<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
----------
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): NOVEMBER 4, 1998 (AUGUST 24,
1998)
MRS. FIELDS' ORIGINAL COOKIES, INC.
-----------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 333-45179 87-0552899
- ------------------------------------------------------------- ----------------------------- -------------------------------------
(State or other jurisdiction of incorporation or organization) (Commission File Number) (IRS Employer Identification No.)
<S> <C> <C>
</TABLE>
<TABLE>
2855 EAST COTTONWOOD PARKWAY, SUITE 400
SALT LAKE CITY, UTAH 84121-7050
- ------------------------------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
<S> <C>
</TABLE>
Registrant's telephone number, including area code: (801) 736-5600
NOT APPLICABLE
---------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
- -----------------------------------------
ITEM 7 (A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
-----------------------------------------
Filed herewith as a part of this report are the following financial
statements: (a) Cookies USA, Inc. and subsidiary (i) Report of
Independent Accountants, (ii) Consolidated Balance Sheets as of
June 29, 1997 and June 28, 1998, (iii) Consolidated Statements of
Operations for the fifty-two week periods ended June 30, 1996, June
29, 1997 and June 28, 1998, (iv) Consolidated Statements of Changes
in Stockholders' Deficit for the fifty-two week periods ended June
30, 1996, June 29, 1997 and June 28, 1998, (v) Consolidated
Statements of Cash Flows for the fifty-two week periods ended June
30, 1996, June 29, 1997 and June 28, 1998 and (vi) Notes to
Consolidated Financial Statements; (b) Deblan Corporation (i)
Independent Auditors' Report, (ii) Balance Sheets as of December
31, 1996 and 1997 and June 30, 1998 (unaudited), (iii) Statements
of Earnings for the years ended December 31, 1995, 1996 and 1997
and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited), (iv) Statements of Shareholders' Equity for the years
ended December 31, 1995, 1996 and 1997 and for the six months ended
June 30, 1998 (unaudited), (v) Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1997 (unaudited) and 1998 (unaudited) and (vi) Notes
to Financial Statements; (c) Chocolate Chip Cookies of Texas, Inc.
(i) Report of Independent Public Accountants, (ii) Balance Sheets
as of September 30, 1996 and 1997 and June 30, 1998 (unaudited),
(iii) Statements of Operations for the years ended September 30,
1995, 1996 and 1997 and for the nine months ended June 30, 1997
(unaudited) and 1998 (unaudited), (iv) Statements of Stockholders'
Equity for the years ended September 30, 1995, 1996 and 1997 and
for the nine months ended June 30, 1998 (unaudited), (v) Statements
of Cash Flows for the years ended September 30, 1995, 1996 and 1997
and for the nine months ended June 30, 1997 (unaudited) and 1998
(unaudited) and (vi) Notes to Financial Statements; (d) The
Combined Karp Entities (i) Report of Independent Public
Accountants, (ii) Combined Balance Sheets as of December 31, 1996
and 1997 and June 30, 1998 (unaudited), (iii) Combined Statements
of Operations for the years ended December 31, 1995, 1996 and 1997
and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited), (iv) Combined Statements of Stockholders' Equity for
the years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1998 (unaudited), (v) Combined Statements of
Cash Flows for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited) and (vi) Notes to Combined Financial Statements. These
financial statements are being filed in accordance with and within
the time period provided for in Item 7(a)(4).
ITEM 7 (B) PRO FORMA FINANCIAL INFORMATION
-------------------------------
Filed herewith as a part of this report are Mrs. Fields' Original
Cookies, Inc.'s Unaudited Pro Forma Condensed Combined Statements
of Operations for the 53 weeks ended January 3, 1998 and the 39
weeks ended October 3, 1998, and the notes thereto. These pro forma
financial statements are being filed in accordance with and within
the time period provided for in Item 7(a)(4).
<PAGE>
ITEM 7 (C) EXHIBITS
--------
Exhibit 2.1* Securities Purchase Agreement, dated as of August 13, 1998, by
and among Cookies USA, Inc., the Individuals and Entities
identified therein as the Sellers and Mrs. Fields' Original
Cookies, Inc. (Schedules and exhibits to the Securities Purchase
Agreement have been omitted from this filing and will be
furnished to the Securities and Exchange Commission upon
request.)
Exhibit 2.2* Stock Purchase Agreement among Mrs. Fields' Original Cookies,
Inc., as Buyer, and Jake Tortorice of Chocolate Chip Cookies of
Texas, Inc. as Seller
Exhibit 2.3* Stock Purchase Agreement among Mrs. Fields' Original Cookies,
Inc., as Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome
E. Mouton, Steven J. Bryan and Jason A. Piltzmaker, holders of
all outstanding capital stock of Deblan Corporation, as Sellers
Exhibit 2.4* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and ASK & MSK Family Limited Partnership-II(B), Ltd.
Exhibit 2.5* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Crossroads Cookies, Inc.
Exhibit 2.6* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Hot Barton and Northpark Cookies, Inc.
Exhibit 2.7* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Northpark Cookies, Inc.
Exhibit 2.8* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Quail Springs Cookies, Inc.
Exhibit 2.9* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Westgate Cookies, Inc.
Exhibit 99.1* Press Release of Mrs. Fields' Original Cookies, Inc. dated
August 25, 1998.
* Previously filed
<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 hereunto duly authorized.
MRS. FIELDS' ORIGINAL COOKIES, INC.
DATE: NOVEMBER 4, 1998 /S/ L. TIM PIERCE
--------------------------------
L. TIM PIERCE, CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT INDEX
ITEM 7 (C) EXHIBITS
--------
Exhibit 2.1* Securities Purchase Agreement, dated as of August 13, 1998, by
and among Cookies USA, Inc., the Individuals and Entities
identified therein as the Sellers and Mrs. Fields' Original
Cookies, Inc. (Schedules and exhibits to the Securities Purchase
Agreement have been omitted from this filing and will be
furnished to the Securities and Exchange Commission upon
request.)
Exhibit 2.2* Stock Purchase Agreement among Mrs. Fields' Original Cookies,
Inc., as Buyer, and Jake Tortorice of Chocolate Chip Cookies of
Texas, Inc. as Seller
Exhibit 2.3* Stock Purchase Agreement among Mrs. Fields' Original Cookies,
Inc., as Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome
E. Mouton, Steven J. Bryan and Jason A. Piltzmaker, holders of
all outstanding capital stock of Deblan Corporation, as Sellers
Exhibit 2.4* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and ASK & MSK Family Limited Partnership-II(B), Ltd.
Exhibit 2.5* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Crossroads Cookies, Inc.
Exhibit 2.6* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Hot Barton and Northpark Cookies, Inc.
Exhibit 2.7* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Northpark Cookies, Inc.
Exhibit 2.8* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Quail Springs Cookies, Inc.
Exhibit 2.9* Asset Purchase Agreement between Mrs. Fields' Original Cookies,
Inc. and Westgate Cookies, Inc.
Exhibit 99.1* Press Release of Mrs. Fields' Original Cookies, Inc. dated
August 25, 1998.
* Previously filed
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Stockholders of Cookies USA, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' deficit, and
of cash flows present fairly, in all material respects, the financial position
of Cookies USA, Inc. and its subsidiary at June 29, 1997 and June 28, 1998, and
the results of their operations and their cash flows for each of the three
fifty-two week periods in the period ended June 28, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
August 24, 1998
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
------
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 4,885 $ 8,382
Accounts receivable--trade...................................................... 1,702 2,042
Inventory (Notes 1 and 2)....................................................... 1,292 1,212
Prepaid expenses (Note 3)....................................................... 1,227 1,245
Current deferred income tax benefit (Notes 1 and 11)............................ 392 872
Current portion of notes receivable (Note 4).................................... 867 88
Other receivables............................................................... 8 8
------- -------
Total current assets......................................................... 10,373 13,849
------- -------
Property and equipment, net of accumulated depreciation (Note 5).................. 6,304 4,916
Construction in progress, net of construction deposits received from
franchisees...................................................................... 92 163
------- -------
6,396 5,079
------- -------
Other assets:
Deferred loan costs, net of accumulated amortization of $2,050
and $2,626, respectively (Note 1)............................................. 2,050 1,474
Notes receivable, net of current portion (Note 4)............................... 302 352
Deferred income tax benefit (Notes 1 and 10).................................... 2,372 1,438
Deposits........................................................................ 50 49
Accrued straight-line minimum rent receivable for subleases to
franchisees (Note 1).......................................................... 1,267 1,388
------- -------
6,041 4,701
------- -------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $3,104 and $3,975, respectively (Note 1)............. 31,848 30,977
------- -------
$54,658 $54,606
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable.............................................................. $ 376 $ 913
Sales taxes payable........................................................... 105 102
Accrued interest payable...................................................... 2,202 2,202
Accrued expenses (Note 6)..................................................... 1,568 1,075
Deposits...................................................................... 673 727
-------- --------
Total current liabilities.................................................. 4,924 5,019
-------- --------
Capital lease obligations (Note 9).............................................. 62 36
-------- --------
Accrued straight-line minimum rent payable (Note 1)............................. 2,113 2,164
-------- --------
Long-term debt (Note 7):
Senior secured notes.......................................................... 40,000 40,000
Original issue discount, net of accumulated amortization of $102
and $131, respectively...................................................... (98) (69)
Subordinated unsecured notes payable.......................................... 10,000 10,000
-------- --------
Total long-term debt....................................................... 49,902 49,931
-------- --------
Commitments and contingencies (Note 9)
Mandatorily redeemable preferred stock (Note 11):
Senior cumulative (6.00%) convertible; $1.00 par value; 10,500 shares
authorized, issued and outstanding.......................................... 12,739 13,369
Junior Class A cumulative ($50 per annum); $1.00 par value; 2,500
shares authorized, issued and outstanding................................... 2,944 3,069
Junior Class B cumulative ($50 per annum); $1.00 par value; 750
shares authorized, issued and outstanding................................... 883 921
-------- --------
Total mandatorily redeemable preferred stock............................... 16,566 17,359
-------- --------
Common stock and other stockholders' deficit:
Common stock, $.01 par value; 115,000 shares authorized; 82,800
shares issued and outstanding............................................... 1 1
Additional paid-in capital.................................................... 449 449
Excess of purchase price over predecessor basis............................... (10,164) (10,164)
Accumulated deficit........................................................... (9,195) (10,189)
-------- --------
Total stockholders' deficit................................................ (18,909) (19,903)
-------- --------
$ 54,658 $ 54,606
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIFTY- FOR THE FIFTY- FOR THE FIFTY-
TWO TWO TWO
WEEK PERIOD WEEK PERIOD WEEK PERIOD
ENDED ENDED ENDED
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Cookie and beverage sales ...................................... $24,719 $22,375 $18,854
Batter sales to franchisees .................................... 10,104 11,270 12,214
Franchise royalties ............................................ 4,289 4,729 5,267
Franchise sales--existing and new stores ....................... 1,157 1,602 873
Other, net ..................................................... 115 66 139
------- ------- -------
Total revenue ................................................. 40,384 40,042 37,347
------- ------- -------
Operating expenses:
Cost of sales .................................................. 19,523 18,615 17,056
Retail store occupancy ......................................... 7,379 7,055 5,737
Other retail store expenses .................................... 1,316 1,019 870
Selling, general and administrative expenses ................... 7,309 7,619 7,220
Management fee expense (Note 14) ............................... 250 250 250
------- ------- -------
Total operating expenses ...................................... 35,777 34,558 31,133
------- ------- -------
Income from operations ....................................... 4,607 5,484 6,214
------- ------- -------
Other (income) expenses, net:
Interest income ................................................ (56) (251) (346)
Interest expense ............................................... 5,646 5,634 5,635
Amortization of deferred loan costs ............................ 572 586 576
------- ------- -------
Total other expenses, net ..................................... 6,162 5,969 5,865
------- ------- -------
Income (loss) before income taxes ............................ (1,555) (485) 349
State and federal income tax expense (benefit) (Note 10) ........ (194) 261 551
------- ------- -------
Net loss ..................................................... $(1,361) $ (746) $ (202)
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS OF
PURCHASE
PRICE
COMMON STOCK ADDITIONAL OVER TOTAL
-------------------- PAID-IN PREDECESSOR ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL BASIS DEFICIT DEFICIT
--------- --------- ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 29, 1995 ........................... 82,800 $ 1 $449 $(10,164) $ (5,503) $(15,217)
Net loss for the fifty-two week period ended June
30, 1996.......................................... -- -- -- -- (1,361) (1,361)
Redeemable preferred stock accretion .............. -- -- -- -- (792) (792)
------ ------- ---- -------- -------- --------
Balance at June 30, 1996 ........................... 82,800 1 449 (10,164) (7,656) (17,370)
Net loss for the fifty-two week period ended June
29, 1997.......................................... -- -- -- -- (746) (746)
Redeemable preferred stock accretion .............. -- -- -- -- (793) (793)
------ ------- ---- -------- -------- --------
Balance at June 29, 1997 ........................... 82,800 1 449 (10,164) (9,195) (18,909)
Net loss for the fifty-two week period ended June
28, 1998.......................................... -- -- -- -- (202) (202)
Redeemable preferred stock accretion .............. -- -- -- -- (792) (792)
------ ------- ---- -------- -------- --------
Balance at June 28, 1998 ........................... 82,800 $ 1 $449 $(10,164) $(10,189) $(19,903)
====== ======= ==== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIFTY- FOR THE FIFTY- FOR THE FIFTY-
TWO WEEK TWO WEEK TWO WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998
---------------- ---------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(1,361) $ (746) $ (202)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation................................................. 1,854 1,940 1,604
Amortization of cost in excess of fair value of net assets
acquired (goodwill)......................................... 870 871 871
Amortization of deferred loan costs.......................... 572 586 576
Amortization of original issue discount...................... 29 29 29
Net gain on sales and disposals of property, equipment and
inventory................................................... (402) (550) (247)
Net (decrease) increase in accrued straight-line minimum rent
receivable and payable...................................... 86 (29) (70)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.................. (550) (195) (340)
Decrease (increase) in inventory............................ (140) 95 80
Decrease (increase) in prepaid expenses..................... (100) (52) (18)
Decrease (increase) in current deferred tax benefit......... (50) (195) (480)
Decrease (increase) in other receivables.................... 165 56 --
Decrease (increase) in deferred tax benefit................. (186) 348 934
Decrease (increase) in other assets......................... (7) 11 1
Increase (decrease) in accounts payable..................... (462) (456) 538
Increase (decrease) in sales taxes payable.................. 2 (25) (3)
Increase (decrease) in accrued interest payable............. -- (3) --
Increase (decrease) in accrued expenses..................... (913) 172 (493)
Increase (decrease) in deposits............................. (22) (66) 54
------- ------- -------
Net cash provided by (used for) operating activities....... (615) 1,791 2,834
------- ------- -------
Cash flows from investing activities:
Acquisitions of property and equipment, including net
increase in
construction in progress, net of construction deposits (1,913) (1,084) (1,263)
received
from franchisees.............................................
Proceeds from sales and disposals of property and equipment... 1,146 453 1,005
Proceeds from collection of notes receivable.................. 448 474 947
------- ------- -------
Net cash provided by (used for) investing activities....... (319) (157) 689
------- ------- -------
Cash flows from financing activities:
Payments of deferred loan costs............................... -- (27) --
Principal repayments under capital lease obligations.......... (15) (25) (26)
------- ------- -------
Net cash used for financing activities..................... (15) (52) (26)
------- ------- -------
Net increase (decrease) in cash and cash equivalents during
period........................................................ (949) 1,582 3,497
Cash and cash equivalents, beginning of period................. 4,252 3,303 4,885
------- ------- -------
Cash and cash equivalents, end of period....................... $ 3,303 $ 4,885 $ 8,382
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FOR THE FIFTY- FOR THE FIFTY- FOR THE FIFTY-
TWO WEEK TWO WEEK TWO WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998
---------------- ---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for:
Interest............................................. $5,617 $5,609 $5,606
State and federal income taxes....................... $ 119 $ 91 $ 286
</TABLE>
Cash paid for state and federal income taxes represents payments made to
government authorities during the periods presented.
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During the fifty-two weeks ended June 30, 1996, June 29,1997 and June 28,
1998, the Company recorded accretion on mandatorily redeemable preferred stock
totaling $792,000, $793,000 and $793,000, respectively.
During the fifty-two weeks ended June 30, 1996, the Company exchanged accounts
receivable from unrelated franchisees totaling $156,000 for fixtures and
equipment and leasehold improvements representing retail cookie stores
previously licensed by franchisees.
During the fifty-two weeks ended June 30, 1996, notes receivable with face
amounts totaling $296,000 were received from unrelated franchisees in connection
with the sale of two Company-operated stores.
During the fifty-two weeks ended June 29, 1997, notes receivable with face
amounts totaling $1,353,000 were received from unrelated franchisees in
connection with the sale of eight Company-operated stores.
During the fifty-two weeks ended June 29, 1997, the Company exchanged accounts
receivable from unrelated franchisees totaling $91,000 for fixtures and
equipment and leasehold improvements representing retail cookie stores
previously licensed by the franchisees.
During the fifty-two weeks ended June 28, 1998, notes receivable with face
amounts totaling $217,000 were received from unrelated franchisees in connection
with the sale of five Company-operated stores.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Cookies USA, Inc. ("Cookies USA") was incorporated in December 1993 and was
formed by the Jordan Company to acquire 100% of the common stock of The Original
Great American Chocolate Chip Cookie Company, Inc. ("Great American Cookies").
Great American Cookies is in the business of franchising cookie stores and
manufacturing cookie batter which is sold to Company-operated and franchised
retail stores. The financial statements include the consolidated accounts of
Cookies USA and Great American Cookies (the "Company").
On December 10, 1993, Cookies USA acquired Great American Cookies in
several transactions. Immediately following the acquisition, Great American
Cookies changed its name from The Original Great American Chocolate Chip Cookie
Company, Inc. to Great American Cookie Company, Inc. Due to the 22% interest
retained by the selling stockholders of Great American Cookies via their common
and convertible preferred stock interest in Cookies USA, the excess of purchase
price over predecessor basis as reflected in the stockholders' deficit section
of the accompanying consolidated balance sheets represents the limitation on the
write-up of the assets acquired.
The Company's business follows seasonal trends and experiences its highest
revenues in the fourth calendar 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.
CONSOLIDATION
The consolidated financial statements include the accounts of Cookies USA
and its subsidiary, Great American Cookies. All significant intercompany
transactions and accounts have been eliminated in consolidation.
ACCOUNTING PERIODS
During the fiscal year ended June 30, 1996, the Company changed its year
end from the last Thursday in the month of June to the last Sunday in the month
of June. As a result, three days were added to the fifty-two week period ended
Thursday, June 27, 1996 to effectively change the Company's fiscal year end to
Sunday, June 30, 1996. This change does not materially impact the comparability
of the years presented in these financial statements.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, accounts
receivable, accounts payable and accrued expenses approximate fair value at the
respective balance sheet dates due to the relatively short period to maturity of
these instruments. The long-term notes payable with fixed interest rates are
recorded at face values of $50.0 million at June 29, 1997 and June 28, 1998;
however, the fair values of such long-term notes, based on quoted market values,
are approximately $50.5 million and $51.4 million at June 29, 1997 and June 28,
1998, respectively.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
REVENUE RECOGNITION
Revenues from the Company-operated stores are recognized in the period the
related cookies and beverages are sold. Revenues from the sale of batter are
recognized at the time of shipment. Franchise royalties, which are based on a
percentage of franchised store sales, are recognized in the same period related
franchise store revenues are generated. Franchise license fee revenues are
recognized at the time that all Company obligations regarding the franchise sale
have been met. Fees received pursuant to development agreements which grant the
right to develop franchised units in future periods in specific geographic areas
are deferred and recognized as income on a pro rata basis as the Company's
obligations regarding the franchised units subject to the development agreements
are met.
CASH EQUIVALENTS
The Company considers all highly liquid, short-term investments with original
maturities of three months or less to be cash equivalents. Cash equivalents at
June 29, 1997 and June 28, 1998 consist of short-term commercial paper. These
investments are stated at cost, which approximates market.
INVENTORIES
Inventories of cookie and brownie products, beverage products, paper and
supplies and smallwares are stated at the lower of cost or market with cost
determined based on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are expensed in the year incurred, while renewals and betterments
that materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed, and the related accumulated depreciation,
are eliminated from the accounts, and any resulting gain or loss is recognized
in the statement of operations.
Depreciation is provided using straight-line and accelerated methods over the
estimated lives of the assets which are as follows:
<TABLE>
<S> <C>
Building.......................................................... 20 years
Furniture, fixtures and equipment................................. 3-7 years
Building and leasehold improvements............................... Lesser of 8 years or the life of the related lease
</TABLE>
During fiscal year 1996, the Company revised its estimate of the useful life
of certain leasehold improvements. The effect of this change in estimate was to
increase fiscal year 1996 pre-tax net loss by $214,000.
During fiscal year 1998, the Company revised its estimate of the useful life
of certain computer equipment. The effect of this change in estimate was to
decrease fiscal 1998 pre-tax income by $111,000.
STORE OPENING AND CLOSING COSTS
Non-capital expenditures incurred in opening new stores or remodeling existing
stores are expensed in the year incurred. When a store is closed, the store's
unamortized investment in leasehold improvements and fixtures and equipment is
recorded as a loss on store closing.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
DEFERRED LOAN COSTS
Debt issue costs of approximately $4.0 million were incurred in connection
with the issuance of the 10.875% senior secured notes payable due 2001 (see Note
7). Deferred loan costs are being amortized over the life of the related notes
(85 months), with annual charges to income of approximately $576,000.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Cost in excess of fair value of net assets acquired (goodwill) is being
amortized over a forty-year period, with annual charges to income of
approximately $870,000.
The carrying value of goodwill is periodically evaluated for indications of
possible impairment. The review is based on comparing the carrying amount to the
undiscounted estimated cash flows from continuing operations over the remaining
amortization period. The carrying amount was further substantiated by the
acquisition of the Company by an unrelated party as further discussed in Note
15. No impairment is indicated as of June 28, 1998.
OPERATING LEASES
The Company has various operating lease commitments on both Company-operated
and franchised store locations and equipment. Operating leases with escalating
payment terms, including those subleased to franchisees, are recorded on a
straight-line basis over the life of the related lease.
ORIGINAL ISSUE DISCOUNT
The Company has issued warrants to the holders of the senior secured notes.
The value of the warrants has been accounted for as an original issue discount
and is being amortized over the life of the related notes (85 months), with
annual charges to income of approximately $29,000.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Concurrent with the acquisition and its termination of the S Corporation
status (see Notes 1 and 10), the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). In
accordance with the provisions of SFAS 109, deferred income taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of the
enacted tax laws.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
EARNINGS PER SHARE
Earnings per share is not presented, as the Company is a non-public entity
that is closely held.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period consolidated
financial statements to conform with the current period presentation.
2. INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
------------ ------------
<S> <C> <C>
Raw ingredients ...................................................... $ 237,000 $ 279,000
Batter, including retail stores ...................................... 368,000 254,000
Beverage syrup ....................................................... 56,000 43,000
Paper goods and packaging supplies ................................... 168,000 149,000
Purchased icing and decorative toppings held for resale .............. 52,000 57,000
Equipment held for resale ............................................ 75,000 43,000
Marketing and miscellaneous supplies held for resale ................. 336,000 387,000
---------- ----------
$1,292,000 $1,212,000
========== ==========
</TABLE>
3. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
------------ ------------
<S> <C> <C>
Rent ................................................................ $1,158,000 $1,178,000
Other ............................................................... 69,000 67,000
---------- ----------
$1,227,000 $1,245,000
========== ==========
</TABLE>
4. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
------------- -------------
<S> <C> <C>
Notes receivable..................................................... $1,169,000 $440,000
Less current portion................................................. (867,000) (88,000)
---------- --------
Notes receivable, net of current portion............................. $302,000 $352,000
========== ========
</TABLE>
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
Notes receivable are due from various franchisees and principally result from
the sale of existing Company-operated stores to franchisees. Each note is
guaranteed by the purchaser and collateralized by the assets sold. Short-term
notes generally carry an interest rate of 15% per annum and are intended to
serve as interim financing until the franchisee can secure long-term financing
from a third-party lender. Notes classified as non-current are generally due in
monthly installments of principal and interest, with the interest rates ranging
from between 9% and 12.5% per annum. The aggregate maturities of the notes
receivable are as follows:
<TABLE>
<CAPTION>
JUNE 28,
1998
---------------
<S> <C>
Fiscal Year Ending June
1999 ............................................................................ $ 88,000
2000 ............................................................................ 140,000
2001 ............................................................................ 94,000
2002 ............................................................................ 41,000
2003 ............................................................................ 8,000
Thereafter ...................................................................... 69,000
--------
$440,000
========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
-------------- --------------
<S> <C> <C>
Land ............................................................. $ 240,000 $ 240,000
Building ......................................................... 761,000 761,000
Building and leasehold improvements .............................. 6,829,000 6,189,000
Furniture, fixtures and equipment ................................ 3,228,000 3,067,000
----------- -----------
11,058,000 10,257,000
Less accumulated depreciation .................................... (4,754,000) (5,341,000)
----------- -----------
Property and equipment, net ...................................... $ 6,304,000 $ 4,916,000
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
------------- -------------
<S> <C> <C>
Employee compensation including payroll taxes ....................... $379,000 $388,000
Bonuses payable ..................................................... 480,000 475,000
Construction expenses ............................................... 15,000 --
Professional fees ................................................... 293,000 88,000
Management fees ..................................................... 188,000 62,000
Other ............................................................... 213,000 62,000
---------- ----------
$1,568,000 $1,075,000
========== ==========
</TABLE>
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
7. LONG-TERM DEBT
Notes payable at June 29, 1997 and June 28, 1998 are described as follows:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
---------------- ----------------
<S> <C> <C>
10.875% senior secured notes payable due January 15, 2001,
Series B. Interest accrues daily and is payable semi-annually
on January 15 and July 15. (The notes are secured by certain
tangible and intangible assets, including, but not limited to,
the equipment constituting Great American Cookies' batter
production facility, the capital stock of all current and future
subsidiaries of Great American Cookies, intellectual property
rights and other intangible assets of Great American Cookies) ........... $40,000,000 $40,000,000
Original issue discount related to the issuance of 7,200 detachable
warrants with the 10.875% senior secured notes .......................... (98,000) (69,000)
12.5% subordinated unsecured note payable due October 31, 2003
with initial annual prepayment thereof due October 31, 2001.
Interest accrues daily and is payable semi-annually on April 30
and October 31 .......................................................... 10,000,000 10,000,000
----------- -----------
$49,902,000 $49,931,000
=========== ===========
</TABLE>
The $10 million of subordinated notes issued by Cookies USA have principal
payments due as follows: $2.5 million due October 31, 2001; $2.5 million due
October 31, 2002; and $5.0 million due October 31, 2003. As Great American
Cookies is the sole operating unit of the consolidated entity, Great American
Cookies is the sole source of any cash to be paid by Cookies USA as interest and
principal payment on such debt. Such payments will be made primarily via
dividends to Cookies USA. Such dividends are subject to certain covenants
provided for under the senior secured notes (see Note 11).
Great American Cookies is subject to certain covenants provided for under the
indenture including limitations on restricted payments, incurrence of
indebtedness and issuances of preferred stock, asset sales, granting of liens,
restrictions on subsidiary dividends, mergers, consolidations, sale of assets,
and on transactions with affiliates, various reporting requirements to the
holders of the senior secured notes and the Securities and Exchange Commission
and maintenance of a fixed charge coverage ratio. If a violation of a covenant
occurs, the holders of at least 25% in principal amount of the then outstanding
senior secured notes may declare all outstanding senior secured notes to be due
and payable immediately (see Note 11).
Upon the occurrence of a change of control as defined in the note agreements,
the Company will be required to (i) offer to repurchase all of the 10.875%
senior secured notes then outstanding at a purchase price equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
the date of repurchase and (ii) repurchase the 12.5% subordinated notes at par
plus accrued and unpaid interest, if any, to the date of repurchase.
8. 401(K) PROFIT-SHARING PLAN
The Company provides a defined contribution profit-sharing plan (the "Plan")
for all employees meeting certain requirements. On February 14, 1997, the
Company amended the Plan to include a pre-tax savings provision in accordance
with Section 401(k) of the Internal Revenue Code.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Plan, eligible employees may contribute as much as 15% of
compensation up to the federal statutory limit, with the Company matching 25% of
the first 6% of compensation contributed by the employee. The Company's matching
portion of the Plan contributions resulted in expense of $9,000 and $39,000 in
fiscal years 1997 and 1998, respectively. During fiscal year 1996, no amounts
were expensed for profit-sharing plan contributions.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has various operating lease commitments on both Company-operated
and franchised store locations. These leases generally contain escalating rental
payments and various provisions for contingent rental payments based on sales
volume. Future minimum lease payments, including scheduled escalating rental
payments, as of June 28, 1998 are as follows:
<TABLE>
<CAPTION>
SUBLEASES TO
LEASES FRANCHISES NET
------------- ---------------- ---------------
Fiscal Year Ending June
<S> <C> <C> <C>
1999 .......................................... $ 9,796,000 $ 7,071,000 $ 2,725,000
2000 .......................................... 8,797,000 6,369,000 2,428,000
2001 .......................................... 7,586,000 5,589,000 1,997,000
2002 .......................................... 6,540,000 4,747,000 1,793,000
2003 .......................................... 5,368,000 3,909,000 1,459,000
Thereafter .................................... 9,737,000 7,331,000 2,406,000
----------- ----------- -----------
$47,824,000 $35,016,000 $12,808,000
=========== =========== ===========
</TABLE>
Operating leases with escalating payment terms, including those subleased to
franchisees, are expensed on a straight-line basis over the life of the related
lease.
For the fifty-two week periods ended June 30, 1996, June 29, 1997 and June 28,
1998, gross rent expense (including mall pass-through charges) was approximately
$13,332,000, $14,135,000 and $13,593,000, while sublease income (including mall
pass-through charges) was approximately $9,628,000, $10,533,000 and $10,571,000,
respectively.
CAPITAL LEASES
The Company leases various office equipment under capital lease agreements
expiring on various dates through 2000. The Company's aggregate future
obligation under these agreements, net of interest expense, is $62,000 as of
June 29, 1997 and $36,000 as of June 28, 1998.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASE GUARANTEES
In connection with the sale of existing Company-operated stores to
franchisees, the Company has guaranteed certain lease renewals to the
prospective franchisee. If such leases are not obtained, then predetermined
payments shall be made to the franchisees as follows:
<TABLE>
<CAPTION>
NUMBER OF AMOUNT OF
LEASE RENEWALS GUARANTEE
--------------- -------------
Fiscal Year of Lease Expiration
<S> <C> <C>
1999 ............................................. 1 $ 75,000
2000 ............................................. 1 24,000
2001 ............................................. -- --
2002 ............................................. 1 60,000
--------
$159,000
========
</TABLE>
As of June 28, 1998, the Company has not recorded any liability with respect
to these guarantees as these amounts represent loss contingencies which
management believes are not probable.
PURCHASE COMMITMENTS
The Company is committed to purchase certain raw materials from various
suppliers over the next year at fixed prices. As of June 28, 1998, such purchase
commitments totaled approximately $1,750,000.
EMPLOYMENT AGREEMENTS
On December 10, 1993, the Company entered into annual renewable employment
agreements with the founders of Great American Cookies ("Founders"), who are
also directors of the Company. Under these employment agreements, each Founder
receives a salary of $150,000 and a payment in connection with an agreement not
to compete of $100,000 per year. Additionally, whether employed or not, each
Founder is also entitled to receive an annual $100,000 bonus if Great American
Cookies advances funds to Cookies USA to permit Cookies USA to pay interest on
its subordinated notes. The Company's employment of the two Founders ended on
December 7, 1995 and December 9, 1996. Under the above agreements, the Company
made aggregate payments to the Founders of $564,000, $285,000 and $200,000,
during the fifty-two week periods ended June 30, 1996, June 29, 1997 and June
28, 1998, respectively. As of June 30, 1996, June 29, 1997 and June 28, 1998,
$200,000 was due to the Founders and included in accrued liabilities in the
accompanying consolidated balance sheets.
The Company has entered into employment agreements with its Executive Vice
President of Development, Vice President of Operations and Director of
Production with terms of one to two years. The agreements are for an aggregate
annual base salary of $355,000. The agreements have customary provisions for
benefits and noncompetition.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCENTIVE AND SEVERANCE AGREEMENTS
In connection with the Company's negotiations (see Note 15) with Mrs. Fields'
Original Cookies, Inc. ("Mrs. Fields"), the Company has entered into agreements
with a number of employees incenting them to assist with the sale process and to
stay until the closing of such sale. In addition, the Company has informed its
home office employees of the severance payments to be paid to them in the event
their employment is terminated without cause subsequent to the closing of the
proposed sale. The aggregate amount of these incentives and severance payments,
as well as any severance payments to employees with employment agreements, is
$1,623,000. These amounts are conditional upon the closing of the sale and no
amounts will be due or paid if a sale to Mrs. Fields does not occur.
LEGAL
From time to time the Company is subject to claims and legal actions in the
ordinary course of its business. Other than the matter discussed in Note 15, the
Company is not a party to any material litigation and is not aware that any such
litigation is threatened.
10. INCOME TAXES
Cookies USA and Great American Cookies file consolidated federal income tax
returns. The following information has been determined based upon the provisions
of SFAS 109 for the fifty-two week periods ended June 30, 1996, June 29, 1997
and June 28, 1998.
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO
WEEK PERIOD WEEK PERIOD WEEK PERIOD
ENDED ENDED ENDED
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Income tax (benefit) provision:
Current:
Federal.................................................... $ -- $ -- $ --
State...................................................... 48,000 107,000 97,000
--------- -------- --------
48,000 107,000 97,000
Deferred:
Federal.................................................... (217,000) 131,000 386,000
State...................................................... (25,000) 23,000 68,000
--------- -------- --------
(242,000) 154,000 454,000
--------- -------- --------
Total (benefit) provision for income taxes.............. $(194,000) $261,000 $551,000
========= ======== ========
</TABLE>
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The differences between income taxes at the statutory federal and state income
tax rates and the income tax expense reported in the statements of operations
for the fifty-two week periods ended June 30, 1996, June 29, 1997 and June 28,
1998 are as follows:
<TABLE>
<CAPTION>
FIFTY-TWO FIFTY-TWO FIFTY-TWO
WEEK PERIOD WEEK PERIOD WEEK PERIOD
ENDED ENDED ENDED
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal statutory tax rate .................................... (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit .................... (4.0)% 4.0% 4.0%
Goodwill amortization and other ............................... 25.5 % 15.8% 119.9%
------- ----- -----
(12.5)% 53.8% 157.9%
======= ===== =====
</TABLE>
Deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
---------------- ----------------
Current:
<S> <C> <C>
NOL carryforward ........................................................... $ 350,000 $ 872,000
Other ...................................................................... 42,000 --
---------- ----------
$ 392,000 $ 872,000
========== ==========
Non-current:
NOL carryforward ........................................................... $1,079,000 $ --
Depreciation ............................................................... 841,000 1,191,000
Other ...................................................................... 452,000 247,000
---------- ----------
$2,372,000 $1,438,000
========== ==========
</TABLE>
As of June 28, 1998, the Company had net operating loss carryforwards for
income tax reporting purposes of approximately $2.2 million, which are scheduled
to expire in varying amounts in the years 2009 to 2011. The Company's net
operating loss carryforwards are limited under Section 382 of the Internal
Revenue Code regarding changes in ownership.
11. PREFERRED STOCK
In connection with Cookies USA's acquisition of Great American Cookies on
December 10, 1993, Cookies USA issued $2.5 million of Junior Class A Preferred
Stock and $750,000 of Junior Class B Preferred Stock. Additionally, Cookies USA
issued $10.5 million of Senior Preferred Stock to the Founders of Great American
Cookies in exchange for a portion of the stock of Great American Cookies ($3.5
million) and the assets of other entities owned by the Founders ($7.0 million).
As Great American Cookies is a wholly owned subsidiary of Cookies USA and is the
sole operating unit of the consolidated entity, Great American Cookies is the
sole source of any cash to be paid by Cookies USA as dividends on such
securities.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 10,500 shares of $1.00 par Senior Preferred Stock issued by Cookies USA on
December 10, 1993 are 6% cumulative convertible shares. A share of the Senior
Preferred Stock is convertible at any time at the option of the holder into
1.1308 shares of Cookies USA Common Stock. The holders of Senior Preferred Stock
are entitled to certain antidilution protections to maintain their percentage of
ownership in Cookies USA. Accumulated dividends on the Senior Preferred Stock
have priority over any dividends of "Junior Securities" (Junior Class A and
Class B Preferred and Common Stock), but are subordinate to any debt payments of
Cookies USA or the Company. Such preferred shares may be redeemed at any time
for $1,000 per share plus accrued but unpaid dividends at the option of Cookies
USA; however, all such shares not previously converted or redeemed shall be
redeemed by payment in cash of $1,000 per share plus accrued but unpaid
dividends on November 30, 2003. As of June 28, 1998, Cookies USA has accrued
$2,869,000 for unpaid dividends due to the holders of the Senior Preferred
Stock.
The 2,500 shares of $1.00 par Junior Class A Preferred Stock and the 750
shares of $1.00 par Junior Class B Preferred Stock issued by Cookies USA are
entitled to receive, when legally available and when declared, dividends at the
rate of $50 per share per annum. Such shares may be redeemed by Cookies USA at
any time for $1,000 per share plus all dividends accrued and unpaid; however,
all such shares not previously redeemed shall be redeemed by payment of cash of
$1,000 per share plus all accrued and unpaid dividends on the first business day
of January 2004. The Junior Class A and B Preferred Stock have no conversion,
preemptive, voting or subscription rights. As of June 28, 1998, Cookies USA has
accrued $740,000 for unpaid dividends due to the holders of the Junior Class A
and B Preferred Stock.
Great American Cookies' debt covenants related to the senior secured notes
limit the ability of Great American Cookies to pay dividends. Under the debt
covenants, as outlined in the Indenture pursuant to which the Senior Secured
Notes were issued, Great American Cookies may pay dividends if:
(a) no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof,
(b) immediately after the dividend and after giving effect thereto on a pro
forma basis, the Company could incur at least $1.00 of additional indebtedness
under the provisions of the debt covenants, and
(c) such dividend, together with the aggregate of all other "Restricted
Payments" (as defined in the Indenture) made by Great American Cookies and its
subsidiaries after the date of the Indenture, is less than the sum of (x) 50% of
the Adjusted Consolidated Net Income of Great American Cookies for the period
(taken as one accounting period) from the beginning of the first quarter
commencing immediately after the date of the Indenture to the end of Great
American Cookies' most recently ended first quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Adjusted Consolidated Net Income for such period is a deficit, 100% of such
deficit), plus (y) 100% of the aggregate net cash proceeds received by Great
American Cookies from the issue or sale of Equity Interest of Great American
Cookies (other than Equity Interests sold to a subsidiary of Great American
Cookies and other than Disqualified Stock) after the date of the Indenture and
on or prior to the time of such Restricted Payment, plus (z) 100% of the net
cash proceeds received by Great American Cookies from the issuance or sale,
other than to a subsidiary of Great American Cookies, of any convertible or
exchangeable debt security of Great American Cookies that has been converted or
exchanged into equity interests of Great American Cookies pursuant to the terms
thereof (other than Disqualified Stock) after the date of the Indenture and on
or prior to the time of such dividend. The foregoing limitations on Restricted
Payments do not prohibit, among other items, payments to Cookies USA under the
Tax Sharing Agreement, payments to Cookies USA to permit payments of current
interest then due on the Subordinated Debt or for any other purpose provided
that certain fixed coverage ratio tests have been achieved, or making other
Restricted Payments in the aggregate amount not to exceed $1.5 million.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTION AGREEMENTS, WARRANTS AND OTHER STOCKHOLDERS'
AGREEMENT
As part of its acquisition of Great American Cookies, Cookies USA entered into
Non-Qualified Stock Option Agreements (the "Stock Option Agreements") with the
Founders. Under the Stock Option Agreements, each of the Founders is granted an
option to purchase 5,600 shares of common stock of Cookies USA at an exercise
price of $2.23 per share, which expires on December 10, 2003. The options will
not be vested initially. The options will become vested at the rate of 20% per
year for each fiscal year in which certain operating cash flow targets are
achieved. Notwithstanding the foregoing, if Cookies USA's operating cash flow
targets are achieved on a cumulative basis in subsequent years, then the options
will be vested. As of June 28, 1998, none of the outstanding stock options were
vested.
If the employment with the Company of either of the Founders is terminated,
each Founder will have the right to require Cookies USA to repurchase all of his
shares of Common Stock, and all other securities of Cookies USA convertible
into, exchangeable for or entitling the holder to acquire its Common Stock, at
the appraised fair market value thereof. The purchase price will be paid with a
subordinated note that will bear interest at 8% per annum until the fifth
anniversary of the Stockholders Agreement dated December 10, 1993 and at the
prime rate plus 2% thereafter. The note will be secured by the Common Stock
purchased by Cookies USA and will be payable in equal installments on each of
the sixth through the tenth anniversaries of the Stockholders Agreement. As of
June 28, 1998, the employment of both of the Founders has been terminated and
such Founders have not requested Cookies USA to repurchase their shares. At June
29, 1997 and June 28, 1998, the fair value of these options was de minimis.
In connection with the issuance of the 10.875% senior secured notes payable
(see Note 7), the Company issued 7,200 warrants to purchase common stock at a
purchase price of $27.78 per warrant. The warrants expire on January 15, 2001
and have an exercise price of $0.01 per share subject to anti-dilution
protection. Additionally, the warrants have certain rights related to the
purchase of shares of common stock to a third party whereby the warrant holder
may require the purchaser to purchase a determined number of warrants at the
common stock purchase price less the exercise price per warrant. If the holders
of at least 75% of the common stock agree to sell their shares to a third party,
the warrants have certain obligations whereby the warrant holders may be
required to sell their warrants for a price equal to the purchase price of the
common stock less the exercise price per warrant.
13. COMPANY AND FRANCHISED STORES
As of June 30, 1996, June 29, 1997 and June 28, 1998 there were 115, 100 and
81 Company-operated outlets and 253, 263 and 279 franchised outlets in
operation, respectively.
During the fifty-two week period ended June 30, 1996, the Company earned
initial license fees of $275,000 from the sale of 11 new in-line stores to
franchisees. Additionally, the Company earned $21,000 from license transfer,
upgrade and other fees.
During the fifty-two week period ended June 29, 1997, the Company earned
initial license fees of $300,000 from the sale of 12 new in-line stores to
franchisees. Additionally, the Company earned $75,000 from license transfer,
upgrade and other fees.
During the fifty-two week period ended June 28, 1998, the Company earned
initial license fees of $125,000 from the sale of five new in-line stores to
franchisees. Additionally, the Company earned $13,000 from license transfer,
upgrade and other fees.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED-PARTY TRANSACTIONS
The majority shareholders of the Common Stock of Cookies, USA, Inc. are
affiliated with the holders of the $10 million of Subordinated Notes issued by
Cookies USA. The holders of the Senior Preferred Stock of Cookies USA are also
holders of some of the Common Stock of Cookies USA. The holders of the Junior
Class A and B Preferred Stock of Cookies USA are also affiliated with the
majority of the holders of the Common Stock of Cookies USA (see Note 11).
A franchisee who owns eight franchise outlets is related to one of the
Company's directors. During the fifty-two week periods ended June 30, 1996, June
29, 1997 and June 28, 1998, the Company had sales of batter and supplies of
approximately $497,000, $476,000 and $419,000, respectively, to this related
party. The Company also received royalty revenues of approximately $202,000,
$199,000 and $186,000 for the fifty-two week periods ended June 30, 1996, June
29, 1997 and June 28, 1998, respectively, from this franchisee. As of June 30,
1996, June 29, 1997 and June 28, 1998, this franchisee owed the Company
approximately $91,000, $34,000 and $47,000, respectively.
During the fifty-two week periods ended June 30, 1996, June 29, 1997 and June
28, 1998, the Company expensed $250,000 for management services provided by TJC
Management Corp. ("TJC"), an affiliate of the majority shareholder of Cookies
USA. Under the agreement with TJC, these fees are not to exceed $300,000 per
year. Amounts due to TJC as of June 30, 1996, June 29, 1997 and June 28, 1998
were $375,000, $188,000 and $63,000, respectively, and are included in accrued
liabilities in the accompanying consolidated balance sheets.
15. SUBSEQUENT EVENTS
On August 24, 1998, Mrs. Fields' Original Cookies, Inc. a Delaware corporation
("Mrs. Fields"), acquired 100% of the capital stock and subordinated
indebtedness of Cookies USA, Inc., for an aggregate purchase price of
approximately $18.4 million, pursuant to a Securities Purchase Agreement (the
"Purchase Agreement"), dated as of August 13, 1998 among Mrs. Fields, Cookies
USA, and the individuals and entities identified as sellers therein. Prior to
August 24, 1998, Cookies USA owned 100% of the Company. Upon consummation of the
purchase of Cookies USA, Mrs. Fields caused Cookies USA to be merged with and
into Mrs. Fields, as a result of which the Company became a direct wholly owned
subsidiary of Mrs. Fields. In related transactions, Mrs. Fields also consummated
the purchase of all of the capital stock of two Great American franchisees,
Deblan Corporation, a Delaware corporation ("Deblan"), and Chocolate Chip
Cookies of Texas, Inc., a Texas corporation ("Chocolate Chip"), for aggregate
consideration of approximately $15.0 million (including the repayment of
approximately $0.6 million of debt). Upon consummation of the purchases of
Deblan and Chocolate Chip, Mrs. Fields caused Deblan and Chocolate Chip to be
merged with and into the Company. To facilitate these acquisitions Mrs. Fields
used part of the proceeds of an offering of $40.0 million in aggregate principal
amount of its Series C 10 1/8% Senior Notes, together with part of the
contribution of the net proceeds of an offering of unit securities of its
parent, Mrs. Fields' Holding Company, Inc. In accordance with the indenture,
dated as of November 26, 1997, among Mrs. Fields, The Mrs. Fields' Brand, Inc.,
and The Bank of New York, as trustee, as amended, (as so amended, the
"Indenture") under which the Senior Notes were issued, the Company became a
guarantor of the Senior Notes and of an aggregate of $100 million of Series A
and Series B 10 1/8% Senior Notes previously issued under the same indenture by
Mrs. Fields. The Company also became a guarantor of amounts borrowed by Mrs.
Fields under an amended and restated credit agreement (the "Credit Agreement"),
dated as of February 28, 1998, between Mrs. Fields and LaSalle National Bank.
Mrs. Fields also purchased eight stores from entities controlled by another
Great American franchisee for a total purchase price of $1.75 million on
September 9, 1998. The franchisee was also a holder of Cookies USA securities
and a party to the Purchase Agreement. Also on August 24, 1998, the Company
distributed all of its owned stores together with any and all related assets and
liabilities) as a dividend to Mrs. Fields, and Mrs. Fields assume such stores
(together with any and all related assets and liabilities) pursuant to an
Assumption Agreement (the "Assumption Agreement"), dated as of August 24, 1998,
between the Company and Mrs. Fields.
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The foregoing summary should be read in conjunction with and is qualified by
reference to the Purchase Agreement, the stock purchase agreements between Mrs.
Fields and the holders of the capital stock of Deblan and Chocolate Chip, the
merger agreements between each of Deblan and Chocolate Chip, the Indenture, the
First Supplemental Indenture, dated as of August 24, 1998, among Mrs. Fields,
The Mrs. Fields Brand, Inc., and The Bank of New York, as trustee, the Second
Supplemental Indenture, dated as of August 24, 1998, among Mrs. Fields, The Mrs.
Fields Brand, Inc., and The Bank of New York, as trustee, and the Credit
Agreement, which are set forth as exhibits hereto.
The foregoing summary should be read in conjunction with and is qualified by
reference to the Purchase Agreement, to the stock purchase agreements between
Mrs. Fields and the holders of the capital stock of Deblan and Chocolate Chip,
and to the merger agreements between each of Deblan and Chocolate Chip and the
Company, which are set forth as exhibits to this report.
In connection with the contemplated acquisition of Cookies USA, the Company
commenced a tender offer on August 17, 1998 for all of the outstanding $40.0
million in aggregate principal amount of Great American's 10 7/8% Senior Secured
Notes due 2001 (the "Notes"). On August 24, 1998, the Company purchased
approximately $33.5 million of the Notes that had been tendered through August
20, 1998 and an additional $5.4 million of the Notes that had been tendered
through August 21, 1998. All remaining Notes outstanding were tendered as of the
expiration of the tender offer at Midnight on September 14, 1998, and Mrs.
Fields accepted and paid for the approximately $1.1 million of remaining Notes
on September 16, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Deblan Corporation
Houston, Texas
We have audited the accompanying Balance Sheets of Deblan Corporation as of
December 31, 1996 and 1997 and the related Statements of Earnings, Shareholders'
Equity and Cash Flows for the years ended December 31, 1995, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Deblan Corporation as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1995, 1996 and 1997, in conformity with
generally accepted accounting principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
August 17,1998
<PAGE>
DEBLAN CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1996 1997 1998
------------- -------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................................ $ 399 $ 689 $ 702
Temporary investment................................................. 50 50 50
Accounts receivable:
Employees.......................................................... 12 10 12
Other.............................................................. 12 18 11
Inventory............................................................ 161 145 180
Prepaid expenses..................................................... 4 2 17
------ ------ ------
Total Current Assets............................................. 638 914 972
------ ------ ------
Property and Equipment:
Machinery and equipment.............................................. 1,173 1,269 1,339
Furniture and fixtures............................................... 62 75 81
Leasehold improvements............................................... 1,531 1,721 1,721
Transportation equipment............................................. 21 80 55
------ ------ ------
2,787 3,145 3,196
Less: Accumulated depreciation and amortization..................... 1,319 1,417 1,520
------ ------ ------
Net Property and Equipment......................................... 1,468 1,728 1,676
------ ------ ------
Deferred Federal Income Tax Asset..................................... 3 2 14
------ ------ ------
Goodwill, net of accumulated amortization of
$7, $8 and $8, respectively.......................................... 13 12 12
------ ------ ------
Intangibles, net of accumulated amortization of
$317, $325 and $347, respectively.................................... 275 285 263
------ ------ ------
Other Assets.......................................................... 185 181 181
------ ------ ------
$2,582 $3,122 $3,118
====== ====== ======
</TABLE>
See notes to financial statements.
<PAGE>
DEBLAN CORPORATION
BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES
Current Liabilities:
Current portion of long-term debt...................... $ 278 $ 291 $ 244
Accounts payable....................................... 212 232 335
Accrued expenses....................................... 191 230 108
Accrued payroll........................................ 143 190 137
Federal income tax payable............................. 95 44 44
------ ------ ------
Total Current Liabilities........................... 919 987 868
Long-Term Debt, net of current portion.................. 299 479 362
------ ------ ------
1,218 1,466 1,230
------ ------ ------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common Stock - $.10 par, 110,000 shares authorized,
97,800 shares issued and outstanding................... 10 10 10
Additional Paid-In Capital.............................. 104 104 104
Retained Earnings....................................... 1,250 1,542 1,774
------ ------ ------
Total Shareholders' Equity.......................... 1,364 1,656 1,888
------ ------ ------
$2,582 $3,122 $3,118
====== ====== ======
</TABLE>
See notes to financial statements.
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Store Sales........................................ $8,512 $8,572 $9,503 $4,342 $4,768
------ ------ ------ ------ ------
Operating Costs and Expenses
Selling and store occupancy costs.................. 5,465 5,400 5,744 2,570 2,666
Food cost of sales................................. 1,518 1,519 1,675 773 831
General and administrative......................... 971 1,061 1,169 672 779
Depreciation and amortization...................... 266 237 255 138 142
------ ------ ------ ------ ------
Total operating costs and expenses.............. 8,220 8,217 8,843 4,153 4,418
------ ------ ------ ------ ------
Earnings From Operations............................ 292 355 660 189 350
------ ------ ------ ------ ------
Other Income (Expense)
Interest income.................................... 14 19 26 10 17
Gain (loss) on disposition of
property and equipment........................... (124) 32 (147) -- (4)
Interest expense................................... (109) (79) (73) (32) (34)
Other.............................................. 21 13 21 22 18
------ ------ ------ ------ ------
(198) (15) (173) -- (3)
------ ------ ------ ------ ------
Earnings Before Income Tax.......................... 94 340 487 189 347
------ ------ ------ ------ ------
Federal and State Income Tax
(Recovery)
Current.......................................... 52 145 194 82 127
Deferred......................................... (9) (9) 1 (10) (12)
------ ------ ------ ------ ------
43 136 195 72 115
------ ------ ------ ------ ------
Net Earnings........................................ $ 51 $ 204 $ 292 $ 117 $ 232
====== ====== ====== ====== ======
</TABLE>
See notes to financial statements.
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1994.......................... 97,800 $ 10 $104 $ 995 $1,109
Net Earnings....................................... -- -- -- 51 51
------ ----- ---- ------ ------
Balance - December 31, 1995.......................... 97,800 10 104 1,046 1,160
Net Earnings....................................... -- -- -- 204 204
------ ----- ---- ------ ------
Balance - December 31, 1996.......................... 97,800 10 104 1,250 1,364
Net Earnings....................................... -- -- -- 292 292
------ ----- ---- ------ ------
Balance - December 31, 1997.......................... 97,800 10 104 1,542 1,656
Net Earnings (unaudited)........................... -- -- -- 232 232
------ ----- ---- ------ ------
Balance - June 30, 1998 (unaudited).................. 97,800 $ 10 $104 $1,774 $1,888
====== ===== ==== ====== ======
</TABLE>
See notes to financial statements.
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Cash received from customers and
employees............................................ $ 8,506 $ 8,563 $ 9,500 $ 4,348 $ 4,773
Cash paid to vendors and employees..................... (7,777) (8,146) (8,442) (4,082) (4,389)
Interest paid.......................................... (109) (79) (73) (32) (34)
Income tax paid........................................ (100) (9) (245) (165) (127)
Interest received...................................... 14 19 26 10 17
Other income received.................................. 21 13 21 22 18
------- ------- ------- ------- -------
Net Cash Provided by Operating
Activities.......................................... 555 361 787 101 258
------- ------- ------- ------- -------
Cash Flows From Investing Activities:
Purchase of property and equipment..................... (282) (203) (685) (348) (78)
Purchase of license agreement.......................... -- (59) (75) (50) --
Payment of store start-up costs........................ (5) (13) (36) (21) --
Purchase of additional cash value of
life insurance....................................... (18) (13) (19) (9) (9)
Proceeds from sale of property and
equipment............................................ -- 226 125 -- 6
------- ------- ------- ------- -------
Net Cash Used in Investing
Activities.......................................... (305) (62) (690) (428) (81)
------- ------- ------- ------- -------
Cash Flows From Financing Activities:
Proceeds from long-term financing...................... 228 -- 482 284 --
Payment of debt........................................ (323) (306) (289) (147) (164)
------- ------- ------- ------- -------
Net Cash Provided by (Used in)
Financing Activities................................ (95) (306) 193 137 (164)
------- ------- ------- ------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents............................................ 155 (7) 290 (190) 13
Cash and Cash Equivalents -
Beginning of Period.................................... 251 406 399 399 689
------- ------- ------- ------- -------
Cash and Cash Equivalents -
End of Period.......................................... $ 406 $ 399 $ 689 $ 209 $ 702
======= ======= ======= ======= =======
</TABLE>
See notes to financial statements.
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------- ------------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings.......................................... $ 51 $ 204 $ 292 $ 117 $ 232
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization...................... 266 237 255 138 142
(Gain) Loss on disposition of property and
equipment........................................ 124 (32) 147 -- 4
Deferred taxes (recovery)......................... (9) (9) 1 (10) (12)
(Increase) Decrease in:
Accounts receivable.............................. (5) (9) (4) 6 5
Inventory........................................ 25 (16) 16 (16) (35)
Prepaid expenses................................. (2) 5 2 (11) (15)
Prepaid federal income tax....................... (41) 41 -- -- --
Deposits......................................... 4 9 23 7 9
Accounts payable................................. 66 (109) 20 37 103
Accrued expenses................................. 84 (55) 86 (82) (175)
Federal income tax payable....................... (8) 95 (51) (85) --
----- ----- ----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES............. $ 555 $ 361 $ 787 $ 101 $ 258
===== ===== ===== ===== =====
</TABLE>
See notes to financial statements.
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
1. ACCOUNTING POLICIES
Doing business as The Great American Chocolate Chip Cookie Company, the
Company operated twenty-three franchise locations at December 31, 1995, 1996 and
1997 and June 30, 1998, in various Texas, Louisiana, Colorado and Florida
shopping malls. The Company maintains its accounts on the accrual method of
accounting in accordance with generally accepted accounting principles.
Accounting principles followed by the Company and the methods of applying those
principles which materially affect the determination of financial position,
results of operations and cash flows are summarized below:
REVENUE RECOGNITION
Revenue is recognized at the time sales are made.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. At all balance sheet dates, the
Company had deposits in excess of federally insured limits.
INVENTORY
Inventory consists of packaging materials, beverages and baking ingredients
for use in the ordinary course of business. All inventory is valued at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line and accelerated methods over the following estimated useful
lives:
Machinery and equipment 5-7 years
Furniture and fixtures 5-7 years
Leasehold improvements 10-20 years
Transportation equipment 5 years
TEMPORARY INVESTMENT
Temporary investment includes certificates of deposit with an original
maturity of greater than three months.
FEDERAL AND STATE INCOME TAX
Federal and state income tax is provided at current prevailing rates.
The Company records deferred tax liabilities and assets for the anticipated
future tax effects of temporary differences that arise as a result of
differences in the carrying amounts and tax bases of assets and liabilities.
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
LICENSES
Fees paid in connection with obtaining operating licenses are amortized
over the life of the license, ranging from 60 months to 360 months.
INTANGIBLES
Intangibles consist of organization and store start-up costs which are
amortized over a 60-month period, and store license fees which are amortized
over periods ranging from 60 months to 360 months. In April 1998, the American
Institute of Certified Public Accountants issued Statement of Position (SOP) 98-
5 which requires store start-up expenses to be expensed as incurred. This SOP
is effective for financial statements for fiscal years beginning after December
15, 1998.
GOODWILL
Goodwill represents the excess of cost over book value of assets acquired.
The Company amortizes goodwill using the straight-line method over twenty years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements
for the six months ended June 30, 1997 and 1998, presented herein, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's financial position, results of operations,
shareholders' equity and cash flows for the interim period. The results of
operations and cash flows for the six months ended June 30, 1997 and 1998 are
not necessarily indicative of the results which would be expected for a full
year.
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
LONG-LIVED ASSETS
The Company assesses and measures for impairment of all long-lived assets,
including intangibles, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that
long-lived assets be reviewed for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of future undiscounted net cash
flows of the related asset or group of assets over the remaining life in
measuring whether the assets are recoverable. The Company assesses impairment
of long-lived assets at the store level which the Company believes is the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets. As of December 31, 1996, December 31, 1997 and June 30, 1998,
the Company does not consider any of its long-lived assets to be impaired.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of the Company's financial instruments approximates fair
value. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has not yet adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income." The Statement will be effective for
the fiscal year 1998. It establishes standards for reporting and displaying of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required.
The Company has not yet adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information."
The Statement will be effective for the fiscal year 1998. It establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. In the initial year of application,
comparative information for earlier years is to be restated.
The Company believes that adoption of these Statements will not have a
material impact on its financial condition, results of operations or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' financial
statements to conform with the presentation as of June 30, 1998.
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
2. INTANGIBLES
Intangibles consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1996 1997 1998
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
License fees (net of accumulated
amortization of $263, $270
and $285, respectively)..................................... $ 243 $ 237 $ 222
Organization and store start-up costs
(net of accumulated amortization of
$54, $55 and $62, respectively)............................. 32 48 41
----- ----- -----
$ 275 $ 285 $ 263
===== ===== =====
</TABLE>
3. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1996 1997 1998
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash value of officer's life insurance....................... $ 82 $ 101 $ 110
Deposits..................................................... 103 80 71
----- ----- -----
$ 185 $ 181 $ 181
===== ===== =====
</TABLE>
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
4. FEDERAL INCOME TAXES
Differences between the effective tax rate and the statutory federal tax
rate are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax expense at the statutory rate......... $ 32 $ 116 $ 166 $ 64 $ 118
Increase (Decrease) in:
State income taxes, net of income tax benefit............ 6 4 5 2 1
Officer's life insurance and other
nondeductible expenses.................................. 17 20 23 7 4
Surtax exemption......................................... (12)
Other.................................................... -- (4) 1 (1) (8)
----- ----- ----- ----- -----
$ 43 $ 136 $ 195 $ 72 $ 115
===== ===== ===== ===== =====
</TABLE>
The net deferred federal income tax asset results from differences in
depreciation between tax reporting and financial statement reporting, as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accumulated depreciation................... $ 3 $ 2 $ 14
===== ===== =====
</TABLE>
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
5. NOTES PAYABLE
Notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable - bank, bearing interest at bank prime plus 1%,
secured by certificate of deposit, equipment, leasehold improvements,
assignment of life insurance, common stock and guaranty of majority
shareholder, due in aggregate monthly installments of $6.6, including
interest, maturing in 1998............................................ $ 98 $ 27 $ --
Notes payable - bank, bearing interest at bank prime plus .5%,
secured by certificate of deposit, equipment, leasehold improvements,
assignment of life insurance, common stock and guaranty of majority
shareholder, due in aggregate monthly installments of $26.5,
including interest, maturing in various years through 2002............ 465 686 561
Notes payable - bearing interest at 8.5% to 8.6%, secured by
transportation equipment, due in aggregate monthly installments of
$1.8, including interest, maturing in various years through 2002...... 14 57 45
------- -------- --------
577 770 606
Less: Current maturities.............................................. 278 291 244
------- -------- --------
$ 299 $ 479 $ 362
======= ======== ========
</TABLE>
The following is a schedule of future minimum principal payments on debt (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31, AMOUNT
------------------- --------
<S> <C>
1998............................................................................ $291
1999............................................................................ 210
2000............................................................................ 113
2001............................................................................ 124
2002............................................................................ 32
----
$770
====
</TABLE>
In connection with the notes payable-bank, the Company has entered into a
loan agreement which contains certain restrictive covenants, including
maintenance of certain financial ratios, and limitations on borrowings, capital
expenditures, loans, sale of assets, dividend payments and executive
compensation. At December 31, 1996, December 31, 1997 and June 30, 1998, the
Company was in compliance with the covenants or had obtained waivers for those
covenants for the succeeding 12 months for which it was not in compliance.
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
6. OPERATING LEASES
The Company leases facilities at various locations from unrelated third
parties. The facility leases expire in years ranging from 1998 through 2005.
Rent expense is composed of the following items (in thousands):
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Facilities.......................................... $ 997 $ 908 $ 953 $ 478 $ 478
Equipment........................................... 20 18 8 5 2
Contingent rents.................................... 78 101 162 54 54
----------- ----------- ----------- ----------- -----------
$ 1,095 $ 1,027 $ 1,123 $ 537 $ 534
=========== =========== =========== =========== ===========
</TABLE>
The following is a schedule of future minimum rental payments (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31, FACILITIES EQUIPMENT TOTAL
--------------------- ------------ ----------- -------
<S> <C> <C> <C>
1998............................................... $ 805 $ 2 $ 807
1999............................................... 726 -- 726
2000............................................... 624 -- 624
2001............................................... 529 -- 529
2002............................................... 477 -- 477
Thereafter......................................... 1,305 -- 1,305
--------- ------- ------
$ 4,466 $ 2 $4,468
========= ======= ======
</TABLE>
7. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code for all eligible employees. All eligible employees are permitted
to defer compensation up to the maximum percentage of annual compensation
allowed by the Internal Revenue Code. The plan provides for a matching 50%
contribution and a discretionary contribution by the Company. The Company
provided contributions of $40,560, $49,974 and $77,877 for the years ended
December 31, 1995, 1996 and 1997, and $14,470 and $25,211 for the six months
ended June 30, 1997 and 1998, respectively.
8. COMMITMENTS
The Company is required to pay its franchisor seven percent of revenues as
a franchise fee.
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
9. CORPORATE REGISTRATION
In a corporate reorganization in February, 1997, the par value of the
common stock was changed from $1.00 to $.10, followed by a 150-to-1 stock split
which increased the number of issued shares to 97,800. Additionally, the number
of shares authorized was increased to 110,000. The financial statements
presented have been restated to reflect the stock split. Common stock was
increased $3,000, and retained earnings were reduced $3,000.
10. REDEMPTION AGREEMENT
The shareholders of the Company entered into a stock redemption agreement
with the Company in March, 1997. The following is a brief overview of the
general terms:
Upon the death of the majority shareholder, the Company is obligated to
purchase his stock (87,300 shares at December 31, 1997). The price per
share shall be the greater of the proceeds from the redemption of life
insurance or the value of the stock as stipulated by the shareholders,
annually. The initial value stipulated in March, 1997 was $22.75 per share.
The Company owns and is beneficiary of life insurance in the amount of
$1,500,000 on the life of the majority shareholder, the proceeds of which
may be used toward this redemption.
Upon the death of the other shareholders, the Company is obligated to
purchase the stock at the above described stipulated value.
11. SUBSEQUENT EVENT
Subsequent to year end, the shareholders of the Company agreed to sell
their shares to Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields") subject to
certain events, including Mrs. Fields obtaining financing through a private
placement of debt securities.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chocolate Chip Cookies of Texas, Inc.:
We have audited the accompanying balance sheets of Chocolate Chip Cookies of
Texas, Inc. (a Texas corporation) as of September 30, 1996 and 1997, and the
related statements of operations, stockholder's equity and cash flows for the
years ended September 30, 1995, 1996 and 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chocolate Chip Cookies of
Texas, Inc. as of September 30, 1996 and 1997, and the results of its operations
and its cash flows for the years ended September 30, 1995, 1996 and 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
July 22, 1998
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.......................................................... $ 161 $ 66 $ 173
Accounts receivable........................................... -- -- 2
Inventories................................................... 21 22 34
Prepaid assets................................................ 4 1 20
----------- ----------- -----------
Total current assets.................................... 186 89 229
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements........................................ 353 494 496
Equipment and fixtures........................................ 150 168 168
Vehicles...................................................... 26 26 26
----------- ----------- -----------
529 688 690
Less accumulated depreciation and amortization................ (377) (408) (435)
----------- ----------- -----------
Net property and equipment.............................. 152 280 255
----------- ----------- -----------
OTHER ASSETS:
Deposits...................................................... -- -- 13
Intangibles, net of accumulated amortization
of $216, $245 and $257, respectively........................ 47 43 31
----------- ----------- -----------
Total other assets...................................... 47 43 44
----------- ----------- -----------
2 3 1
DEFERRED TAX ASSET............................................. ----------- ----------- -----------
Total assets............................................ $ 387 $ 415 $ 529
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
BALANCE SHEETS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt............................. $ 31 $ 33 $ --
Accounts payable.............................................. 73 73 50
Accrued salaries.............................................. 33 43 94
Accrued liabilities........................................... 18 45 50
Deferred rent expense......................................... 22 31 34
Income taxes payable.......................................... 12 15 57
-------- ---------- ----------
Total current liabilities............................... 189 240 285
-------- ---------- ----------
LONG-TERM DEBT, net of current portion......................... 81 47 --
-------- ---------- ----------
Total liabilities....................................... 270 287 285
-------- ---------- ----------
COMMITMENTS (Note 6)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000,000 shares authorized
and 250 shares outstanding.................................... -- -- --
Treasury stock, 750 shares at cost............................ (216) (216) (216)
Retained earnings............................................. 333 344 460
-------- ---------- ----------
Total stockholder's equity.................................... 117 128 244
-------- ---------- ----------
Total liabilities and stockholder's equity.............. $ 387 $ 415 $ 529
========= ========= ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET STORE SALES............................ $2,168 $2,321 $2,650 $1,962 $2,266
------ ------ ------ ------ ------
OPERATING COSTS:
Selling and store occupancy costs......... 1,197 1,234 1,373 1,005 1,101
Food cost of sales........................ 504 603 634 472 531
General and administrative................ 352 363 565 424 429
Depreciation and amortization............. 48 49 60 41 39
------ ------ ------ ------ ------
Total operating costs and expenses... 2,101 2,249 2,632 1,942 2,100
------ ------ ------ ------ ------
Income from operations.............. 67 72 18 20 166
------ ------ ------ ------ ------
OTHER INCOME/(EXPENSE):
Interest expense.......................... (21) (11) (8) (6) (4)
Interest income........................... 4 3 6 4 4
------ ------ ------ ------ ------
Income before provision for
income taxes....................... 50 64 16 18 166
PROVISION FOR INCOME TAXES................. 12 12 5 6 50
------ ------ ------ ------ ------
NET INCOME................................. $ 38 $ 52 $ 11 $ 12 $ 116
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK RETAINED
-------------- ---------------
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994............ 250 $ -- 750 $(216) $243 $ 27
Net income............................ -- -- -- -- 38 38
--- ------ --- ----- ---- ----
BALANCE, SEPTEMBER 30, 1995............ 250 -- 750 (216) 281 65
Net income............................ -- -- -- -- 52 52
--- ------ --- ----- ---- ----
BALANCE, SEPTEMBER 30, 1996............ 250 -- 750 (216) 333 117
Net income............................ -- -- -- -- 11 11
--- ------ --- ----- ---- ----
BALANCE, SEPTEMBER 30, 1997............ 250 -- 750 (216) 344 128
Net income (unaudited)................ -- -- -- -- 116 116
--- ------ --- ----- ---- ----
BALANCE, JUNE 30, 1998 (unaudited)..... 250 $ -- 750 $(216) $460 $244
=== ====== === ===== ==== ====
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38 $ 52 $ 11 $ 12 $ 116
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............ 48 49 60 41 39
Changes in assets and liabilities:
Accounts receivable..................... -- -- -- -- (2)
Inventories............................. (11) 9 (1) (13) (12)
Prepaid assets.......................... (7) 3 3 4 (19)
Deposits................................ -- -- -- -- (13)
Deferred tax asset...................... (1) 1 (1) (2) 2
Accounts payable........................ -- (10) -- 4 (23)
Income taxes payable.................... (20) 7 3 4 42
Accrued liabilities, salaries and
deferred rent expense................. 28 4 46 121 59
----- ----- ----- ----- -----
Net cash provided by operating
Activities........................... 75 115 121 171 189
----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (143) (10) (159) (69) (2)
Amounts paid for non-compete agreements.... (63) -- -- -- --
Amounts paid for franchise agreements...... (25) -- (25) (26) --
----- ----- ----- ----- -----
Net cash used in investing
activities........................... (231) (10) (184) (95) (2)
----- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............. 160 -- -- -- --
Principal payments on debt................. (21) (27) (32) (24) (80)
----- ----- ----- ----- -----
Net cash provided by (used in)
financing activities................. 139 (27) (32) (24) (80)
----- ----- ----- ----- -----
NET (DECREASE) INCREASE IN CASH............... (17) 78 (95) 52 107
CASH, beginning of period..................... 100 83 161 161 66
----- ----- ----- ----- -----
CASH, end of period........................... $ 83 $ 161 $ 66 $ 213 $ 173
===== ===== ===== ===== =====
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF CASH FLOWS (Continued)
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $21, $11, $8, $6 (unaudited) and
$4 (unaudited) for the years ended September 30, 1995, 1996 and 1997 and for the
nine months ended June 30, 1997 and 1998, respectively.
Cash paid for income taxes was approximately $17, $2, $1, $1 (unaudited)
and $1 (unaudited) for the years ended September 30, 1995, 1996 and 1997 and for
the nine months ended June 30, 1997 and 1998, respectively.
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES TO UNAUDITED PERIODS)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Chocolate Chip Cookies of Texas, Inc. (the "Company"), a Texas corporation,
was incorporated in 1981. The Company operates retail stores which sell freshly
baked cookies and other food products. The Company's stores are franchised from
Great American Cookie Company, Inc. ("GACC"). As of June 30, 1998, the Company
owned and operated six stores, of which five are located in Texas and one in
Louisiana.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company experiences its highest revenues in
the first fiscal quarter. Because the Company's stores are all located in
shopping malls, the Company's sales performance is significantly dependent on
the performance of those malls. As a franchisee of GACC, substantially all of
the Company's sales are derived from products purchased from GACC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
payable and debt instruments. The carrying value of those instruments reported
in the balance sheets are considered to estimate their respective fair values
due to the short-term nature of such instruments and the current interest rate
environment.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the FIFO (first-in, first-out) method (see Note 3).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the lesser of the useful life of the improvement or the remaining term of
the applicable lease. The depreciable lives of equipment, fixtures and vehicles
range from five to ten years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES TO UNAUDITED PERIODS)
INTANGIBLES
Intangibles primarily consist of franchise fees paid to GACC and amounts
paid for non-compete agreements between the Company and various other parties.
Intangibles are being amortized on a straight-line basis over the lives of the
agreements, which are generally ten years for franchise agreements and three
years for non-compete agreements.
INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax bases of assets and liabilities using enacted tax rates
expected to apply when differences are expected to be settled or realized.
REVENUE RECOGNITION
Revenues generated from the Company's stores are recognized at the point of
sale.
SOURCES OF SUPPLY
The Company currently buys a significant amount of its food products and
supplies from GACC and an unrelated supplier. In accordance with the franchise
agreement, the Company must buy its food products from GACC (see Note 6).
Management believes that the Company could obtain its supplies from numerous
other suppliers at comparable prices and terms.
LONG-LIVED ASSETS
The Company assesses and measures for impairment of long-lived assets,
including intangibles, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that
long-lived assets be reviewed for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of future undiscounted net cash
flows of the related asset or group of assets over the remaining life in
measuring whether assets are recoverable. The Company assesses impairment of
long-lived assets at the store level, which the Company believes is the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets. As of June 30, 1998, the Company does not consider any of its
long-lived assets to be impaired.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES TO UNAUDITED PERIODS)
RECENT ACCOUNTING PRONOUNCEMENTS
During the nine months ended June 30, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
130, "Comprehensive Income", SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company does not expect that
these statements will have a significant impact on its financial statements.
INTERIM FINANCIAL STATEMENTS
The financial statements as of and for the nine months ended June 30, 1998,
and for the nine months ended June 30, 1997, are unaudited. In the opinion of
management, these financial statements have been presented on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for these periods. These interim financial
statements are not necessarily indicative of the results that may be achieved
for the full fiscal year.
3. INVENTORIES
The Company's inventories consist of the following as of September 30, 1996
and 1997 and June 30, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
--------------- --------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Food................................... $12,000 $13,000 $23,000
Beverages.............................. 3,000 3,000 4,000
Supplies............................... 6,000 6,000 7,000
------- ------- -------
$21,000 $22,000 $34,000
======= ======= =======
</TABLE>
4. LONG-TERM DEBT
As of September 30, 1996 and September 30, 1997, long-term debt consisted
of a promissory note payable to Wells Fargo Bank secured by the property and
equipment of the Company. The note was originally issued by the Company on
October 17, 1994 with a variable interest rate equal to the prime rate. As of
September 30, 1997 the interest rate on the note was 8.50%. During April 1998,
the note was paid in full.
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES TO UNAUDITED PERIODS)
5. INCOME TAXES
The components of the provision for income taxes for the years ended
September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal:
Current..................... $ 11,000 $ 11,000 $ 5,000 $ 8,000 $ 44,000
Deferred.................... (1,000) -- (1,000) (2,000) 2,000
State:
Current...................... 2,000 1,000 1,000 -- 4,000
--------- --------- -------- -------- ---------
Total.......................... $ 12,000 $ 12,000 $ 5,000 $ 6,000 $ 50,000
========= ========= ======== ======== =========
</TABLE>
The differences between income taxes at the statutory income tax rate and
income taxes reported in the statements of operations are as follows for the
years ended September 30, 1995, 1996 and 1997 and the nine months ended June 30,
1997 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate.............. 15% 15% 15% 15% 30%
State franchise taxes............... 4 2 6 - 2
Other............................... 5 2 10 18 (2)
---- ---- ---- ---- ----
24% 19% 31% 33% 30%
==== ==== ==== ==== ====
</TABLE>
The significant components of the Company's deferred income tax assets and
liabilities at September 30, 1996 and 1997 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred income tax assets:
Deferred rent expense................................... $ 3,000 $ 5,000 $ 10,000
Amortization of non-compete
agreements and franchise agreements................... 6,000 9,000 20,000
-------- --------- ---------
Total deferred income tax assets.................... 9,000 14,000 30,000
Deferred income tax liabilities:
Accumulated depreciation................................ (7,000) (11,000) (29,000)
-------- --------- ---------
Net deferred income tax assets........................... $ 2,000 $ 3,000 $ 1,000
======== ========= =========
</TABLE>
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES TO UNAUDITED PERIODS)
6. RELATED-PARTY TRANSACTIONS
RELATED-PARTY OPERATING LEASES
The Company leases retail store facilities under long-term noncancelable
operating lease agreements with remaining terms of one to nine years from GACC.
The future minimum lease payments due under these operating leases as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
1998................................................................................... $ 185,000
1999................................................................................... 185,000
2000................................................................................... 192,000
2001................................................................................... 193,000
2002................................................................................... 166,000
Thereafter................................................................................... 326,000
----------
$1,247,000
==========
</TABLE>
Each of these leases provides for contingent rentals based on gross
revenues. Total rental expense, which has been accounted for on a straight-line
basis for escalating leases included above, for the years ended September 30,
1995, 1996 and 1997 and for the nine months ended June 30, 1997 and 1998 was
approximately $280,000, $299,000, $335,000, $239,000 (unaudited) and $219,000
(unaudited), respectively.
FRANCHISE ROYALTIES
The Company pays GACC franchise royalties in connection with its franchise
agreements with GACC. Franchise royalties are calculated as 7% of gross
revenues (as defined in the individual agreements). During the years ended
September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and
1998, the Company incurred approximately $152,000, $163,000, $185,000, $132,000
(unaudited) and $158,000 (unaudited), respectively, for franchise royalties,
which are included as part of selling and store occupancy costs in the
accompanying statements of operations. As of September 30, 1996 and 1997 and
June 30, 1998, approximately $13,000, $15,000 and $17,000 (unaudited),
respectively, in franchise royalties were payable to GACC.
INVENTORY
The Company, in connection with its franchise agreements with GACC,
purchases the majority of its inventories from GACC. During the years ended
September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and
1998, the Company purchased approximately $311,000, $348,000, $387,000, $298,000
(unaudited) and $327,000 (unaudited), respectively, in inventories from GACC. As
of September 30, 1996 and 1997 and June 30, 1998, approximately $12,000, $14,000
and $15,000 (unaudited), respectively, were payable to GACC related to inventory
purchases.
7. SUBSEQUENT EVENT
On August 24, 1998, the Company sold 100 percent of its common stock to
Mrs. Fields' Original Cookies, Inc.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Combined Karp Entities:
We have audited the accompanying combined balance sheets of the Combined Karp
Entities (the "Company") identified in Note 1 as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1995, 1996 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Combined Karp
Entities as of December 31, 1996 and 1997, and the results of their operations
and their cash flows for the years ended December 31, 1995, 1996 and 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
October 6, 1998
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED BALANCE SHEETS
(in thousands)
ASSETS
------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $ 179 $ 176 $ 98
Inventories....................................................... 57 54 62
Prepaid assets.................................................... 42 34 31
------------ ------------- ----------
Total current assets...................................... 278 264 191
------------ ------------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements............................................ 803 803 803
Equipment and fixtures............................................ 460 460 462
------------ ------------- ----------
1,263 1,263 1,265
Less accumulated depreciation..................................... (617) (718) (768)
------------ ------------- ----------
Net property and equipment................................ 646 545 497
------------ ------------- ----------
OTHER ASSETS:
Deposits.......................................................... 42 37 35
Intangibles, net of accumulated amortization
of $159, $179 and $191, respectively.............................. 136 121 111
------------ ------------- ----------
Total other assets........................................ 178 158 146
------------ ------------- ----------
NON-CURRENT DEFERRED TAX ASSET..................................... 8 20 23
------------ ------------- ----------
Total assets.............................................. $ 1,110 $ 987 $ 857
============ ============= ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................. $ 39 $ 95 $ 63
Accrued salaries................................................. 55 52 42
Accrued liabilities.............................................. 123 121 107
Income taxes payable............................................. 128 142 147
------------ ------------ -----------
Total current liabilities................................ 345 410 359
------------ ------------ -----------
RELATED-PARTY PAYABLES............................................ 23 23 23
------------ ------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock (Note 5)............................................ 90 90 90
Additional paid-in capital....................................... 1,324 1,452 1,536
Accumulated deficit.............................................. (672) (988) (1,151)
------------ ------------ -----------
Total stockholders' equity............................... 742 554 475
------------ ------------ -----------
Total liabilities and stockholders' equity............... $ 1,110 $ 987 $ 857
============ ============ ===========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET STORE SALES................................ $ 2,342 $ 2,445 $ 2,500 $ 1,144 $ 1,181
------------ ------------ ------------ ----------- -----------
OPERATING COSTS:
Food cost of sales............................ 614 668 683 336 339
Selling and store occupancy costs............. 1,421 1,488 1,635 788 744
General and administrative.................... 192 199 238 101 114
Depreciation and amortization................. 104 127 121 59 62
------------ ------------ ------------ ----------- -----------
Total operating costs..................... 2,331 2,482 2,677 1,284 1,259
------------ ------------ ------------ ----------- -----------
Income (loss) from operations........... 11 (37) (177) (140) (78)
INTEREST EXPENSE.............................. (54) (30) (18) (9) (7)
------------ ------------ ------------ ----------- -----------
Loss before provision for income taxes (43) (67) (195) (149) (85)
PROVISION FOR INCOME TAXES..................... (26) (19) (15) (4) (6)
------------ ------------ ------------ ----------- -----------
NET LOSS....................................... $ (69) $ (86) $ (210) $ (153) $ (91)
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON STOCK PAID-IN CAPITAL DEFICIT TOTAL
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.................... $ 90 $ 398 $ (13) $ 475
Distributions................................ -- -- (137) (137)
Net loss..................................... -- -- (69) (69)
-------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1995.................... 90 398 (219) 269
Distributions................................ -- -- (367) (367)
Capital contributions........................ -- 926 -- 926
Net loss..................................... -- -- (86) (86)
-------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1996.................... 90 1,324 (672) 742
Distributions................................ -- -- (106) (106)
Capital contributions........................ -- 128 -- 128
Net loss..................................... -- -- (210) (210)
-------------- --------------- ------------- -------------
BALANCE, DECEMBER 31, 1997.................... 90 1,452 (988) 554
Distributions (unaudited).................... -- -- (72) (72)
Capital contributions (unaudited)............ -- 84 -- 84
Net loss (unaudited)......................... -- -- (91) (91)
-------------- --------------- ------------- -------------
BALANCE, JUNE 30, 1998 (unaudited)............ $ 90 $ 1,536 $(1,151) $ 475
============== =============== ============= =============
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................. $ (69) $ (86) $ (210) $ (153) $ (91)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 104 127 121 59 62
Changes in assets and liabilities:
Related-party receivables.............. (79) 143 -- -- --
Inventories............................ -- -- 3 -- (8)
Prepaid assets......................... (5) 5 8 11 3
Deposits............................... 1 (11) 5 5 2
Deferred taxes......................... (2) (9) (12) (7) (3)
Accounts payable....................... 38 (52) 56 25 (32)
Accrued salaries....................... -- 17 (3) (15) (10)
Accrued liabilities.................... 15 13 (2) (21) (14)
Income taxes payable................... 13 14 14 3 5
Related-party payables................. 69 (567) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 85 (406) (20) (93) (86)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..... (13) (111) -- -- (2)
Acquisition of intangibles................ 4 (20) (5) (5) (2)
Distributions............................. (137) (367) (106) (66) (72)
Additional investment..................... -- 926 128 62 84
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities................ (146) 428 17 (9) 8
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH.............. (61) 22 (3) (102) (78)
CASH, beginning of period.................... 218 157 179 179 176
----------- ----------- ----------- ----------- -----------
CASH, end of period.......................... $ 157 $ 179 $ 176 $ 77 $ 98
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF COMBINED CASH FLOW INFORMATION:
Cash paid for interest was approximately $40,000, $18,000, $18,000, $9,000
(unaudited) and $7,000 (unaudited) for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1997 and 1998, respectively.
Cash paid for income taxes was approximately $18,000, $10,000, $10,000, $2,000
(unaudited) and $1,000 (unaudited) for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1997 and 1998, respectively.
During the year ended December 31, 1996, related-party payables of Hot White
Plains Cookies, Inc, Hot Roosevelt Cookies, Inc. and Hot Rockaway Cookies of
approximately $364,00, $264,000 and $198,000, respectively, were forgiven and
accounted for as capital contributions to these entities.
During the year ended December 31, 1996 and December 31,1997, related party
receivables of Hot Barton and Northpark Cookies, Inc. and Northpark Cookies,
Inc. of approximately $71,000 and $0 and $120,000 and $4,000, respectively, were
distributed to stockholders.
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INCLUDING NOTES TO UNAUDITED PERIODS)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
The Combined Karp Entities (the "Company") established operations on the
following dates under the laws of the respective states:
<TABLE>
<CAPTION>
STRUCTURE OF STATE OF STATE OF
COMPANY INCEPTION DATE ENTITY INCORPORATION OPERATION
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hot Barton and Northpark Cookies, Inc. August 6, 1981 C-corporation Georgia New Jersey
Northpark Cookies, Inc. October 5, 1981 C-corporation Iowa Iowa
Crossroads Cookies, Inc. December 9, 1981 C-corporation Georgia Oklahoma
Quail Springs Cookies, Inc. April 20, 1982 C-corporation Georgia Oklahoma
Westgate Cookies, Inc. August 30, 1982 S-corporation Texas Texas
Hot White Plains Cookies, Inc. September 23, 1992 S-corporation Georgia New York
Hot Roosevelt Cookies, Inc. April 7, 1993 S-corporation Georgia New York
Hot Rockaway Cookies April 11, 1996 -- Florida New Jersey
</TABLE>
Northpark Cookies, Inc.'s status of incorporation became inactive as of
November 25, 1987. The successor in interest is Hot Barton and Northpark
Cookies, Inc.
The ASK & MSK Family Limited Partnership-II(B), Inc. (the "Partnership") was
incorporated in Florida on April 11, 1996. On this date, the Partnership
acquired Hot Roosevelt Cookies, Inc. and Hot White Plains Cookies, Inc. As
these entities share common control, these acquisitions were accounted for in a
manner similar to a pooling of interests. In addition, on April 11, 1996, the
Partnership invested in the Hot Rockaway Cookies store.
The Company operates retail stores that sell freshly baked cookies and other
food products. The retail stores are franchised from Great American Cookie
Company, Inc. ("GACC").
The entities that make up the Company have various fiscal year ends which
have been recast to December 31 for purposes of these combined financial
statements. These fiscal year ends are as follows:
COMPANY FISCAL YEAR END
- ------------------------------------- ------------------
Hot Barton and Northpark Cookies, Inc. July 31
Northpark Cookies, Inc. July 31
Crossroads Cookies, Inc. November 30
Quail Springs Cookies, Inc. November 30
Westgate Cookies, Inc. December 31
Hot White Plains Cookies, Inc. December 31
Hot Roosevelt Cookies, Inc. December 31
Hot Rockaway Cookies December 31
The Company's business follows seasonal trends and is affected by climate and
weather conditions. The Company experiences its highest revenues in the fourth
quarter. Because the stores are located in shopping malls, sales performance is
significantly dependent on the performance of those malls. As a franchisee of
GACC, substantially all of the Entities' sales are derived from products
purchased from GACC.
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The individuals entities included within the combined financial statements
operate under similar ownership and common control. All significant
intercompany balances and transactions have been eliminated in the combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
payable and related-party payables. The carrying value of cash and accounts
payable reported in the combined balance sheets are considered to approximate
their respective fair values due to the short-term nature of such instruments
and the current interest rate environment. The fair value of related-party
payables at prevailing market rates is estimated to be $25,000 as of December
31, 1996, 1997 and June 30, 1998.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the FIFO (first-in, first-out) method (see Note 3).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the useful life of the improvement or the remaining term of the
applicable lease. The depreciable lives of equipment and fixtures are ten
years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in the statement of operations.
INTANGIBLES
Intangibles consist primarily of franchise fees and store operating lease
costs paid to GACC. Intangibles are being amortized on a straight-line basis
over the lives of the franchise or lease agreements, which are generally ten
years.
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for expected
future tax consequences of events that have been recognized in the combined
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax bases of assets and liabilities using enacted tax rates
expected to apply when differences are expected to be settled or realized.
REVENUE RECOGNITION
Revenues generated from the combined stores are recognized at the point of
sale.
SOURCES OF SUPPLY
The Company currently buys a significant portion of their food products and
supplies from GACC and an unrelated supplier. In accordance with the franchise
agreements, the Company must buy its food products from GACC (see Note 6).
Management believes that the Company could obtain its supplies from numerous
other suppliers at comparable prices and terms.
LONG-LIVED ASSETS
The Company assesses and measures for impairment of long-lived assets,
including intangibles, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that
long-lived assets be reviewed for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of future undiscounted net cash
flows of the related asset or group of assets over the remaining life in
measuring whether assets are recoverable. The Company assesses impairment of
long-lived assets at the store level, which management believes is the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets. As of June 30, 1998, the Company does not consider any of its
long-lived assets to be impaired.
RECENT ACCOUNTING PRONOUNCEMENTS
During the six months ended June 30, 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Comprehensive Income", SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company does not expect the
implementation of these pronouncements will have a significant impact on its
financial statements.
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
INTERIM COMBINED FINANCIAL STATEMENTS
The combined financial statements as of and for the six months ended June 30,
1998 and for the six months ended June 30, 1997 are unaudited. In the opinion
of management, these combined financial statements have been presented on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the combined financial position and results of operations for
these periods. These combined interim financial statements are not necessarily
indicative of the results that may be achieved for the full fiscal year.
3. INVENTORIES
The Company's inventories consist of the following as of December 31, 1996
and 1997 and June 30, 1998:
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
----------- ----------- ---------
(UNAUDITED)
Food.........................$ 38,000 $ 33,000 $ 40,000
Beverages.................... 5,000 6,000 7,000
Supplies..................... 14,000 15,000 15,000
-------- -------- ---------
$ 57,000 $ 54,000 $ 62,000
======== ======== =========
4. INCOME TAXES
The following four entities are not included in income tax calculations due
to their status as S-corporations or as a business operated within a
partnership; Westgate Cookies, Inc., Hot White Plains Cookies, Inc., Hot
Roosevelt Cookies, Inc. and Hot Rockaway Cookies. Had these entities been
taxable entities, on a pro forma basis, an income tax provision (benefit) of
approximately $22,000, $(27,000), $16,000, $(14,000) and $15,000 would have been
provided for the years ended December 31, 1995, 1996, 1997 and the six months
ended June 30, 1997 and 1998, respectively. Income taxes were provided for all
entities with C-corporation status.
The components of the provision for income taxes for the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------ ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal:
Current....................... $ 10,000 $13,000 $ 9,000 $ 4,000 $ 3,000
Deferred...................... (2,000) (8,000) (12,000) (7,000) (3,000)
State:
Current....................... 18,000 14,000 18,000 7,000 6,000
-------- ------- -------- ------- -------
Total.............................. $ 26,000 $19,000 $ 15,000 $ 4,000 $ 6,000
======== ======= ======== ======= =======
</TABLE>
The differences between income taxes at the statutory income tax rate and
income taxes reported in the statements of operations are the result of
permanent differences.
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
The significant components of the Entities' deferred income tax assets and
liabilities at December 31, 1996 and 1997 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred income tax assets:
Accumulated depreciation............................... $ 5,000 $ 9,000 $ 11,000
Net operating loss carryforwards....................... 3,000 8,000 9,000
Capital losses in excess of capital gains.............. -- 3,000 3,000
----------- ------------ -----------
Net deferred income tax assets.................... $ 8,000 $ 20,000 $ 23,000
=========== ============ ===========
</TABLE>
5. STOCKHOLDERS' EQUITY
SHARE DATA
The individual entities had the following assigned par value, authorized and
outstanding shares at December 31, 1996 and 1997, and June 30, 1998:
<TABLE>
<CAPTION>
ENTITY PAR VALUE SHARES AUTHORIZED SHARES OUTSTANDING
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hot Barton and Northpark Cookies, Inc......... $0.10 1,000 200
Northpark Cookies, Inc........................ 0.50 1,000,000 180,000
Crossroads Cookies, Inc....................... 0.10 2,000 1,000
Quail Springs Cookies, Inc.................... 0.10 1,000 500
Westgate Cookies, Inc......................... 0.10 1,000 1,000
Hot White Plains Cookies, Inc................. 0.01 10,000 500
Hot Roosevelt Cookies, Inc.................... 0.01 10,000 500
</TABLE>
CAPITAL CONTRIBUTIONS
The individual entities received the following capital contributions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
ENTITY 1996 1997 JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hot Barton and Northpark Cookies, Inc...... $ -- $ 7,000 $ --
Northpark Cookies, Inc..................... -- -- 7,000
Crossroads Cookies, Inc.................... -- -- --
Quail Springs Cookies, Inc................. -- -- --
Westgate Cookies, Inc...................... -- -- --
Hot White Plains Cookies, Inc.............. 428,000 46,000 15,000
Hot Roosevelt Cookies, Inc................. 300,000 27,000 12,000
Hot Rockaway Cookies....................... 198,000 48,000 50,000
-----------------------------------------------------------
$ 926,000 $ 128,000 $ 84,000
===========================================================
</TABLE>
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
DISTRIBUTIONS
The individual entities made the following distributions to stockholders:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
ENTITY 1996 1997 JUNE 30, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hot Barton and Northpark Cookies, Inc........ $ (71,000) $ -- $ --
Northpark Cookies, Inc....................... (120,000) (4,000) --
Crossroads Cookies, Inc...................... (24,000) (3,000) --
Quail Springs Cookies, Inc................... (45,000) (45,000) (30,000)
Westgate Cookies, Inc........................ (107,000) (54,000) (42,000)
Hot White Plains Cookies, Inc................ -- -- --
Hot Roosevelt Cookies, Inc................... -- -- --
Hot Rockaway Cookies......................... -- -- --
--------------------------------------------------
$(367,000) $(106,000) $(72,000)
==================================================
</TABLE>
6. RELATED-PARTY TRANSACTIONS
RELATED-PARTY OPERATING LEASES
The Company leases retail store facilities under long-term noncancelable
operating lease agreements with remaining terms of one to nine years from GACC.
The future minimum lease payments due under these operating leases as of
December 31, 1997 are as follows:
YEAR ENDING DECEMBER 31,
----------------------------------------------
1998....................................... $ 370,000
1999....................................... 347,000
2000....................................... 240,000
2001....................................... 222,000
2002....................................... 110,000
Thereafter................................. 152,000
----------
$1,441,000
==========
Each of these leases provides for contingent rentals based upon gross
revenues. Total rental expense, which has been accounted for on a straight-line
basis for escalating leases included above, for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30, 1997 and 1998 was
approximately $457,000, $486,000, $553,000, $276,000 (unaudited) and $225,000
(unaudited), respectively.
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
FRANCHISE ROYALTIES
The Company pays GACC franchise royalties in connection with its franchise
agreements with GACC. Franchise royalties are calculated as 7% of gross
revenues (as defined in the individual agreements). During the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998, the Company incurred approximately $164,000, $165,000, $175,000, $80,000
(unaudited) and $83,000 (unaudited), respectively, for franchise royalties,
which are included as part of selling and store occupancy costs in the
accompanying combined statements of operations. As of December 31, 1996 and
1997 and June 30, 1998, approximately $21,000, $21,000 and $14,000 (unaudited),
respectively, in franchise royalties were payable to GACC.
INVENTORY
The Company, in connection with its franchise agreements with GACC, purchases
the majority of its inventory from GACC. During the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998, the Company
purchased approximately $372,000, $406,000, $425,000, $190,000 (unaudited) and
$178,000 (unaudited), respectively, in inventory from GACC. As of December 31,
1996 and 1997 and June 30, 1998, approximately $14,000, $24,000 and $8,000
(unaudited), respectively, were payable to GACC related to inventory purchases.
RELATED-PARTY PAYABLES
The related-party payables of $23,000, $23,000 and $23,000 (unaudited) as of
December 31, 1996, December 31, 1997 and June 30, 1998 represent loans from
stockholders to Hot Barton and Northpark Cookies, Inc. These loans are non-
interest bearing and have no specific payment terms or maturity dates.
MANAGEMENT FEES
Each entity was responsible for paying management fees to a company owned by a
related party. For the years ended December 31, 1995, 1996 and 1997 and for the
six months ended June 30, 1997 and 1998, the Entities paid approximately
$24,000, $60,000, $80,000, $40,000 (unaudited) and $40,000 (unaudited),
respectively, in management fees. As of December 31, 1996 and 1997 and June 30,
1998 approximately $5,000, $7,000 and $7,000 (unaudited), respectively, were
payable to a related party for management fees.
7. SUBSEQUENT EVENT
On July 29, 1998, the Entities entered into individual Asset Purchase
Agreements with Mrs. Fields' Original Cookies, Inc. In accordance with these
agreements, Mrs. Fields' Original Cookies, Inc. purchased the following assets
of the entities: leasehold rights and interests, tangible personal property,
such as inventories and property and equipment, certain agreements between the
sellers and GACC, customer and vendor lists, recipes and production techniques,
store petty cash, deposits and prepaid expenses. On September 9, 1998, the
agreements were consummated.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On August 24, 1998, Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields")
sold $40,000,000 in aggregate principal amount of Series C Senior Notes due 2004
(the "Offering"). The net proceeds of the Offering and the equity infusion of
the net proceeds of the Mrs. Fields' Holding Company, Inc. ("MFH") Offering (the
"MFH Equity Infusion") together with existing Company cash were used to: (i)
finance the acquisition of all of the outstanding capital stock of Cookies USA,
Inc. (Cookies USA, Inc. and its wholly owned subsidiary, Great American Cookie
Company, will be referred to herein as "Great American"); (ii) finance the
tender offer to repurchase all of Great American's $40,000,000 aggregate
principal amount of 10 7/8% Senior Secured Notes due 2001, including accrued but
unpaid interest and a premium of $1,600,000; (iii) finance the repayment of all
of Great American's $10,000,000 aggregate principal amount of 12.5% Subordinated
Notes, including accrued but unpaid interest; (iv) finance the retirement of
Great American's Senior Redeemable Preferred Stock and Junior Redeemable
Preferred Stock at an aggregate discounted purchase price of $8,400,000; (v)
finance the acquisition of all of the outstanding capital stock of Deblan
Corporation ("Deblan") and Chocolate Chip Cookies of Texas, Inc. ("Chocolate
Chip"), two franchisees of Great American, including the repayment of assumed
debt; and (vi) finance the asset purchase of eight stores controlled by another
Great American franchisee (the "Combined Karp Entities").
The unaudited pro forma condensed combined financial statements are based
upon the historical financial statements of Mrs. Fields, H&M, Pretzel Time,
Great American, Deblan, Chocolate Chip and the Combined Karp Entities. The
combined operations of these entities are collectively referred to herein as the
"Company." The unaudited pro forma condensed combined financial statements have
been prepared using the purchase method of accounting for the acquisitions of
Great American, Deblan, Chocolate Chip and the Combined Karp Entities, as well
as the previous acquisitions of H&M and Pretzel Time. Mrs. Fields, H&M and
Pretzel Time operate using a 52/53-week year ending near December 31. Great
American operates using a 52/53-week year ending near June 30. Deblan operates
using a year ending December 31, Chocolate Chip operates using a year ending
September 30 and the Combined Karp Entities have been combined to reflect
operations using a year ending December 31.
The unaudited pro forma condensed combined statements of operations for the
53 weeks ended January 3, 1998 and the 39 weeks ended October 3, 1998 assume
that the above acquisitions and debt and equity capital infusions occurred as of
December 29, 1996 (the first day of the most recently completed fiscal year) and
combine the historical results of operations of the entities for those periods
with pro forma adjustments to give effect to the above acquisitions and debt and
equity capital infusions.
The unaudited pro forma condensed combined financial statements are for
illustrative purposes only. Such information does not purport to be indicative
of the results which would actually have been effected on the date and for the
periods indicated, nor is it indicative of actual or future operating results or
financial position that may occur.
1
<PAGE>
THE COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE 53 WEEKS ENDED JANUARY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MRS. FIELDS PRE-ACQUISITION
-------------------------------------------------------------------------------------
PRE-
PRETZEL PRO FORMA ACQUISITION
H&M TIME ADJUSTMENTS PRO FORMA
MRS. FIELDS (SEE NOTE 2) (SEE NOTE 3) (SEE NOTE 1) COMBINED
------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net store sales............................... $123,987 $9,328 $ 302 $ -- $133,617
Batter sales.................................. -- -- -- -- --
Franchising, net.............................. 3,574 -- 2,142 (653)(a) 5,063
Licensing, net................................ 2,028 -- -- -- 2,028
Other, net.................................... 918 36 181 -- 1,135
-------- ------ ------ ------- --------
Total revenues............................... 130,507 9,364 2,625 (653) 141,843
-------- ------ ------ ------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs............. 66,832 6,120 284 (653)(a) 72,583
Food cost of sales............................ 28,127 1,366 63 -- 29,556
General and administrative.................... 16,730 1,326 1,617 (750)(b) 18,923
Depreciation and amortization................. 10,403 690 118 525 (c) 11,736
-------- ------ ------ ------- --------
Total operating costs and expenses........... 122,092 9,502 2,082 (878) 132,798
-------- ------ ------ ------- --------
Income (loss) from operations................ 8,415 (138) 543 225 9,045
INTEREST EXPENSE............................... (7,830) (370) (120) (2,857)(d) (11,177)
INTEREST INCOME................................ 246 -- -- -- 246
OTHER INCOME (EXPENSE), net.................... (368) -- -- -- (368)
-------- ------ ------ ------- --------
Income (loss) before provision for income
Taxes....................................... 463 (508) 423 (2,632) (2,254)
PROVISION FOR INCOME TAXES..................... 655 -- -- -- 655
-------- ------ ------ ------- --------
Income (loss) before preferred stock
accretion and dividends of subsidiaries and
minority interest........................... (192) (508) 423 (2,632) (2,909)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES..................... (644) -- -- -- (644)
MINORITY INTEREST.............................. (138) -- -- (169)(e) (307)
-------- ------ ------ ------- --------
Income (loss) from continuing operations..... $ (974) $ (508) $ 423 $(2,801) $ (3,860)
======== ====== ====== ======= ========
OTHER DATA:
Cash flows from operating activities......... $ 919 $ (94) $ 805 $ -- $ 1,630
Cash flows from investing activities......... (15,505) (32) (24) -- (15,561)
Cash flows from financing activities......... 24,164 (489) 14 -- 23,689
EBITDA (See Note 8).......................... 18,818 552 661 750 20,781
Ratio of earnings to fixed charges
(See Note 10)............................... -- -- 4.53x -- --
Deficiency of earnings to fixed charges
(See Note 10)............................... $ (319) $ (508) $ -- $ -- $ (3,205)
<CAPTION>
MRS. FIELDS POST-ACQUISITION
-------------------------------------------------------------------------------------
COMBINED POST-
GREAT CHOCOLATE KARP PRO FORMA ACQUISITION
AMERICAN DEBLAN CHIP ENTITIES ADJUSTMENTS PRO FORMA
(SEE NOTE 4) (SEE NOTE 5) (SEE NOTE 6) (SEE NOTE 7) (SEE NOTE 1) COMBINED
------------ ------------ ------------ ------------ ------------ ------------
REVENUES: <C> <C> <C> <C> <C> <C>
Net store sales............................... $20,563 $9,503 $2,789 $2,500 $ -- $ 168,972
Batter sales.................................. 11,744 -- -- -- (2,222)(f) 9,522
Franchising, net.............................. 5,391 -- -- -- (1,035)(g) 9,419
Licensing net................................. -- -- -- -- -- 2,028
Other, net.................................... 167 21 -- -- -- 1,323
------- ------ ------ ------ ------- ---------
Total revenues............................... 37,865 9,524 2,789 2,500 (3,257) 191,264
------- ------ ------ ------ ------- ---------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs............. 13,548 5,891 1,396 1,635 (1,035)(g) 94,018
Food cost of sales............................ 10,578 1,675 654 683 (2,222)(f) 40,924
General and administrative.................... 6,664 1,169 510 238 (2,172)(h) 25,332
Depreciation and amortization................. 2,725 255 51 121 3,380 (i) 18,268
------- ------ ------ ------ ------- ---------
33,515 8,990 2,611 2,677 (2,049) 178,542
Total operating costs and expenses........... ------- ------ ------ ------ ------- --------
Income (loss) from operations................ 4,350 534 178 (177) (1,208) 12,722
INTEREST EXPENSE............................... (6,219) (73) (5) (18) 1,929 (j) (15,563)
INTEREST INCOME................................ 307 26 5 -- 584
OTHER INCOME (EXPENSE), net.................... 1,264 -- -- -- 896
------- ------ ------ ------ ------- --------
Income (loss) before provision for income
Taxes....................................... (298) 487 178 (195) 721 (1,361)
PROVISION FOR INCOME TAXES..................... 223 195 43 15 (323)(k) 808
------- ------ ------ ------ ------- --------
Income (loss) before preferred stock
accretion and dividends of subsidiaries and
minority interest........................... (521) 292 135 (210) 1,044 $ (2,169)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES..................... -- -- -- -- -- (644)
MINORITY INTEREST.............................. -- -- -- -- -- (307)
------- ------ ------ ------ ------- --------
Income (loss) from continuing................ $ (521) $ 292 $ 135 $ (210) $ 1,044 $ (3,120)
operations.................................. ======= ====== ====== ====== ======= ========
OTHER DATA:
Cash flows from operating activities......... $ 1,674 $ 787 $ 240 $ (20) $ -- $ 4,311
Cash flows from investing activities......... 299 (690) (184) 17 -- (16,119)
Cash flows from financing activities......... (105) 193 (32) -- -- 23,745
EBITDA (See Note 8).......................... 7,075 789 229 (56) 2,172 30,990
Ratio of earnings to fixed charges (See
Note 10)..................................... -- 7.67x 36.60x -- -- --
Deficiency of earnings to fixed charges
(See Note 10)............................... $(1,090) $ -- $ -- $ (195) $ -- $ (3,104)
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
2
<PAGE>
THE COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
GREAT CHOCOLATE KARP
AMERICAN DEBLAN CHIP ENTITIES
MRS. FIELDS (SEE NOTE 4) (SEE NOTE 5) (SEE NOTE 6) (SEE NOTE 7)
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES:
<S> <C> <C> <C> <C> <C>
Net store sales ................................. $ 88,922 $11,225 $6,370 $1,873 $1,489
Batter sales .................................... 1,016 7,707 -- -- --
Franchising, net ................................ 3,884 3,449 -- -- --
Licensing, net .................................. 1,081 -- -- -- --
Other, net ...................................... 1,056 82 -- -- --
-------- ------- ------ ------ ------
Total revenues ................................. 95,959 22,463 6,370 1,873 1,489
-------- ------- ------ ------ ------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs ............... 52,357 7,645 3,523 1,000 370
Food cost of sales .............................. 21,588 6,428 1,108 454 297
General and administrative ...................... 12,621 5,288 1,067 421 754
Depreciation and amortization ................... 9,707 1,510 182 22 89
-------- ------- ------ ------ ------
Total operating costs and expenses ............. 96,273 20,871 5,880 1,897 1,510
-------- ------- ------ ------ ------
Income (loss) from operations .................. (314) 1,592 490 (24) (21)
INTEREST EXPENSE, net ............................ (9,001) (4,077) (43) (2) (8)
INTEREST INCOME .................................. 550 258 24 4 --
OTHER INCOME (EXPENSE), net ...................... (256) (149) 40 11 --
-------- ------- ------ ------ ------
Income (loss) before provision for income taxes.. (9,021) (2,376) 511 (11) (29)
.
PROVISION (BENEFIT) FOR INCOME TAXES ............. 68 (38) 115 27 6
-------- ------- ------ ------ ------
Income (loss) before preferred stock accretion
and dividends of subsidiaries and minority
interest ..................................... (9,089) (2,338) 396 (38) (35)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES ...................... (333) -- -- -- --
MINORITY INTEREST ................................ (268) -- -- -- --
-------- ------- ------ ------ ------
Income (loss) from continuing operations ....... $ (9,690) $(2,338) $ 396 $ (38) $ (35)
======== ======= ====== ====== ======
OTHER DATA:
Cash flows from operating activities.............. $ 676 $(1,517) $ 372 $ (40) $ (54)
Cash flows from investing activities.............. (34,315) (310) (72) (7) (2)
Cash flows from financing activities.............. 22,498 (18) (205) (72) 12
EBITDA (See Note 9) ............................. 9,393 3,102 672 (2) 68
Ratio of earnings to fixed charges (See Note 10).. -- -- 12.88x -- --
Deficiency of earnings to fixed charges
(See Note 10) .................................. $ (9,397) $(2,888) $ -- $ (11) $ (29)
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
(SEE NOTE 1) COMBINED
------------- -----------
REVENUES:
<S> <C> <C> <C>
Net store sales ................................. $ -- $109,879
Batter sales .................................... (832) (f) 7,891
Franchising, net ................................ (385) (g) 6,948
Licensing, net .................................. -- 1,081
Other, net ...................................... -- 1,138
------- --------
Total revenues ................................. (1,217) 126,937
------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs ............... (385) (g) 64,510
Food cost of sales .............................. (832) (f) 29,043
General and administrative ...................... (1,404) (h) 18,747
Depreciation and amortization ................... 2,664 (i) 14,174
------- --------
Total operating costs and expenses ............. 43 126,474
------- --------
Income (loss) from operations .................. (1,260) 463
INTEREST EXPENSE, net ............................ 729 (j) (12,402)
INTEREST INCOME .................................. -- 836
OTHER INCOME (EXPENSE), net ...................... -- (354)
------- --------
Income (loss) before provision for income taxes.. (531) (11,457)
.
PROVISION (BENEFIT) FOR INCOME TAXES ............. -- 178
------- --------
Income (loss) before preferred stock accretion
and dividends of subsidiaries and minority
interest ..................................... (531) (11,635)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES ...................... -- (333)
MINORITY INTEREST ................................ -- (268)
------- --------
Income (loss) from continuing operations ....... $ (531) $(12,236)
======= ========
OTHER DATA:
Cash flows from operating activities.............. $ -- $ (563)
Cash flows from investing activities.............. -- (34,706)
Cash flows from financing activities.............. -- 22,215
EBITDA (See Note 9) ............................. 1,404 14,637
Ratio of earnings to fixed charges (See Note 10).. -- --
Deficiency of earnings to fixed charges
(See Note 10) .................................. $ -- $(12,345)
</TABLE>
See accompanying notes to pro forma condensed
combined financial statements.
3
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
PRE-ACQUISITION
(a) Adjustment to reflect the elimination of franchise fees and
related costs as a result of consolidating H&M and Pretzel Time.
(b) Adjustment to reflect the impact of the reduction in salaries and
payroll expenses related to employees of H&M and Pretzel Time terminated at the
date of the acquisitions assuming that the acquisitions were consummated as of
December 29, 1996. The terminations occurred concurrent with and were a direct
result of the acquisitions. These terminations will have a continuing impact, as
the positions occupied by the terminated employees have been eliminated. The
terminated employees will not be replaced as the Company has sufficient
resources with existing staff to fulfill the applicable responsibilities. Other
costs will not be incurred that will offset these reductions. The impact is
factually supportable as the employees were terminated at the time of the
acquisitions.
(c) Adjustment to reflect amortization of goodwill, which goodwill
totaling $15,500,000, was recorded in connection with the purchase of the net
assets of H&M and the majority ownership of Pretzel Time. Goodwill is being
amortized over a 15-year period. Also includes adjustment to reflect a reduction
in depreciation expense as a result of reducing H&M's property and equipment to
estimated fair market value in connection with the acquisition. The average
estimated depreciable lives for these assets is seven years.
(d) Adjustment to reflect additional interest expense that would have
been incurred on the $100,000,000 Series A/B Senior Notes. Adjustment also
reflects a reduction in interest expense related to: (i) the retirement of
$64,098,000 of Mrs. Fields debt with interest rates ranging from 8.78% to 10.0%;
(ii) the retirement of $8,250,000 of H&M debt with interest rates ranging from
8.0% to 16.0%; (iii) the assumed conversion of $4,643,000 of a Mrs. Fields note
payable with an interest rate of 9.78%; (iv) the additional amortization related
to approximately $5,976,000 of deferred loan costs assumed to be amortized over
a seven-year period; and (v) net of interest income on a $500,000 loan to a
minority stockholder of Pretzel Time with an interest rate of 10.0%.
(e) Adjustment to reflect the recording of the minority interest in
Pretzel Time's income from continuing operations.
POST-ACQUISITION
(f) Adjustment to reflect the elimination of batter sales and batter
cost of sales as a result of combining Great American, Deblan, Chocolate Chip
and the Combined Karp Entities.
(g) Adjustment to reflect the elimination of franchise fees and
related costs as a result of combining Great American, Deblan, Chocolate Chip
and the Combined Karp Entities.
(h) Adjustment to reflect the impact of the reduction in salaries and
payroll expenses related to employees of Great American, Deblan, Chocolate Chip
and the Combined Karp Entities terminated at the date of the acquisitions
assuming that the acquisitions were consummated at December 29, 1996. The
terminations were a contractual component of the acquisition agreements and
occurred concurrent with and were a direct result of the acquisitions. These
terminations will have a continuing impact, as the positions occupied by the
terminated employees have been eliminated. The terminated employees will not be
replaced as the Company has sufficient resources with existing staff to fulfill
the applicable responsibilities. Other costs will not be incurred that will
offset these reductions. The impact is factually supportable as the employees
were terminated at the time of the acquisitions.
(i) Adjustment to reflect amortization of goodwill, which goodwill
totaling $68,387,000, was recorded in connection with the purchase of the net
assets of Great American, Deblan, Chocolate Chip and the Combined Karp Entities.
Goodwill is being amortized over a 15-year period. Also includes adjustment to
reflect a reduction in depreciation expense as a result of reducing Great
American, Deblan, Chocolate Chip and the Combined Karp Entities property and
equipment to estimated fair market value in connection with each respective
acquisition. The average estimated depreciable lives for these assets is seven
years.
(j) Adjustment to reflect the reduction in interest expense related
to: (i) the retirement of $40,000,000 of Great American 10.875% Senior Secured
Notes; (ii) the retirement of $10,000,000 of Great American 12.5% Subordinated
Notes; (iii) the elimination of Great American's original issue discount; (iv)
the elimination of Great American's deferred loan costs; (v) net of the
additional interest expense related to approximately $5,007,000 of new deferred
loan costs amortized over a seven-year period; and (vi) net of the additional
interest expense on the $40,000,000 of Series C Senior Notes and amortization of
$600,000 of assumed discount.
(k) Adjustment to reflect the change in provision for income taxes due
to the consolidated results of operations of the entities before provision for
income taxes.
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. H&M ACQUISITION
MFH, through its wholly owned subsidiary, MFPC, acquired the net
assets and certain debt of H&M on July 25, 1997, and concurrent with the
completion of a prior offering contributed the net assets of H&M and related
debt to Mrs. Fields. Accordingly, in the accompanying unaudited pro forma
condensed combined statement of operations for the 53 weeks ended January 3,
1998, H&M's results of operations from December 29, 1996 to July 24, 1997 are
included under the "H&M" column heading. Also, in the accompanying unaudited pro
forma condensed combined statement of operations for the 39 weeks ended October
3, 1998, H&M's results of operations are included under the "Mrs. Fields" column
heading. The purchase price of $13,750,000 paid by MFH was allocated based on
the estimated fair values of the net assets acquired, as presented below:
<TABLE>
<S> <C>
Fair value of net assets acquired............................... $ 4,132,000
Goodwill acquired............................................... 9,618,000
-----------
Total purchase price........................................ $13,750,000
===========
</TABLE>
3. PRETZEL TIME ACQUISITION
MFH acquired 56.0% of the common stock of Pretzel Time, a $500,000
note receivable from Pretzel Time's founder and contract rights on September 2,
1997. Concurrent with the completion of a prior offering, MFH contributed its
56.0% interest to Mrs. Fields. Accordingly, in the accompanying unaudited pro
forma condensed combined statements of operations for the 53 weeks ended January
3, 1998, Pretzel Time's results of operations from December 29, 1996 to
September 1, 1997 are included under the "Pretzel Time" column heading. Also, in
the accompanying unaudited pro forma condensed combined statement of operations
for the 39 weeks ended October 3, 1998, Pretzel Time's results of operations are
included under the "Mrs. Fields" column heading.
MFH paid $4,200,000 in cash to acquire 56.0% of the common stock of
Pretzel Time and made a $500,000, five-year maturity loan, with an interest rate
of 10.0%, to a minority stockholder and founder of Pretzel Time. Of the
$4,200,000 paid by MFH, $750,000 was paid to Pretzel Time to be used for working
capital purposes. Pretzel Time's stockholders' deficit of $425,000 at the date
of acquisition was eliminated and goodwill of $5,882,000 was recorded.
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. GREAT AMERICAN ACQUISITION
On August 24, 1998, Mrs. Fields acquired all of the outstanding
capital stock and subordinated indebtedness of Great American for an aggregate
purchase price of $18,400,000. The purchase price was allocated based on the
estimated fair values of the net assets acquired, as presented below:
<TABLE>
<S> <C>
Fair value of net liabilities assumed......................... $(37,233,000)
Goodwill acquired............................................. 55,633,000
------------
Total purchase price...................................... $ 18,400,000
============
</TABLE>
Because Great American operates using a 52/53-week year ending near
June 30, its results of operations for the 53 weeks ended January 3, 1998, in
the accompanying pro forma condensed combined statements of operations, do not
agree with Great American's historical results of operations for either the 52
weeks ended June 29, 1997 or June 28, 1998. Additionally, in the accompanying
pro forma condensed combined statement of operations for the 39 weeks ended
October 3, 1998, Great American's results of operations from December 29, 1997
to August 23, 1998 are included under the "Great American" column heading. Great
American's results of operations from August 24, 1998 to October 3, 1998 are
included under the "Mrs. Fields" column heading.
The following data reconciles the key components of Great American's
results of operations in the pro forma condensed combined statement of
operations for the 39 weeks ended October 3, 1998 with the key components of
Great American's results of operations in its historical financial statements
for the 52 weeks ended June 28, 1998:
<TABLE>
<CAPTION>
LESS ADD
52 WEEKS ENDED 26 WEEKS ENDED JUNE 29, 1998 TO DECEMBER 29, 1997
JUNE 28, 1998 DECEMBER 28, 1997 AUGUST 23, 1998 TO AUGUST 23, 1998
------------------ ------------------ ----------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net store sales.............................. $18,854 $10,382 $ 2,753 $11,225
Batter sales to franchisees.................. 12,214 6,140 1,633 7,707
Franchising, net............................. 6,140 3,558 867 3,449
Other, net................................... 139 72 15 82
Operating costs and expenses................. 31,133 16,044 5,782 20,871
Income (loss) from operations................ 6,214 4,108 (514) 1,592
Net income (loss)............................ (202) 644 (1,492) (2,338)
</TABLE>
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DEBLAN ACQUISITION
On August 24, 1998, Mrs. Fields acquired all of the outstanding
capital stock of Deblan for an aggregate purchase price of $10,465,000.
Accordingly, in the accompanying pro forma condensed combined statement of
operations for the 39 weeks ended October 3, 1998, Deblan's results of
operations from January 1, 1998 to August 23, 1998 are included under the
"Deblan" column heading. Deblan's results of operations from August 24, 1998 to
October 3, 1998 are included under the "Mrs. Fields" column heading. The
purchase price was allocated based on the estimated fair values of the net
assets acquired, as presented below:
<TABLE>
<S> <C>
Fair value of net assets acquired............................. $ 2,239,000
Goodwill acquired............................................. 8,226,000
-----------
Total purchase price...................................... $10,465,000
===========
</TABLE>
The following data reconciles the key components of Deblan's results
of operations in the pro forma condensed combined statement of operations for
the 39 weeks ended October 3, 1998 with the key components of Deblan's results
of operations in its unaudited historical financial statements for the six
months ended June 30, 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 1, 1998 TO JANUARY 1, 1998 TO
JUNE 30, 1998 AUGUST 23, 1998 AUGUST 23, 1998
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net store sales................................. $4,768 $1,602 $6,370
Operating costs and expenses.................... 4,418 1,462 5,880
Income from operations.......................... 350 140 490
Net income...................................... 232 164 396
</TABLE>
6. CHOCOLATE CHIP ACQUISITION
On August 24, 1998, Mrs. Fields acquired all of the outstanding
capital stock of Chocolate Chip for an aggregate purchase price of $3,965,000.
The purchase price was allocated based on the estimated fair values of the net
assets acquired, as presented below:
<TABLE>
<S> <C>
Fair value of net assets acquired.............................. $ 217,000
Goodwill acquired.............................................. 3,748,000
----------
Total purchase price....................................... $3,965,000
==========
</TABLE>
Because Chocolate Chip operates using a year ending September 30, its
results of operations for the 53 weeks ended January 3, 1998, in the
accompanying pro forma condensed combined statement of operations, do not agree
with Chocolate Chip's historical results of operations for the year ended
September 30, 1997. Additionally, in the accompanying pro forma condensed
combined statement of operations for the 39 weeks ended October 3, 1998,
Chocolate Chip's results of operations from January 1, 1998 to August 23, 1998
are included under the "Chocolate Chip" column heading. Chocolate Chip's
results of operations from August 24, 1998 to October 3, 1998 are included under
the "Mrs. Fields" column heading.
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following data reconciles the key components of Chocolate Chip's
results of operations in the pro forma condensed combined statement of
operations for the 39 weeks ended October 3, 1998 with the key components of
Chocolate Chip's results of operations in its historical financial statements
for the nine months ended June 30, 1998:
<TABLE>
<CAPTION>
LESS
NINE MONTHS THREE MONTHS ADD
ENDED ENDED JULY 1, 1998 TO JANUARY 1, 1998
JUNE 30, 1998 DECEMBER 31, 1997 AUGUST 23, 1998 TO AUGUST 23, 1998
------------------ ------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net store sales............................ $2,266 $803 $410 $1,873
Operating costs and expenses............... 2,100 646 443 1,897
Income (loss) from operations.............. 166 157 (33) (24)
Net income (loss).......................... 116 155 1 (38)
</TABLE>
7. COMBINED KARP ENTITIES ACQUISITION
On September 9, 1998, Mrs. Fields acquired eight Great American stores
and related net assets from a Great American franchisee (collectively, the
"Combined Karp Entities") for an aggregate purchase price of $1,750,000.
Accordingly, in the accompanying pro forma condensed combined statement of
operations for the 39 weeks ended October 3, 1998, the Combined Karp Entities'
results of operations from January 1, 1998 to September 9, 1998 are included
under the "Combined Karp Entities" column heading. The Combined Karp Entities'
results of operations from September 10, 1998 to October 3, 1998 are included
under the "Mrs. Fields" column heading. The purchase price was allocated based
on the estimated fair values of the net assets acquired, as presented below:
<TABLE>
<S> <C>
Fair value of net assets acquired............................... $ 970,000
Goodwill acquired............................................... 780,000
----------
Total purchase price........................................ $1,750,000
==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 1, 1998 TO JANUARY 1, 1998 TO
JUNE 30, 1998 SEPTEMBER 9, 1998 SEPTEMBER 9, 1998
------------------- ------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net store sales................................. $1,181 $308 $1,489
Operating costs and expenses.................... 1,259 251 1,510
Income (loss) from operations................... (78) 57 (21)
Net income (loss)............................... (91) 56 (35)
</TABLE>
8. Pro Forma Combined EBITDA for the 53 Weeks Ended January 3, 1998
<TABLE>
<CAPTION>
THE COMPANY
MRS. FIELDS POST-
PRE ACQUISITION COMBINED ACQUISITION
PRO FORMA GREAT CHOCOLATE KARP PRO FORMA - PRO FORMA
COMBINED AMERICAN DEBLAN CHIP ENTITIES ADJUSTMENTS COMBINED
--------------- -------- ------ --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations........ $ 9,045 $4,350 $534 $178 $(177) $(1,208) $12,722
Add:
Depreciation and amortization........ 11,736 2,725 255 51 121 3,380 18,268
------- ------ ---- ---- ----- ------- -------
EBITDA.............................. $20,781 $7,075 $789 $229 $ (56) $ 2,172 $30,990
======= ====== ==== ==== ===== ======= =======
</TABLE>
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. PRO FORMA COMBINED EBITDA FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>
THE COMPANY
MRS. FIELDS POST-
PRE ACQUISITION COMBINED ACQUISITION
PRO FORMA GREAT CHOCOLATE KARP PRO FORMA PRO FORMA
COMBINED AMERICAN DEBLAN CHIP ENTITIES ADJUSTMENTS COMBINED
---------------- -------- ------ ---------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations........ $ (314) $1,592 $490 $(24) $(21) $(1,260) $ 463
Add:
Depreciation and amortization........ 9,707 1,510 182 22 89 2,664 14,174
------ ------ ---- ---- ---- ------- -------
EBITDA.............................. $9,393 $3,102 $672 $ (2) $ 68 $ 1,404 $14,637
====== ====== ==== ==== ==== ======= =======
</TABLE>
10. RATIO OF EARNINGS TO FIXED CHARGES
For purposes of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued and net
of debt premium amortization), including the amortization of debt issuance costs
and original issue discount, noncash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with capital lease obligations, letter of credit commissions, fees or
discounts and the product of all dividends and accretion on mandatorily
redeemable cumulative preferred stock multiplied by a fraction, the numerator of
which is one and the denominator of which is one minus the current combined
federal, state and local statutory tax rate.
