interest (2,132) (218)
PROVISION FOR INCOME TAXES (54) (35)
------- -------
Loss before preferred stock accretion and dividends of subsidiaries and
minority interest (2,186) (253)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES
(111) (94)
MINORITY INTEREST (92) (2)
------- -------
Net loss $(2,389) $ (349)
======= =======
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
-5-
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
October 3, 1998 September 27, 1997
--------------- ------------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store and batter sales $89,938 $83,759
Franchising, net 3,884 2,201
Licensing, net 1,081 1,215
Other, net 1,056 351
------- -------
Total revenues 95,959 87,526
------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 52,357 48,200
Food cost of sales 21,588 19,549
General and administrative 12,621 10,803
Depreciation and amortization 9,707 6,596
------- -------
Total operating costs and expenses 96,273 85,148
------- -------
Income (loss) from operations (314) 2,378
------- -------
OTHER INCOME (EXPENSE), net:
Interest expense (8,981) (5,070)
Interest income 530 153
Other expense (256) (228)
------- -------
Total other expense, net (8,707) (5,145)
------- -------
Loss before provision for income taxes, preferred stock
accretion and dividends of subsidiaries and minority
interest (9,021) (2,767)
PROVISION FOR INCOME TAXES (68) (179)
------- -------
Loss before preferred stock accretion and dividends of subsidiaries
and minority interest (9,089) (2,946)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES
(333) (276)
MINORITY INTEREST (268) (2)
------- -------
Net loss $(9,690) $(3,224)
======= =======
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
-6-
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
October 3, 1998 September 27, 1997
----------------- -------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,690) $(3,224)
Adjustments to reconcile net loss to net cash provided by operating activities,
net of effects from acquisitions:
Depreciation and amortization 9,707 6,596
Amortization of deferred loan costs 650 --
Amortization of discount on notes 8 --
Loss on sale of assets 256 228
In-kind interest expense on note payable to stockholder -- 276
Preferred stock accretion and dividends of subsidiaries 333 276
Minority interest 268 2
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (361) --
Amounts due from franchisees and licensees (1,624) 371
Inventories (127) (23)
Prepaid rent and other 1,306 512
Other assets (207) --
Accounts payable and accrued liabilities 356 (773)
Store closure reserve (1,892) (1,927)
Accrued salaries, wages and benefits (110) (841)
Accrued interest payable 2,886 (67)
Sales taxes payable (530) (297)
Deferred credits (553) (318)
-------- -------
Net cash provided by operating activities 676 791
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions and related expenses (28,699) --
Purchase of property and equipment, net of effects from acquisitions (5,616) (3,216)
-------- -------
Net cash used in investing activities (34,315) (3,216)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 39,400 --
Payment of debt financing costs (5,007) --
Equity infusion from MFH 29,056 --
Principal payments on long-term debt (40,838) (98)
Principal payments on capital lease obligations (49) --
Reduction in preferred stock of PTI (64) --
-------- -------
Net cash provided by (used in) financing activities 22,498 (98)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,141) (2,523)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 16,287 6,709
-------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 5,146 $ 4,186
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $6,291 $3,890
Cash paid for income taxes $ 42 $ 80
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
-7-
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
------------------------------------------------
Mrs. Fields' Original Cookies, Inc. (the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc.
("MFH" or the "Parent"). MFH is a majority owned subsidiary of Capricorn
Investors II, L.P. ("Capricorn"). The Company has five wholly owned operating
subsidiaries; namely, The Mrs. Fields' Brand, Inc. ("MFB"), Mrs. Fields' Cookies
Australia, Mrs. Fields' Cookies (Canada) Ltd., Great American Cookie Company,
Inc. ("GACC") and H & M Canada, and four partially owned subsidiaries, the
largest of which is Pretzel Time, Inc. ("PTI") of which the Company owns 70
percent of the common stock. GACC was acquired by the Company on August 24,
1998.
The Company primarily operates retail stores which sell freshly baked
cookies, brownies, pretzels and other food products through five specialty
retail chains. As of October 3, 1998, the Company owned and operated 150 "Mrs.
Fields Cookies" stores, 128 "Original Cookie Company" stores, 109 "Great
American Cookie Company" stores, 86 "Hot Sam Pretzels" stores and 93 "Pretzel
Time" stores, all of which are located in the United States and two Pretzel Time
stores located in Canada. Additionally, the Company has franchised or licensed
683 stores in the United States and 82 stores in several other countries. As of
October 3, 1998, the Company operated 433 core stores and operated 135 stores
which are in the process of being closed or franchised.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company experiences its highest revenues in
the fourth quarter. Because the Company's stores are heavily concentrated in
shopping malls, the Company's sales performance is significantly dependent on
the performance of those malls.
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q, and accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these consolidated
financial statements reflect all adjustments, which consist only of normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and cash flows as of and for the periods
presented herein. These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's previously filed Registration Statement
on Form S-4, as amended.
The results of operations for the 39 weeks ended October 3, 1998 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending January 2, 1999. Earnings per share is not presented, as
the Company is wholly owned by MFH.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENT
- -------------------------------
During the 39 weeks ended October 3, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires an "all-inclusive" income statement approach
which specifies that all revenues, expenses, gains and losses recognized during
the period be reported in income, regardless of whether or not they are
considered to be results of operations of the period. The adoption of SFAS No.
130 had no material impact on the Company's financial statement presentation.
-8-
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the prior period's consolidated
financial statements to conform with the current period presentation.
(3) BUSINESS COMBINATIONS
---------------------
On August 24, 1998, the Company acquired all of the outstanding capital
stock and subordinated indebtedness of Cookies USA, Inc. ("Cookies USA"), the
sole stockholder of Great American Cookie Company, Inc., or ("GACC"), for an
aggregate purchase price of $18,400,000. GACC is an operator and franchisor of
mall-based specialty retail cookie outlets and manufacturer of cookie batter
which is distributed to GACC-operated retail stores and sold to franchised
retail stores. Concurrently with the acquisition of Cookies USA, the Company
entered into agreements with two GACC franchisees pursuant to which the Company
purchased a total of 29 GACC franchises for an aggregate purchase price of
$14,430,000. The Company acquired the franchises through the acquisition of 100
percent of the capital stock of the two corporations through which the
franchisees operated. On September 9, 1998, the Company acquired eight
additional GACC franchised retail stores from a GACC franchisee, pursuant to an
asset purchase agreement, for an aggregate purchase price of $1,898,000. These
acquisitions will be collectively referred to as the "Great American
Acquisitions."
The Great American Acquisitions have been accounted for using the purchase
method of accounting (based on preliminary estimates of fair values of the net
assets acquired) and resulted in recording approximately $69,390,000 of goodwill
that is being amortized using the straight-line method over 15 years.
Additionally, the Company caused Cookies USA to be merged with and into the
Company and caused the acquired franchisees' corporations and/or net assets to
be merged with and into GACC. GACC became a wholly owned subsidiary of the
Company. The acquired entities' results of operations have been included with
those of the Company since the applicable dates of acquisition.
The Great American Acquisitions were financed by (i) the net proceeds from
the Company issuing $40,000,000 Series C Senior Notes; (ii) the contribution of
the net proceeds totaling $29,056,000 of an MFH offering to the Company (the
"MFH Equity Infusion"); and (iii) existing cash of the Company.
(4) PRO FORMA RESULTS OF OPERATIONS
-------------------------------
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company assuming the acquisitions of H
& M, PTI, MFB and the Great American Acquisitions had occurred at December 29,
1996. Pro forma adjustments have been made to give effect to amortization of
goodwill, interest expense on acquisition debt and certain other adjustments.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which actually would
have resulted had the acquisitions been consummated at December 29, 1996.
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
October 3, 1998 September 27, 1997 October 3, 1998 September 27, 1997
--------------------- ------------------------ --------------------- ----------------------
(Unaudited)
<S> <C> <C> <C> <C>
Total revenues............... $43,931,000 $44,441,000 $126,937,000 $134,018,000
Income from operations....... 363,000 1,170,000 463,000 3,285,000
Net loss..................... (4,037,000) (2,950,000) (12,236,000) (8,448,000)
</TABLE>
-9-
<PAGE>
(5) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
----------------------------------------------------------
The Company's obligation related to its $140,000,000 aggregate principal
amount of 10 1/8 percent Series A, Series B and Series C Senior Notes due 2004
is fully and unconditionally guaranteed on a senior basis by The Mrs. Fields'
Brand, Inc. and Great American Cookie Company, Inc. (the "Guarantors"), wholly
owned subsidiaries of the Company. These guarantees are general unsecured
obligations of the Guarantors, rank senior in right of payment to all
subordinated indebtedness of the Guarantors and rank pari passu in right of
payment with all existing and future senior indebtedness of the Guarantors.
There are no restrictions on the Company's ability to obtain cash dividends or
other distributions of funds from the Guarantors, except those imposed by
applicable law. The following supplemental financial information sets forth, on
a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for Mrs. Fields' Original Cookies, Inc. (the "Parent
Company") and Mrs. Fields' Cookies Australia, Mrs. Fields' Cookies (Canada) Ltd.
and H & M Canada, and four partially owned subsidiaries, the largest of which is
Pretzel Time, Inc., of which the Company owns 70 percent of the common stock
(collectively, the "Non-Guarantor Subsidiaries"). The Mrs. Fields' Brand, Inc.
and Great American Cookie Company, Inc. are collectively presented in the
supplemental financial information as the "Guarantor Subsidiaries". The Company
has not presented separate financial statements and other disclosures concerning
the Guarantor Subsidiaries because management has determined that such
information is not material to investors.
In the supplemental condensed consolidating financial statements, the
principal elimination entries eliminate the Parent Company's investments in
subsidiaries and intercompany balances and transactions.
-10-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
--------------------------------------------------
AS OF OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ (1,378) $ 5,114 $1,410 $ -- $ 5,146
Accounts receivable, net 1,745 -- 151 -- 1,896
Amounts due from franchisees and
licensees, net 1,537 3,951 128 -- 5,616
Inventories 3,862 922 6 -- 4,790
Other current assets and amounts due
from (to) affiliates, net 47,017 (39,355) (585) -- 7,077
---------- ------------- ------------ ---------- ----------
Total current assets 52,783 (29,368) 1,110 -- 24,525
PROPERTY AND EQUIPMENT, net 33,313 1,434 256 -- 35,003
INTANGIBLES, net 65,491 77,085 6,580 -- 149,156
INVESTMENTS IN SUBSIDIARIES 53,650 -- -- (53,650) --
OTHER ASSETS 11,921 1,441 611 -- 13,973
---------- ------------- ------------ ---------- ----------
$217,158 $ 50,592 $8,557 $(53,650) $222,657
========== ============= ============ ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt
and capital lease obligations $ 143 $ 31 $ 384 $ -- $ 558
Accounts payable 7,755 865 49 -- 8,669
Accrued liabilities 13,622 3,276 676 -- 17,574
---------- ------------- ------------ ----------- ----------
Total current liabilities 21,520 4,172 1,109 -- 26,801
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion 139,542 -- 56 -- 139,598
OTHER ACCRUED LIABILITIES 4,648 -- -- -- 4,648
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK -- -- 1,171 -- 1,171
MINORITY INTEREST -- -- 268 40 308
STOCKHOLDERS' EQUITY 51,448 46,420 5,953 (53,690) 50,131
---------- ------------- ------------ ----------- ----------
$217,158 $ 50,592 $8,557 $(53,650) $222,657
========== ============= ============ =========== ===========
</TABLE>
-11-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 13 WEEKS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $33,187 $2,511 $ 975 $(840) $35,833
-------- ----------- -------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 18,787 - 73 (411) 18,449
Food cost of sales 7,880 748 30 (429) 8,229
General and administrative 3,820 258 345 -- 4,423
Depreciation and amortization 2,742 645 123 -- 3,510
------- ---------- ------------- ------------ ------------
Total operating costs and
expenses 33,229 1,651 571 (840) 34,611
-------- ----------- -------------- ------------- -------------
(Loss) income from operations (42) 860 404 -- 1,222
INTEREST EXPENSE AND
OTHER, net (3,361) 4 3 -- (3,354)
-------- ----------- -------------- ------------- -------------
(Loss) income before provision
for income taxes, preferred
stock accretion and dividends of
subsidiaries and equity in net
loss of consolidated subsidiaries (3,403) 864 407 -- (2,132)
PROVISION FOR INCOME TAXES (54) -- -- -- (54)
-------- ----------- -------------- ------------- -------------
(Loss) income before preferred
stock accretion and dividends of
subsidiaries and equity in net
loss of consolidated subsidiaries (3,457) 864 407 -- (2,186)
PREFERRED STOCK ACCRETION AND DIVIDENDS
OF SUBSIDIARIES -- -- (111) -- (111)
EQUITY IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES -- -- -- (92) (92)
-------- ----------- -------------- ------------- -------------
NET (LOSS) INCOME $(3,457) $ 864 $ 296 $ (92) $(2,389)
======== =========== ============== ============= =============
</TABLE>
-12-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 91,342 $ 3,194 $ 2,842 $ (1,419) $ 95,959
-------- ---------- ----------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 53,096 -- 251 (990) 52,357
Food cost of sales 21,196 748 73 (429) 21,588
General and administrative 10,692 812 1,117 -- 12,621
Depreciation and amortization 8,073 1,285 349 -- 9,707
-------- --------- ----------- ---------- ----------
Total operating costs and expenses 93,057 2,845 1,790 (1,419) 96,273
-------- --------- ----------- --------- ---------
(Loss) income from operations (1,715) 349 1,052 -- (314)
INTEREST EXPENSE AND
OTHER, net (8,733) 18 8 -- (8,707)
-------- ---------- ----------- ---------- ----------
(Loss) income before provision
for income taxes, preferred
stock accretion and dividends of
subsidiaries and equity in net
loss of consolidated subsidiaries (10,448) 367 1,060 -- (9,021)
PROVISION FOR INCOME TAXES (68) -- -- -- (68)
-------- ---------- ----------- ---------- ----------
(Loss) income before preferred
stock accretion and dividends of
subsidiaries and equity in net
loss of consolidated subsidiaries (10,516) 367 1,060 -- (9,089)
PREFERRED STOCK ACCRETION AND DIVIDENDS
OF SUBSIDIARIES -- -- (333) -- (333)
EQUITY IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES -- -- -- (268) (268)
-------- ---------- ----------- ---------- ----------
NET (LOSS) INCOME $(10,516) $ 367 $ 727 $ (268) $ (9,690)
======== ========== =========== ========== ==========
</TABLE>
-13-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES $(37,783) $ 37,954 $ 505 $ -- $ 676
-------- -------- ------ ----- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions (35,656) 6,957 -- -- (28,699)
Purchase of property and
equipment, net (5,609) -- (7) -- (5,616)
-------- -------- ------ ----- --------
Net cash (used in) provided by
investing activities (41,265) 6,957 (7) -- (34,315)
-------- -------- ------ ----- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 39,400 -- -- -- 39,400
Payment of debt financing costs (5,007) -- -- -- (5,007)
Equity infusion from MFH 29,056 -- -- -- 29,056
Reduction of long-term debt and capital
lease obligations (49) (40,522) (316) -- (40,887)
Reduction in preferred stock -- -- (64) -- (64)
-------- -------- ------ ----- --------
Net cash provided by (used in)
financing activities 63,400 (40,522) (380) -- 22,498
-------- -------- ------ ----- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (15,648) 4,389 118 -- (11,141)
CASH AND CASH EQUIVALENTS, beginning of
period 14,270 725 1,292 -- 16,287
-------- -------- ------ ----- --------
CASH AND CASH EQUIVALENTS, end of period $ (1,378) $ 5,114 $1,410 $ -- $ 5,146
======== ======== ====== ===== ========
</TABLE>
-14-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 14,270 $ 725 $1,292 $ -- $ 16,287
Accounts receivable, net 1,388 -- 147 -- 1,535
Amounts due from franchisees and
licensees, net 1,517 659 -- -- 2,176
Inventories 3,094 -- 6 -- 3,100
Other current assets and amounts due
from (to) affiliates, net 6,593 (615) (253) -- 5,725
--------- ----------- ----------- ------------- -------------
Total current assets 26,862 769 1,192 -- 28,823
PROPERTY AND EQUIPMENT, net 28,907 1 294 -- 29,202
INTANGIBLES, net 59,928 17,725 6,041 -- 83,694
INVESTMENTS IN SUBSIDIARIES 23,089 -- -- (23,089) --
OTHER ASSETS 7,902 -- 63 -- 7,965
--------- ----------- ----------- ------------- -------------
$146,688 $18,495 $7,590 $(23,089) $149,684
========= =========== =========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $ -- $ -- $ 614 $ -- $ 614
Accounts payable 3,621 36 148 -- 3,805
Accrued liabilities 10,499 25 747 -- 11,271
--------- ----------- ----------- ------------- -------------
Total current liabilities 14,120 61 1,509 -- 15,690
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion 100,000 -- 467 -- 100,467
OTHER ACCRUED LIABILITIES 1,802 -- - -- 1,802
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK -- -- 902 -- 902
MINORITY INTEREST -- -- -- 58 58
STOCKHOLDERS' EQUITY 30,766 18,434 4,712 (23,147) 30,765
--------- ----------- ----------- ------------- -------------
$146,688 $18,495 $7,590 $(23,089) $149,684
========= =========== =========== ============= =============
</TABLE>
-15-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 13 WEEKS ENDED SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $30,805 $ 397 $ 86 $ - $31,288
------- ------- ------- ------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy
costs 16,902 -- -- -- 16,902
Food cost of sales 6,559 -- -- -- 6,559
General and administrative 3,210 177 113 -- 3,500
Depreciation and amortization 2,096 277 -- -- 2,373
------- ------- ------- ------- -------
Total operating costs and
expenses 28,767 454 113 -- 29,334
------- ------- ------- ------- -------
Income (loss) from
operations 2,038 (57) (27) - 1,954
INTEREST EXPENSE AND
OTHER, net (1,831) (341) -- -- (2,172)
------- ------- ------- ------- -------
Income (loss) before provision
for income taxes, preferred
stock accretion and dividends
of subsidiaries and equity in
net loss of consolidated
subsidiaries 207 (398) (27) -- (218)
PROVISION FOR INCOME TAXES (35) -- -- -- (35)
------- ------- ------- ------- -------
Income (loss) before preferred
stock accretion and dividends
of subsidiaries and equity in
net loss of consolidated
subsidiaries 172 (398) (27) -- (253)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES -- (94) -- -- (94)
EQUITY IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES -- -- -- (2) (2)
------- ------- ------- ------- -------
NET INCOME (LOSS) $ 172 $(492) $(27) $(2) $ (349)
======= ======= ======= ======= =======
</TABLE>
-16-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $86,225 $ 1,215 $ 86 $ - $87,526
-------- ------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy
costs 48,200 -- -- -- 48,200
Food cost of sales 19,549 -- -- -- 19,549
General and administrative 10,060 607 136 -- 10,803
Depreciation and amortization 5,766 830 -- -- 6,596
------- ------------ ------------ ------------ ------------
Total operating costs and
expenses 83,575 1,437 136 -- 85,148
------- ------------ ------------ ------------ ------------
Income (loss) from
operations 2,650 (222) (50) -- 2,378
INTEREST EXPENSE AND
OTHER, net (4,134) (1,011) -- -- (5,145)
------- ------------ ------------ ------------ ------------
Loss before provision for
income taxes, preferred stock
accretion and dividends of
subsidiaries and equity in
net loss of consolidated
subsidiaries (1,484) (1,233) (50) -- (2,767)
PROVISION FOR INCOME TAXES (179) -- -- -- (179)
------- ------------ ------------ ------------ ------------
Loss before preferred stock
accretion and dividends of
subsidiaries and equity in
net loss of consolidated
subsidiaries (1,663) (1,233) (50) -- (2,946)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES -- (276) -- -- (276)
EQUITY IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES -- -- -- (2) (2)
-------- ------------ ------------ ------------ ------------
NET LOSS $(1,663) $(1,509) $ (50) $ (2) $(3,224)
========= ============ ============ ============ ============
</TABLE>
-17-
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
(dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 309 $ (39) $ 521 $ -- $ 791
------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment, net (3,216) -- -- -- (3,216)
------------ ------------ ------------- ------------ ------------
Net cash used in investing
activities (3,216) -- -- -- (3,216)
------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Reduction of long-term debt
and capital lease obligations (98) -- -- -- (98)
------------ ------------ ------------- ------------ ------------
Net cash used in financing
activities (98) -- -- -- (98)
------------ ------------ ------------- ------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,005) (39) 521 -- (2,523)
CASH AND CASH EQUIVALENTS,
beginning of period 6,121 588 -- -- 6,709
------------ ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period $ 3,116 $ 549 $ 521 $ -- $ 4,186
============ ============ ============= ============ ============
</TABLE>
-18-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In 1996, an investor group led by Capricorn Investors II, L.P.
("Capricorn") formed Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields'
Brand, Inc. (collectively, "Mrs. Fields" or the "Company") as subsidiaries of
Mrs. Fields' Holding Company, Inc. ("MFH").
On September 17, 1996, the Company initiated operations when it purchased
substantially all of the assets and assumed certain liabilities of Mrs. Fields
Inc. and subsidiaries, The Original Cookie Company, Incorporated ("Original
Cookie"), and the pretzel business of Hot Sam Company, Inc. ("Hot Sam").
The Company set out to increase sales and profitability of its cookie and
pretzel operations by implementing key elements of its business plan coupled
with strategic acquisitions. A key element of the business plan is closing or
franchising certain Company-owned stores that do not meet specific financial and
geographical criteria established by management. Implementation of this element
of the business plan is expected to result in enhanced operating margins as
these stores are franchised or closed. Stores not planned for franchise or
closure are referred to as "core" stores. Core stores will continue to be
operated by the Company into the foreseeable future. As a result of converting
certain stores to franchises, royalty revenues are expected to increase and
general and administrative expenses associated with operating those stores are
expected to be reduced.
The Company is pursuing growth in both its cookie and pretzel businesses
through strategic acquisitions. Management expects that significant operating
synergies, expense leveraging and geographic market share can be achieved
through targeted acquisitions. On July 25, 1997, a subsidiary of MFH, Mrs.
Fields' Pretzel Concepts, Inc. ("MFPC") acquired substantially all of the assets
and assumed certain liabilities of H&M Concepts Ltd. Co. ("H&M"), the largest
franchisee of Pretzel Time, Inc.("Pretzel Time"). On September 2, 1997, MFH
acquired 56% of the common stock of Pretzel Time, the franchisor of the Pretzel
Time concept. The acquisitions of H&M and Pretzel Time are collectively referred
to as the "Pretzel Acquisitions".
On November 26, 1997, the Company received as a contribution from MFH, the
business of MFPC and 56% of the shares of common stock of Pretzel Time (the
"Pretzel Contributions"). On that same date the Company received as a
contribution from MFH, all of the common stock of The Mrs. Fields' Brand, Inc.
On January 2, 1998 and June 12, 1998, the Company acquired an additional 4% and
10%, respectively, of Pretzel Time common stock, bringing the Company's total
ownership to 70%.
On August 24, 1998, the Company acquired all of the outstanding capital
stock and subordinated indebtedness of Cookies USA, the parent company of Great
American Cookie Company, Inc. ("Great American") for an aggregate purchase
price of $18.4 million. Cookies USA merged with and into the Company at which
time Great American became a wholly owned subsidiary of the Company. At the same
time, the Company purchased the stock of two Great American franchisees, Deblan
Corporation ("Deblan") and Chocolate Chip Cookies of Texas, Inc. ("Chocolate
Chip"), together owning and operating 29 Great American franchised stores, for
total consideration of $14.4 million. Deblan and Chocolate Chip were merged with
and into Great American at that time. On September 9, 1998, the Company acquired
eight Great American franchise stores ("Combined Karp Entities") from a Great
American franchisee, for a purchase price of $1.9 million. These transactions
are collectively referred to as the ("Cookie Acquisitions").
RECENT DEVELOPMENTS
On October 5, 1998, the Company purchased all of the retail cookie and
related business and operations of eleven Great American franchise stores from a
Great American franchisee for an aggregate purchase price of $2.8 million.
The Company is currently in discussions with Pretzelmaker Holdings, Inc.
("Pretzelmaker") and the holders of all of Pretzelmaker's outstanding capital
stock regarding a possible acquisition by the Company of all outstanding
Pretzelmaker capital stock. The Company cannot be sure that a definitive
agreement to purchase Pretzelmaker will be signed, or that this transaction will
be completed.
-19-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in thousands of
dollars and percentage changes from period to period. Data in the table reflects
the consolidated results of the Company for the 13 and 39 weeks ended October 3,
1998 and September 27, 1997, respectively. As supplemental information, the
table also segregates the statement of operations data into a core stores and
stores in the process of being closed or franchised format.
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 39 Weeks Ended
----------------------------------- ------------------------------------
% OF % OF
CHG CHG
FROM FROM
OCT. SEPT. 1997 TO OCT. SEPT. 1997 TO
3, 1998 27, 1997 1998 3, 1998 27, 1997 1998
--------- ---------- ------ ---------- ---------- ------
UNAUDITED STATEMENT OF OPERATIONS DATA: (Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Net store and batter sales.......... $ 33,291 $ 29,920 11.3% $ 89,938 $ 83,759 7.4%
Franchising, net.................... 1,671 833 100.6 3,884 2,201 76.5
Licensing, net...................... 398 397 0.3 1,081 1,215 (11.0)
Other revenue, net.................. 473 138 242.8 1,056 351 200.9
--------- ---------- --------- ----------
Total revenues.............. 35,833 31,288 14.5 95,959 87,526 9.6
--------- ---------- --------- ----------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy
costs......................... 18,449 16,902 9.2 52,357 48,200 8.6
Food cost of sales.................. 8,229 6,559 25.5 21,588 19,549 10.4
General and administrative.......... 4,423 3,500 26.4 12,621 10,803 16.8
Depreciation and amortization....... 3,510 2,373 47.9 9,707 6,596 47.2
--------- ---------- --------- ----------
Total operating costs and
expenses.................. 34,611 29,334 18.0 96,273 85,148 13.1
--------- ---------- --------- ----------
OTHER INCOME (EXPENSE), NET:
Interest expense.................... (3,355) (1,979) 69.5 (8,981) (5,070) 77.1
--------- ---------- --------- ----------
Interest income..................... 113 25 352.0 530 153 246.4
--------- ---------- --------- ----------
Other expense....................... (369) (349) 5.7 (925) (685) 35.0
--------- ---------- --------- ----------
NET LOSS................................... $ (2,389) $ (349) 584.5% $ (9,690) $ (3,224) 200.6%
========= ========== ========= ==========
UNAUDITED SUPPLEMENTAL INFORMATION:
CORE STORES:
Net store and batter sales............ $ 29,439 $ 25,574 15.1% $ 79,094 $ 69,713 13.5%
--------- ---------- --------- ----------
Operating costs and expenses:
Selling and store occupancy
costs.......................... 15,276 13,238 15.4 42,826 36,222 18.2
Food cost of sales................. 7,122 5,477 30.0 18,500 15,536 19.1
Depreciation and amortization...... 1,418 636 123.0 3,839 2,742 40.0
--------- ---------- --------- ----------
Total operating costs and
expenses................. 23,816 19,351 23.1 65,165 54,500 19.6
--------- ---------- --------- ----------
Core stores contribution.. $ 5,623 $ 6,223 (9.6) $ 13,929 $ 15,213 (8.4)
========= ========== ========= ==========
STORES IN THE PROCESS OF BEING
CLOSED OR FRANCHISED:
Net store sales....................... $ 3,852 $ 4,346 (11.4) $ 10,844 $ 14,046 (22.8)
--------- ---------- --------- ----------
Operating costs and expenses:
Selling and store occupancy
costs.......................... 3,173 3,664 (13.4) 9,531 11,978 (20.4)
Food cost of sales............... 1,107 1,082 2.3 3,088 4,013 (23.1)
Depreciation and amortization...... 92 44 109.1 350 54 548.1
--------- ---------- --------- ----------
Total operating costs and
expenses................. 4,372 4,790 (8.7) 12,969 16,045 (19.2)
--------- ---------- --------- ----------
Stores in the process of
being closed or
franchised contribution.. $ (520) $ (444) 17.1 $ (2,125) $ (1,999) 6.3
========= ========== ========= ==========
EBITDA..................................... $ 4,732 $ 4,327 9.4% $ 9,393 $ 8,974 4.7%
========= ========== ========= ==========
</TABLE>
-20-
<PAGE>
13 WEEKS ENDED OCTOBER 3, 1998 COMPARED TO THE 13 WEEKS ENDED
SEPTEMBER 27, 1997
COMPANY-OWNED AND FRANCHISED OR LICENSED STORE ACTIVITY
As of October 3, 1998, there were 568 Company-owned stores and 765
franchised or licensed stores in operation. The store activity for the 13 weeks
ended October 3, 1998 and the 13 weeks ended September 27, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
COMPANY- FRANCHISED COMPANY- FRANCHISED
OWNED OR LICENSED OWNED OR LICENSED
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the period 470 554 435 427
Stores opened (including relocations and acquisitions) 111 236 82 175
Stores closed (including relocations) (2) (23) -- (67)
Non-core (exit plan) stores closed (September 18, 1996 forward) (13) -- (16) --
Stores sold to franchisees (3) 3 (2) 2
Non-core (exit plan) stores franchised (September 18, 1996
forward) (2) 2 (3) 3
Stores acquired from franchisees 7 (7) -- --
----- ---- --- ---
Stores open as of the end of the period 568 765 496 540
===== ==== === ===
</TABLE>
REVENUES
NET STORES SALES. Total net store sales increased $3,371,000, or 11.3%,
from $29,920,000 to $33,291,000 for the 13 weeks ended October 3, 1998 compared
to the 13 weeks ended September 27, 1997.
Net store sales from core stores and batter sales increased $3,865,000, or
15.1%, from $25,574,000 to $29,439,000 for the 13 weeks ended October 3, 1998
compared to the 13 weeks ended September 27, 1997. The increase in net store
sales from core stores was primarily attributable to (i) the operation of 52
Great American core stores obtained in connection with the Cookie Acquisitions
in August and September 1998 (ii) the operation of 69 Pretzel Time core stores
obtained in July 1997 and (iii) the Company's repurchase of 7 core stores from
certain franchisees. Net store sales increases were offset by a 1.6% decrease in
comparable store sales.
Net store sales from stores in the process of being closed or franchised
decreased $494,000, or 11.4%, from $4,346,000 to $3,852,000 for the 13 weeks
ended October 3, 1998 compared to the 13 weeks ended September 27, 1997. This
decrease results from closing 13 stores and franchising 2 stores during the 13
weeks ended October 3, 1998 and the effect of closing or franchising 50 stores
subsequent to June 27, 1997 and prior to the 13 week period ended October 3,
1998.
FRANCHISING REVENUES. Franchising revenues increased $838,000, or 100.6%,
from $833,000 to $1,671,000 for the 13 weeks ended October 3, 1998 compared to
the 13 weeks ended September 27, 1997. The increase in franchising revenues was
primarily attributable to royalties earned from 211 Great American franchised
stores obtained in August 1998 and 141 Pretzel Time franchised stores obtained
in September 1997, offset in part by 11 franchised stores purchased by the
Company during the previous period.
LICENSING REVENUES. Licensing revenues increased $1,000, or 0.3%, from
$397,000 to $398,000 for the 13 weeks ended October 3, 1998 compared to the 13
weeks ended September 27, 1997.
OTHER REVENUE, NET. Other revenue, net, increased $335,000, or 242.8%, from
$138,000 to $473,000 for the 13 weeks ended October 3, 1998 compared to the 13
weeks ended September 27, 1997. The increase in other revenue, net, was
primarily attributable to an increase in contribution from the Company's mail
order division, area development fees earned from certain franchised stores
obtained in 1997 and miscellaneous other income.
TOTAL REVENUES. Total revenue increased by $4,545,000, or 14.5%, from
$31,288,000 to $35,833,000 for the 13 weeks ended October 3, 1998 compared to
the 13 weeks ended September 27, 1997 primarily due to the combination of
factors discussed above.
OPERATING COSTS AND EXPENSES
SELLING AND STORE OCCUPANCY COSTS. Total selling and store occupancy costs
increased $1,547,000, or 9.2%, from $16,902,000 to $18,449,000 for the 13 weeks
ended October 3, 1998 compared to the 13 weeks ended September 27, 1997.
-21-
<PAGE>
Selling and store occupancy costs for core stores increased by $2,038,000,
or 15.4%, from $13,238,000 to $15,276,000 for the 13 weeks ended October 3, 1998
compared to the 13 weeks ended September 27, 1997. Within this overall increase,
selling expenses increased by $1,238,000, or 16.0%, from $7,743,000 to
$8,981,000 for the 13 weeks ended October 3, 1998 compared to the 13 weeks ended
September 27, 1997. The increase in selling expenses was primarily attributable
to the 52 Great American core stores acquired through the Cookie Acquisitions in
August and September 1998, 69 Pretzel Time core stores acquired in July 1997 and
the effect of the minimum wage increasing to $5.15 from $4.75 on September 1,
1997. Store occupancy costs for core stores increased $800,000, or 14.6%, from
$5,495,000 to $6,295,000 for the 13 weeks ended October 3, 1998 compared to the
13 weeks ended September 27, 1997. The increase in store occupancy costs was
primarily attributable to the store additions referred to above and lease
renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $491,000, or 13.4%, from $3,664,000 to $3,173,000 for
the 13 weeks ended October 3, 1998 compared to the 13 weeks ended September 27,
1997. This decrease was primarily the result of closing 13 stores and
franchising 2 stores during the 13 weeks ended October 3, 1998 and the effect of
closing or franchising 50 stores subsequent to June 27, 1997 and prior to the 13
week period ended October 3, 1998.
FOOD COST OF SALES. Total food cost of sales increased $1,670,000, or
25.5%, from $6,559,000 to $8,229,000 for the 13 weeks ended October 3, 1998
compared to the 13 weeks ended September 27, 1997.
Food cost of sales for core stores increased $1,645,000, or 30.0%, from
$5,477,000 to $7,122,000 for the 13 weeks ended October 3, 1998. This increase
was primarily the result of the addition of 52 Great American Cookie Company
core stores in August and September 1998 and 69 Pretzel Time core stores
acquired in July 1997. Food cost of sales also increased due to the addition of
the Great American batter facility in August 1998 which produces batter for the
Great American stores. Batter facility production costs are included in food
cost of sales. The increasing cost of butter was also a significant factor to
increased food cost of sales. Butter, which is a main ingredient in a variety of
products and a condiment for other products, was $1.98 per pound at the
beginning of the 13 weeks ended October 3, 1998 compared to $1.16 per pound at
the beginning of the 13 weeks ended September 27, 1997. Additionally,
distribution costs increased during the 13 weeks ended October 3, 1998 as the
Company changed distributors to improve product availability and the reliability
of service to the stores.
Food cost of sales for stores in the process of being closed or franchised
increased $25,000, or 2.3%, from $1,082,000 to $1,107,000 for the 13 weeks ended
October 3, 1998 compared to the 13 weeks ended September 27, 1997. This increase
was primarily attributable to the addition of 65 Great American stores in August
and September 1998 as well as the increased butter and distribution costs
described above, offset by closing 13 stores and franchising 2 stores during the
13 weeks ended October 3, 1998 and the effect of closing or franchising 50
stores subsequent to June 27, 1997 and prior to the 13 week period ended October
3, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $923,000, or 26.4%, from $3,500,000 to $4,423,000 for the 13 weeks
ended October 3, 1998 compared to the 13 weeks ended September 27, 1997. The
increase in general and administrative expenses was primarily attributable to
the Cookie Acquisitions in 1998 and the Pretzel Acquisitions in 1997.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense
increased by $1,137,000, or 47.9%, from $2,373,000 to $3,510,000 for the 13
weeks ended October 3, 1998 compared to the 13 weeks ended September 27, 1997.
This increase was primarily attributable to increased goodwill from the Pretzel
Acquisitions in 1997 and the Cookie Acquisitions in 1998.
Depreciation and amortization expense for core stores increased $782,000,
or 123.0%, from $636,000 to $1,418,000 for the 13 weeks ended October 3, 1998
compared to the 13 weeks ended September 27, 1997. This increase in depreciation
and amortization expense was primarily attributable to the addition of 52 Great
American core stores in August and September 1998 and 69 Pretzel Time stores in
July 1997.
TOTAL OPERATING COSTS AND EXPENSES. Total operating costs and expenses
increased by $5,227,000, or 18.0%, from $29,334,000 to $34,611,000 for the 13
weeks ended October 3, 1998 compared to the 13 weeks ended September 27, 1997,
for the reasons discussed above.
INTEREST EXPENSE. Interest expense, increased $1,376,000, or 69.5%, from
$1,979,000 to $3,355,000 for the 13 weeks ended October 3, 1998 compared to the
13 weeks ended September 27, 1997. This increase was primarily attributable to
interest expense on $100,000,000 high yield notes which were placed in November
1997 and $40,000,000 high yield notes which were placed in August 1998.
-22-
<PAGE>
INTEREST INCOME. Interest income increased $88,000, or 352.0%, from $25,000
to $113,000 for the 13 weeks ended October 3, 1998 compared to the 13 weeks
ended September 27, 1997. This increase was primarily the result of interest
income earned on excess cash provided by $100,000,000 of high yield notes which
were placed in November 1997 and $40,000,000 of high yield notes which were
placed in August 1998.
OTHER EXPENSES. Other expenses increased $20,000, or 5.7%, from $349,000 to
$369,000 for the 13 weeks ended October 3, 1998 compared to the 13 weeks ended
September 27, 1997. This increase is primarily the result of the Company
recognizing the minority interest from the Pretzel Acquisitions in 1997 and non-
capitalizable acquisition expenses incurred during the 13 weeks ended October 3,
1998.
NET LOSS. The net loss increased by $2,040,000, or 584.5%, from $349,000 to
$2,389,000 for the 13 weeks ended October 3, 1998 compared to the 13 weeks ended
September 27, 1997 due to the combination of factors described above.
CONTRIBUTION FROM CORE STORES. Contribution from core stores decreased by
$600,000, or 9.6%, from $6,223,000 to $5,623,000 for the 13 weeks ended October
3, 1998 compared to the 13 weeks ended September 27, 1997. The decrease is
attributable to a 1.6% decline in comparable store sales coupled with the
increase in selling and store occupancy costs, food cost of sales, and
depreciation and amortization as described above.
NEGATIVE CONTRIBUTION FROM STORES IN THE PROCESS OF BEING CLOSED OR
FRANCHISED. The negative contribution from stores in the process of being closed
or franchised increased by $76,000, or 17.1%, from $444,000 to $520,000 for the
13 weeks ended October 3, 1998 compared to the 13 weeks ended September 27,
1997. The increase in negative contribution was primarily attributable to the
addition of 65 stores from the Cookie Acquisitions offset by closing 13 stores
and franchising 2 stores during the 13 weeks ended October 3, 1998 and the
effect of closing or franchising 50 stores subsequent to June 27, 1997 and prior
to the 13 week period ended October 3, 1998.
EBITDA. Earnings before interest, taxes, depreciation and amortization,
preferred stock accretion and dividends of subsidiaries, minority interest and
other income (expense) ("EBITDA") is presented as management believes that
certain investors find it to be a useful tool for measuring the ability to
service debt. EBITDA does not represent net income or cash flows from operations
as these terms are defined by generally accepted accounting principles and does
not necessarily indicate whether cash flows have been or will be sufficient to
fund cash needs. EBITDA increased by $405,000, or 9.4%, from $4,327,000 to
$4,732,000 for the 13 weeks ended October 3, 1998 compared to the 13 weeks ended
September 27, 1997 for the reasons described above.
39 WEEKS ENDED OCTOBER 3, 1998 COMPARED TO THE 39 WEEKS ENDED
SEPTEMBER 27, 1997
COMPANY-OWNED AND FRANCHISED OR LICENSED STORE ACTIVITY
As of October 3, 1998, there were 568 Company-owned stores and 765
franchised or licensed stores in operation. The store activity for the 39 weeks
ended October 3, 1998 and the 39 weeks ended September 27, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
COMPANY- FRANCHISED COMPANY- FRANCHISED
OWNED OR LICENSED OWNED OR LICENSED
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the fiscal year 481 553 482 418
Stores opened (including relocations and acquisitions) 116 278 84 205
Stores closed (including relocations) (9) (65) (4) (86)
Non-core (exit plan) stores closed (September 18, 1996 forward) (21) -- (63) --
Stores sold to franchisees (4) 4 (3) 3
Non-core (exit plan) stores franchised (September 18, 1996 forward) (13) 13 (4) 4
Stores acquired from franchisees 18 (18) 4 (4)
--- --- --- ---
Stores open as of the end of the period 568 765 496 540
=== === === ===
</TABLE>
REVENUES
NET STORES SALES. Total net store sales increased $6,179,000, or 7.4%, from
$83,759,000 to $89,938,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997.
-23-
<PAGE>
Net store sales from core stores and batter sales increased $9,381,000, or
13.5%, from $69,713,000 to $79,094,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. The increase in net store
sales from core stores was primarily attributable to (i) the operation of 69
Pretzel Time core stores acquired in connection with the Pretzel Acquisitions in
July 1997 (ii) the operation of 52 Great American stores acquired in connection
with the Cookie Acquisitions in August and September 1998 and (iii) batter sales
to Great American franchisees. This increase in net store sales from core stores
was offset in part by the negative effect of a calendar shift. The Company's
year end was December 28 in 1996 and January 3, 1998 in 1997. As a result, the
New Year's holiday week fell in the first quarter of 1997 and again in the
fourth quarter of 1997. The first quarter of 1998 did not benefit from the New
Year's holiday sales. Had this holiday been in the first quarter of 1998, net
store sales from core stores would have been approximately $800,000 greater or
$79,894,000.
On a comparable store basis (adjusted for the calendar shift), system-wide
core store sales were down 1.0% during the 39 weeks ended October 3, 1998
compared to the same period in 1997.
Net store sales from stores in the process of being closed or franchised
decreased $3,202,000, or 22.8%, from $14,046,000 to $10,844,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997. This
decrease results from closing 21 stores and franchising 13 stores during the 39
weeks ended October 3, 1998 and the effect of closing or franchising 79 stores
subsequent to December 28, 1996 and prior to the 39 week period ended October 3,
1998.
FRANCHISING REVENUES. Franchising revenues increased $1,683,000, or 76.5%,
from $2,201,000 to $3,884,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997. The increase in franchising revenues was
primarily attributable to royalties earned from 141 Pretzel Time franchised
stores obtained in connection with the Pretzel Acquisitions in 1997 and the 211
Great American franchised stores obtained in connection with the Cookie
Acquisitions in August and September 1998.
LICENSING REVENUES. Licensing revenues decreased $134,000, or 11.0%, from
$1,215,000 to $1,081,000 for the 39 weeks ended October 3, 1998 compared to the
39 weeks ended September 27, 1997. The decrease in licensing revenues was
primarily attributable to a dry mix license fee earned during the 39 weeks ended
September 27, 1997 that did not recur in the 39 weeks ended October 3, 1998.
OTHER REVENUE, NET. Other revenue, net, increased $705,000, or 200.9%, from
$351,000 to $1,056,000 for the 39 weeks ended October 3, 1998 compared to the 39
weeks ended September 27, 1997. The increase in other revenue, net, was
primarily attributable to area development fees earned from certain franchised
stores obtained in 1997, an increase in contribution from the Company's mail
order division and miscellaneous other income.
TOTAL REVENUES. Total revenues increased by $8,433,000, or 9.6%, from
$87,526,000 to $95,959,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997 due to the reasons discussed above.
OPERATING COSTS AND EXPENSES
SELLING AND STORE OCCUPANCY COSTS. Total selling and store occupancy costs
increased $4,157,000, or 8.6%, from $48,200,000 to $52,357,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997.
Selling and store occupancy costs for core stores increased by $6,604,000,
or 18.2%, from $36,222,000 to $42,826,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. Within this overall increase,
selling expenses for core stores increased by $4,158,000, or 20.0%, from
$20,804,000 to $24,962,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997. The increase in selling expenses was
primarily attributable to the 69 Pretzel Time core stores acquired in connection
with the Pretzel Acquisitions in 1997, the 52 Great American core stores
acquired in connection with the Cookie Acquisitions in August and September
1998, and the effect of the minimum wage increasing to $5.15 from $4.75 on
September 1, 1997. Store occupancy costs for core stores increased $2,446,000,
or 15.9%, from $15,418,000 to $17,864,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. The increase in store
occupancy costs was primarily attributable to the increase in the number of
stores discussed above, the Company re-acquiring 18 core stores from franchisees
during the 39 weeks ended October 3, 1998 and lease renewal increases.
-24-
<PAGE>
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $2,447,000, or 20.4%, from $11,978,000 to $9,531,000 for
the 39 weeks ended October 3, 1998 compared to the 39 weeks ended September 27,
1997. This decrease was primarily the result of closing 21 stores and
franchising 13 stores during the 39 weeks ended October 3, 1998 and the effect
of closing or franchising 79 stores subsequent to December 28, 1996 and prior to
the 39 weeks ended October 3, 1998.
FOOD COST OF SALES. Total food cost of sales increased $2,039,000, or
10.4%, from $19,549,000 to $21,588,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997.
Food cost of sales for core stores increased $2,964,000, or 19.1%, from
$15,536,000 to $18,500,000 for the 39 weeks ended October 3, 1998. This increase
was primarily the result of the addition of 69 Pretzel Time core stores in July
1997 and 52 Great American core stores acquired in connection with the Cookie
Acquisitions in August 1998. Food cost of sales also increased due to the
addition of the Great American batter facility in August 1998 which produces
batter for the Great American stores and the increasing cost of butter. Butter
is one of the main ingredients in a variety of the Company's products and is a
condiment for other products. The price of butter has increased from $0.78/lb.
at the beginning of 1997 to a peak of $2.92/lb. in September 1998.
The market for butter has been in a highly volatile state. During the last
week of September 1998, the price of butter increased to $2.92/lb. from
$2.05/lb. Management believes that the increased butter costs will continue to
negatively impact food cost of sales for the remainder of 1998. Additionally,
distribution costs increased beginning in August 1998 as the Company changed
distributors to improve product availability and the reliability of service to
the stores.
Food cost of sales for stores in the process of being closed or franchised
decreased $925,000, or 23.1%, from $4,013,000 to $3,088,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997. This
decrease was primarily the result of closing 21 stores and franchising 13 stores
during the 39 weeks ended October 3, 1998 and the effect of closing or
franchising 79 stores subsequent to December 28, 1996 and prior to the 39 weeks
ended October 3, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1,818,000, or 16.8%, from $10,803,000 to $12,621,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997. The
increase in general and administrative expenses was primarily attributable to
the Pretzel Acquisitions in 1997 and the Cookie Acquisitions in 1998.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense
increased by $3,111,000, or 47.2%, from $6,596,000 to $9,707,000 for the 39
weeks ended October 3, 1998 compared to the 39 weeks ended September 27, 1997.
This increase was primarily attributable to increased goodwill from the Pretzel
Acquisitions in 1997 and the Cookie Acquisitions in 1998.
Depreciation and amortization expense for core stores increased $1,097,000,
or 40.0%, from $2,742,000 to $3,839,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. This increase in depreciation
and amortization expense was primarily attributable to the addition of 69
Pretzel Time core stores in July 1997 and 52 Great American core stores in
August and September 1998.
TOTAL OPERATING COSTS AND EXPENSES. Total operating costs and expenses
increased by $11,125,000, or 13.1%, from $85,148,000 to $96,273,000 for the 39
weeks ended October 3, 1998 compared to the 39 weeks ended September 27, 1997,
for the reasons discussed above.
INTEREST EXPENSE. Interest expense increased $3,911,000, or 77.1%, from
$5,070,000 to $8,981,000 for the 39 weeks ended October 3, 1998 compared to the
39 weeks ended September 27, 1997. This increase was primarily attributable to
interest expense on $100,000,000 of high yield notes that were placed in
November 1997 and $40,000,000 of high yield notes placed in August 1998.
INTEREST INCOME. Interest income increased $377,000, or 246.4%, from
$153,000 to $530,000 for the 39 weeks ended October 3, 1998 compared to the 39
weeks ended September 27, 1997. This increase was primarily the result of
interest earned on excess cash provided by $100,000,000 of high yield notes
that were placed in November 1997 and $40,000,000 of high yield notes placed in
August 1998.
OTHER EXPENSES. Other expenses increased $240,000, or 35.0%, from $685,000
to $925,000 for the 39 weeks ended October 3, 1998 compared to the 39 weeks
ended September 27, 1997. This increase was primarily attributable to minority
interest from the Pretzel Acquisitions in 1997 and acquisition expenses incurred
during the 39 weeks ended October 3, 1998.
-25-
<PAGE>
NET LOSS. The net loss increased by $6,466,000, or 200.6%, from $3,224,000
to $9,690,000 for the 39 weeks ended October 3, 1998 compared to the 39 weeks
ended September 27, 1997 due to the combination of factors described above.
CONTRIBUTION FROM CORE STORES. Contribution from core stores decreased by
$1,284,000, or 8.4%, from $15,213,000 to $13,929,000 for the 39 weeks ended
October 3, 1998 compared to the 39 weeks ended September 27, 1997. Contribution
from core stores was negatively impacted by a 1.0% decline in comparable store
sales and by the increases in selling and store occupancy costs, food cost of
sales and depreciation and amortization described above. Contribution from core
stores was also negatively impacted by a calendar shift whereby the Company's
year end was December 28 for 1996 and January 3, 1998 for 1997. As a result, the
New Year's holiday week fell in the first quarter of 1997 and again in the
fourth quarter 1997. The first quarter of 1998 did not benefit from the New
Year's holiday sales. Had this holiday been in the first quarter of 1998,
contribution from core stores would have been approximately $600,000 greater, or
$14,529,000.
NEGATIVE CONTRIBUTION FROM STORES IN THE PROCESS OF BEING CLOSED OR
FRANCHISED. The negative contribution from stores in the process of being closed
or franchised increased by $126,000, or 6.3%, from $1,999,000 to $2,125,000 for
the 39 weeks ended October 3, 1998 compared to the 39 weeks ended September 27,
1997. The increase in negative contribution was primarily attributable to the
addition of 52 stores from the Cookie Acquisitions in August and September 1998,
offset in part by closing 21 stores and franchising 13 stores during the 39
weeks ended October 3, 1998. In addition, 79 stores were closed or franchised
subsequent to December 28, 1996 and prior to the 39 week period ended October 3,
1998.
EBITDA. Earnings before interest, taxes, depreciation and amortization,
preferred stock accretion and dividends of subsidiaries, minority interest and
other income (expense) ("EBITDA") is presented as management believes that
certain investors find it to be a useful tool for measuring the ability to
service debt. EBITDA does not represent net income or cash flows from operations
as these terms are defined by generally accepted accounting principles and does
not necessarily indicate whether cash flows have been or will be sufficient to
fund cash needs. EBITDA increased by $419,000, or 4.7%, from $8,974,000 to
$9,393,000 for the 39 weeks ended October 3, 1998 compared to the 39 weeks ended
September 27, 1997 for the reasons discussed above. Had the New Year's holiday
week been in the first quarter of 1998, EBITDA would have been approximately
$600,000 greater, or $9,993,000.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and available borrowings under the Company's existing
revolving credit facilities. At October 3, 1998, the Company had $5.1 million of
cash and $12.7 million of available borrowings under its credit facility. It is
expected that the Company's principal uses of cash will be to provide working
capital, finance capital expenditures (including acquisitions and store closure
costs), meet debt service requirements and other general corporate purposes. The
Company is highly leveraged. Based on current operations and anticipated cost
savings, the Company believes that its sources of liquidity will be adequate to
meet its anticipated requirements for working capital, capital expenditures
(including acquisitions and store closure costs), scheduled debt service
requirements and other general corporate purposes. There can be no assurance,
however, that the Company's business will continue to generate cash flows at or
above current levels or that cost savings can be achieved.
OCTOBER 3, 1998 COMPARED TO JANUARY 3, 1998
As of October 3, 1998, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $12,658,000, a decrease of 36.7%, or
$7,340,000, from January 3, 1998 when liquid assets were $19,998,000. Cash
decreased $11,141,000, or 68.4%, to $5,146,000 at October 3, 1998 from
$16,287,000 at January 3, 1998. This decrease was primarily the result of cash
used for the Cookie Acquisitions in August and September 1998, capital
expenditures of $5,616,000 relating to store remodels and renovations and
interest payments of $6,291,000 primarily relating to $100,000,000 of high
yield notes which were put into place in November 1997, offset in part, by
$530,000 in interest income earned during the period on excess cash.
Current assets decreased by $4,298,000, or 14.9%, to $24,525,000 at October
3, 1998 from $28,823,000 at January 3, 1998. This decrease was primarily the
result of a decrease in cash of $11,141,000, offset by an increase in accounts
receivable of $3,801,000 and an increase in inventories of $1,690,000.
-26-
<PAGE>
Long-term assets increased $77,271,000, or 63.9%, to $198,132,000 at
October 3, 1998 from $120,861,000 at January 3, 1998. This increase was
primarily the result of an increase in property and equipment and goodwill
related to the Cookie Acquisitions.
Current liabilities increased by $11,111,000, or 70.8%, to $26,801,000 at
October 3, 1998 from $15,690,000 at January 3, 1998. This increase is due to an
increase in accounts payable, accrued interest payable, accrued salaries, wages
and benefits, and accrued liabilities offset by a decrease in store closure
reserves, deferred income and sales taxes payable.
The Company's working capital decreased by $15,409,000, or 117.3%, to
($2,276,000) at October 3, 1998 from $13,133,000 at January 3, 1998, for the
reasons described above.
The Company generated $676,000 of cash from operating activities during the
39 weeks ended October 3, 1998, primarily from store sales and franchising and
licensing revenues less costs and expenses incurred to generate the store sales
and franchising and licensing revenues and less interest paid on $100,000,000
of high yield notes.
The Company utilized $34,315,000 of cash from investing activities during
the 39 weeks ended October 3, 1998, primarily for the Cookie Acquisitions,
capital expenditures relating to store remodels and for renovations.
The Company generated $22,498,000 of cash from financing activities during
the 39 weeks ended October 3, 1998, primarily from the issuance of new high
yield notes and an equity infusion from MFH net of principal payments to retire
Great American long-term debt and payment of acquisition costs.
The specialty cookie and pretzel businesses do not require the maintenance
of significant receivables or inventories; however, the Company continually
invests in its business by upgrading and remodeling stores and adding new
stores, carts, and kiosks as opportunities arise. Investments in these long-term
assets, which are key to generating current sales, reduce the Company's working
capital. During the 39 weeks ended October 3, 1998 and September 27, 1997, the
Company expended $5,616,000 and $3,216,000, respectively, for capital assets and
expects to expend approximately $7,800,000 for all of 1998. Management
anticipates that these expenditures will be funded with cash generated from
operations and short-term borrowings under its credit facility as needed.
INFLATION
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of the Company's leases contain escalation
clauses (however, such leases are accounted for on a straight-line basis as
required by generally accepted accounting principles which minimizes
fluctuations in operating income) and many of the Company's employees are paid
hourly wages at the Federal minimum wage level. Minimum wage increases will
negatively impact the Company's payroll costs in the short term, but management
believes such impact can be offset in the long term through operational
efficiency gains and, if necessary, through product price increases.
SEASONALITY
The Company's sales and store contribution are highly seasonal given the
significant impact of its mall-based locations. The Company's sales tend to
mirror customer traffic flow trends in malls which increase significantly during
the fourth quarter (primarily between Thanksgiving and the end of the calendar
year). Holiday gift purchases are also a significant factor in increased sales
in the fourth quarter.
The seasonality effect on store contribution is even more significant than
on sales. The impact on store contribution is more significant due to the fixed
nature of certain store level costs (occupancy costs, store manager salaries,
etc.). Once these fixed costs are covered by store sales, the flow through of
sales to store contribution becomes greater. Accordingly, the fourth quarter is
a key determinant to overall profitability for the year.
-27-
<PAGE>
INFORMATION SYSTEMS - YEAR 2000
Management has assessed the Year 2000 issue and has determined that all
internal IT systems including financial software, corporate networks, the AS400
system and all other systems are Year 2000 compliant with the exception of: (1)
systems used for collecting and communicating sales data from retail locations,
and (2) internally developed plant production and distribution software.
The Company is currently replacing its sales collection systems with
software and hardware that is Year 2000 compliant. This project is approximately
30% complete with final completion projected for August 1999. The estimated cost
of this project is $1.1 million and includes software development and new store
computers. The costs to complete this project are included in the Company's 1998
and 1999 budgets. Funding for this project is being provided by internal cash
flow and by a lease finance company.
Replacement of the plant production and distribution software will take
place in the first quarter of 1999 at an estimated cost of $50,000. No IT
projects have been deferred as a result of the Company's Year 2000 efforts.
Management is in the process of assessing Year 2000 issues with respect to
its significant vendors and financial institutions as to their compliance plans
and whether any Year 2000 issues will impede the ability of such vendors to
continue providing goods and services to the Company. Failure of the Company's
key suppliers to remedy their own Year 2000 issues could delay shipments of
essential products, thereby disrupting the Company's operations. Furthermore,
the Company relies on various service providers, such as utility and
telecommunication service companies, which are beyond the Company's control.
This assessment is approximately 20% complete with final completion anticipated
by the end of 1998. Based upon the results of the assessment to date, management
is not aware of any Year 2000 issues relating to its significant vendors,
financial institutions or its non-IT systems.
-28-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
As previously reported in the Company's Form 10-Qs dated July 4, 1998 and
April 4, 1998, in connection with the GACC acquisition discussions, on or about
September 12, 1997, nine franchisees of GACC filed an action in the Superior
Court of New Jersey, Mercer County, against the Company, Capricorn and other
defendants, challenging a possible acquisition of GACC by the Company. Goldberg,
et al. v. Great American Cookie Company, et al., Docket No. MER-L-3502-97 (Super
Ct. Mercer County). The complaint asserted that the proposed sale violates
Illinois, Indiana, Maryland, New Jersey and Virginia franchise law, violates
North Carolina, South Carolina and Texas unfair trade practices acts, breaches
the plaintiffs' franchise contracts and tortiously interferes with the
plaintiffs' actual and prospective contractual relationships. A motion
dismissing the litigation with prejudice was filed on August 24, 1998.
In the ordinary course of business, the Company is involved in routine
litigation, including franchise disputes. The Company is not a party to any
legal proceedings which, in the opinion of management of the Company, after
consultation with legal counsel, is material to the Company's business,
financial condition or results of operations beyond amounts provided for in the
accompanying financial statements.
The Company's stores and products are subject to regulation by numerous
governmental authorities, including, without limitation, federal, state and
local laws and regulations governing health, sanitation, environmental
protection, safety and hiring and employment practices.
ITEM 5. OTHER INFORMATION
- -------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial data schedule (for SEC use only)
(B) FORMS 8-K
Form 8-K dated September 8, 1998
Form 8-K dated October 20, 1998
Form 8-K/A dated November 4, 1998
-29-
<PAGE>
SIGNATURES
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.
MRS. FIELDS' ORIGINAL COOKIES, INC.
/s/Larry A. Hodges NOVEMBER 12, 1998
- --------------------------------- ------------------
LARRY A. HODGES, PRESIDENT & CEO DATE
-30-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MRS. FIELDS
ORIGINAL COOKIES INC. CONSOLIDATED BALANCE SHEET AT OCTOBER 3, 1998 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THIRTY NINE WEEKS ENDED OCTOBER 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<EXCHANGE-RATE> 1.00
<CASH> 5,146
<SECURITIES> 0
<RECEIVABLES> 7,512
<ALLOWANCES> 1,019
<INVENTORY> 4,790
<CURRENT-ASSETS> 24,525
<PP&E> 51,367
<DEPRECIATION> 16,364
<TOTAL-ASSETS> 222,657
<CURRENT-LIABILITIES> 26,801
<BONDS> 139,465
1,171
0
<COMMON> 0
<OTHER-SE> 50,131
<TOTAL-LIABILITY-AND-EQUITY> 222,657
<SALES> 89,938
<TOTAL-REVENUES> 95,959
<CGS> 21,588
<TOTAL-COSTS> 96,273
<OTHER-EXPENSES> 256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,981
<INCOME-PRETAX> (9,021)
<INCOME-TAX> 68
<INCOME-CONTINUING> (9,089)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,690)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
