UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: July 4, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 333-45179
MRS. FIELDS' ORIGINAL COOKIES, INC.
(Exact name of registrant specified in its charter)
DELAWARE 87-0552899
- ---------------------------- -------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121-7050
- --------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(801) 736-5600
---------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X yes no
The Company had 400 shares of common stock outstanding at August 17, 1998.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 4, 1998 and January 3, 1998...3
Condensed Consolidated Statements of Operations for the thirteen weeks
ended July 4, 1998 and June 28, 1997........................................5
Condensed Consolidated Statements of Operations for the twenty six weeks
ended July 4, 1998 and June 28, 1997........................................6
Condensed Consolidated Statements of Cash Flows for the twenty six weeks
ended July 4, 1998 and June 28, 1997........................................7
Notes to Condensed Consolidated Financial Statements...........................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................28
Item 5. Other Information...................................................28
Item 6. Exhibits and Reports on Form 8-K....................................28
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
------- ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,266 $ 16,287
Accounts receivable, net of allowance for doubtful accounts of $166 and $32,
respectively 1,148 1,535
Amounts due from franchisees and licensees, net of allowance for doubtful
accounts of $417 and $582, respectively 1,995 2,176
Inventories 2,860 3,100
Prepaid rent and other 2,437 2,960
Deferred income tax assets, current portion 2,765 2,765
----------- -----------
Total current assets 19,471 28,823
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 21,622 21,099
Equipment and fixtures 14,862 14,100
Land 128 128
---------- ------------
36,612 35,327
Less accumulated depreciation and amortization (7,628) (6,125)
---------- -----------
Net property and equipment 28,984 29,202
---------- ----------
DEFERRED INCOME TAX ASSETS, net of current portion 734 734
---------- ------------
GOODWILL, net of accumulated amortization of $7,376 and $4,980, respectively
67,037 68,501
--------- ----------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $1,962 and
$1,409, respectively 14,640 15,193
--------- ----------
DEFERRED LOAN COSTS, net of accumulated amortization of $498 and
$70, respectively 5,478 5,906
----------- -----------
OTHER ASSETS 1,064 1,325
----------- -----------
$137,408 $149,684
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of
these condensed consolidated balance sheets.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
--------- ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 422 $ 472
Current portion of capital lease obligations 180 142
Accounts payable 2,854 3,805
Accrued liabilities 1,182 2,826
Current portion of store closure reserve 2,507 3,664
Accrued salaries, wages and benefits 1,923 1,891
Accrued interest payable 911 1,082
Sales taxes payable 375 937
Deferred credits 273 871
------------ ----------
Total current liabilities 10,627 15,690
LONG-TERM DEBT, net of current portion 100,069 100,284
STORE CLOSURE RESERVE, net of current portion 1,802 1,802
CAPITAL LEASE OBLIGATIONS, net of current portion 144 183
------------ ------------
Total liabilities 112,642 117,959
------------ ------------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI (a majority owned
subsidiary), aggregate liquidation preference of $1,466 and $1,437,
respectively 1,081 902
----------- -----------
MINORITY INTEREST 221 58
------------ -----------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized and 400 shares
outstanding - -
Additional paid-in capital 30,843 30,843
Accumulated deficit (7,379) (78)
---------- ----------
Total stockholder's equity 23,464 30,765
---------- ----------
$137,408 $149,684
========== ==========
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated balance sheets.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirteen Weeks Ended
July 4, 1998 June 28, 1997
------------ -------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store sales $28,102 $26,197
Franchising, net 1,092 623
Licensing, net 432 379
Other, net 415 128
---------- ----------
Total revenues 30,041 27,327
-------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 16,854 15,207
Food cost of sales 6,618 6,293
General and administrative 4,116 3,605
Depreciation and amortization 3,316 2,151
--------- ---------
Total operating costs and expenses 30,904 27,256
-------- --------
(Loss) income from operations (863) 71
--------- --------
OTHER INCOME (EXPENSE), net:
Interest expense (2,870) (1,546)
Interest income 241 20
Other expense (131) (10)
--------- ---------
Total other income (expense), net (2,760) (1,536)
-------- ---------
Loss before provision for income taxes (3,623) (1,465)
PROVISION FOR INCOME TAXES (4) (94)
--------- ---------
Loss before preferred stock accretion, dividends of subsidiaries
and minority interest (3,627) (1,559)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES
(111) (93)
MINORITY INTEREST (154) -
--------- ---------
Net loss $(3,892) $ (1,652)
========= =========
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated statements.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Twenty Six Weeks Ended Twenty Six Weeks Ended
July 4, 1998 June 28, 1997
------------ -------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store sales $56,647 $53,839
Franchising, net 2,213 1,368
Licensing, net 683 818
Other, net 583 213
-------- --------
Total revenues 60,126 56,238
-------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 33,908 31,298
Food cost of sales 13,359 12,990
General and administrative 8,198 7,303
Depreciation and amortization 6,197 4,223
-------- --------
Total operating costs and expenses 61,662 55,814
-------- --------
(Loss) income from operations (1,536) 424
--------- --------
OTHER INCOME (EXPENSE), net:
Interest expense (5,626) (3,091)
Interest income 417 128
Other expense (144) (10)
--------- ---------
Total other income (expense), net (5,353) (2,973)
--------- ---------
Loss before provision for income taxes (6,889) (2,549)
PROVISION FOR INCOME TAXES (14) (144)
-------- ---------
Loss before preferred stock accretion, dividends of subsidiaries
and minority interest (6,903) (2,693)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES
(222) (182)
MINORITY INTEREST (176) -
--------- ---------
Net loss $(7,301) $ (2,875)
========= =========
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated statements.
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Twenty Six Weeks Twenty Six Weeks Ended
Ended July 4, 1998 June 28, 1997
------------------ ----------------------
(Unaudited)
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,301) $ (2,875)
Adjustments to reconcile net loss to net cash used in
operating activities, net of effects from acquisitions:
Depreciation and amortization 6,197 4,223
Amortization of deferred loan costs 427 -
Loss on sale of assets 144 -
In-kind interest expense on note payable to stockholder - 182
Preferred stock accretion and dividends of subsidiaries 222 182
Minority interest 176 -
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 387 150
Amounts due from franchisees and licensees 181 318
Inventories 240 (63)
Prepaid rent and other 523 1,216
Other assets 261 177
Accounts payable and accrued liabilities (2,518) (4,048)
Store closure reserve (946) (1,107)
Accrued salaries, wages and benefits 32 (537)
Accrued interest payable (171) 706
Sales taxes payable (562) (302)
Deferred income (598) (58)
-------- ----------
Net cash used in operating activities (3,306) (1,836)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisition expenses (928) -
Purchase of property and equipment, net of effects from acquisitions (3,342) (2,268)
-------- ----------
Net cash used in investing activities (4,270) (2,268)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit - 400
Principal payments on long-term debt (265) (56)
Principal payments on capital lease obligations (138) -
Reduction in preferred stock (42) -
-------- ---------
Net cash (used in) provided by financing activities (445) 344
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,021) (3,760)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 16,287 6,709
------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 8,266 $ 2,949
======= ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $5,370 and $1,704 for the twenty six
weeks ended July 4, 1998 and June 28, 1997, respectively.
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated statements.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Mrs. Fields' Original Cookies, Inc. (the "Company"), a Delaware corporation, is
a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc. ("MFH" or the
"Parent"). MFH is a majority owned subsidiary of Capricorn Investors II, L.P.
("Capricorn"). The Company has five wholly owned subsidiaries; namely, The Mrs.
Fields' Brand, Inc. ("MFB"), Mrs. Fields' Cookies Australia, Mrs. Fields'
Cookies (Canada) Ltd., H & M Canada, and Fairfield Foods, Inc. and four
partially owned subsidiaries, the largest of which is Pretzel Time, Inc. ("PTI")
of which the Company owns 70 percent of the common stock.
The Company primarily operates retail stores which sell freshly baked cookies,
brownies, pretzels and other food products through four specialty retail chains.
As of July 4, 1998, the Company owned and operated 142 "Mrs. Fields Cookies"
stores, 141 "Original Cookie Company" stores, 92 "Hot Sam Pretzels" stores and
95 "Pretzel Time" stores, all of which are located in the United States.
Additionally, the Company has franchised or licensed 470 stores in the United
States and 84 stores in 12 other countries. As of July 4, 1998, the Company
operated 365 core stores and operated 105 stores which are in the process of
being closed or franchised. All of the stores in the process of being closed or
franchised are expected to be closed or franchised by the end of fiscal year
1999.
The Company's business follows seasonal trends and is also affected by climate
and weather conditions. The Company experiences its highest revenues in the
fourth quarter. Because the Company's stores are heavily concentrated in
shopping malls, the Company's sales performance is significantly dependent on
the performance of those malls.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q, and accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these consolidated
financial statements reflect all adjustments, which consist only of normal
recurring adjustments, which are necessary to present fairly the Company's
financial position, results of operations and cash flows as of July 4, 1998 and
for the periods presented herein. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's previously
filed Registration Statement on Form S-4, as amended.
The results of operations for the twenty six weeks ended July 4, 1998 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending January 2, 1999. Earnings per share is not presented, as
the Company is wholly owned by MFH.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncement
During the 26 weeks ended July 4, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income.". SFAS No. 130 requires an "all-inclusive" income statement approach
which specifies that all revenues, expenses, gains and losses recognized during
the period be reported in income, regardless of whether they are considered to
be results of operations of the period. The adoption of SFAS No.
130 had no material impact on the Company's financial statement presentation.
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
Certain reclassifications have been made in the prior period's consolidated
financial statements to conform with the current year presentation.
(3) PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company assuming the PTI and H&M acquisitions had
occurred at the beginning of the fiscal year ended Janaury 3, 1998. Pro forma
adjustments have been made to give effect to amortization of goodwill, interest
expense on acquisition debt and certain other adjustments. The pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisitions been consummated at the beginning of the fiscal year ended
January 3, 1998.
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
-------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Total Revenues............. $30,041 $32,110 $60,126 $66,024
(Loss) income from
operations............... (863) 834 (1,536) 1,466
Net loss................... $(3,892) $(2,212) $(7,301) $(4,182)
</TABLE>
(4) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's obligation related to its $100,000,000 aggregate principal amount
of 10 1/8 percent Series A and Series B Senior Notes due 2004 is fully and
unconditionally guaranteed ("the Guarantee") on a senior basis by one of the
Company's wholly owned subsidiaries. The Guarantee is a general unsecured
obligation of The Mrs. Fields' Brand, Inc. ("the Guarantor Subsidiary"), ranks
senior in right of payment to all subordinated indebtedness of the Guarantor and
ranks pari passu in right of payment with all existing and future senior
indebtedness of the Guarantor. There are no restrictions on the Company's
ability to obtain cash dividends or other distributions of funds from the
Guarantor Subsidiary, except those imposed by applicable law. The following
supplemental financial information sets forth, on a condensed consolidating
basis, balance sheets, statements of operations and statements of cash flows for
Mrs. Fields' Original Cookies, Inc. (the "Parent Company"), The Mrs. Fields'
Brand, Inc. and Mrs. Fields' Cookies Australia, Mrs. Fields' Cookies (Canada)
Ltd., H & M Canada, and Fairfield Foods, Inc. and four partially owned
subsidiaries, the largest of which is Pretzel Time, Inc., of which the Company
owns 70 percent of the common stock (collectively, the "Non-guarantor
Subsidiaries"). The Company has not presented separate financial statements and
other disclosures concerning the Guarantor Subsidiary because management has
determined that such information is not material.
In the supplemental condensed consolidated financial statements, the principal
elimination entries eliminate the Parent Company's investments in subsidiaries
and intercompany balances and transactions.
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 4, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,045 $ 346 $ 875 $ - $ 8,266
Accounts receivable, net 989 - 159 - 1,148
Amounts due from franchisees
and licensees, net 1,242 610 143 - 1,995
Inventories 2,854 - 6 - 2,860
Other current assets and
amounts due from (to)
affiliates, net 5,564 (76) (286) - 5,202
--------------- --------------- ---------------- ----------------- -----------
Total current assets 17,694 880 897 - 19,471
PROPERTY AND EQUIPMENT, net 28,713 1 270 - 28,984
INTANGIBLES, net 57,879 17,084 6,714 - 81,677
INVESTMENTS IN SUBSIDIARIES 26,031 - - (26,031) -
OTHER ASSETS 7,139 - 137 - 7,276
$ 137,456 $ 17,965 $ 8,018 $ (26,031) $ 137,408
============= =============== =============== ================ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease
obligations $ 180 $ - $ 422 $ - $ 602
Accounts payable 2,760 5 89 - 2,854
Accrued liabilities 6,721 23 427 - 7,171
------------- ------------- -------------- ---------------- ------------
Total current liabilities 9,661 28 938 - 10,627
------------- ------------- -------------- ---------------- ------------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 100,144 - 69 - 100,213
OTHER ACCRUED LIABILITIES 1,802 - - - 1,802
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK - - 1,081 - 1,081
MINORITY INTEREST - - 291 (70) 221
STOCKHOLDER'S EQUITY 25,849 17,937 5,639 (25,961) 23,464
------------ ------------- ------------- -------------- -----------
$ 137,456 $ 17,965 $ 8,018 $ (26,031) $ 137,408
============ ============= ============= ============== ===========
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 13 WEEKS ENDED JULY 4, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 28,784 $ 432 $ 1,121 $ (296) $ 30,041
------------ ---------------- ------------ -------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 16,972 - 178 (296) 16,854
Food cost of sales 6,575 - 43 - 6,618
General and administrative 3,534 278 304 - 4,116
Depreciation and amortization 2,882 321 113 - 3,316
------------ ---------------- ------------ -------------- -------------
Total operating costs and expenses 29,963 599 638 (296) 30,904
------------ ---------------- ------------ -------------- -------------
(Loss)income from operations (1,179) (167) 483 - (863)
INTEREST EXPENSE AND
OTHER, net (2,771) 6 5 - (2,760)
------------ ---------------- ------------ -------------- -------------
(Loss) income before
provision for income taxes
and equity in net loss of
consolidated subsidiaries (3,950) (161) 488 - (3,623)
PROVISION FOR INCOME TAXES (4) - - - (4)
------------ ---------------- ------------ -------------- -------------
(Loss) income before
preferred stock accretion
subsidiaries and equity in
net loss of consolidated
subsidiaries (3,954) (161) 488 - (3,627)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - - (111) - (111)
EQUITY IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES - - (154) - (154)
------------ ---------------- ------------ -------------- -------------
NET (LOSS) INCOME $ (3,954) $ (161) $ 223 $ - $ (3,892)
============ ================ ============ ============== =============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 26 WEEKS ENDED JULY 4, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 58,155 $ 683 $ 1,867 $ (579) $ 60,126
------------ ---------------- ----------- --------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 34,309 - 178 (579) 33,908
Food cost of sales 13,316 - 43 - 13,359
General and administrative 6,872 554 772 - 8,198
Depreciation and amortization 5,331 640 226 - 6,197
------------ ---------------- ----------- --------------- -------------
Total operating costs
and expenses 59,828 1,194 1,219 (579) 61,662
------------ ---------------- ----------- --------------- -------------
(Loss) income from operations (1,673) (511) 648 - (1,536)
INTEREST EXPENSE AND
OTHER, net (5,372) 14 5 - (5,353)
------------ ---------------- ----------- --------------- -------------
(Loss) income before
provision for income taxes
and equity in net loss of (7,045) (497) 653 - (6,889)
consolidated subsidiaries
PROVISION FOR INCOME TAXES (14) - - - (14)
------------ ---------------- ----------- --------------- -------------
(Loss) income before
preferred stock accretion
and dividends of
subsidiaries and equity in
net loss of consolidated
subsidiaries (7,059) (497) 653 - (6,903)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - - (222) - (222)
EQUITY IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES - - (176) - (176)
------------ ---------------- ----------- --------------- -------------
NET (LOSS) INCOME $ (7,059) $ (497) $ 255 $ - $ (7,301)
============ ================ =========== =============== =============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 4, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH USED IN OPERATING
ACTIVITIES $ (2,824) $ (379) $ (103) $ - $ (3,306)
--------------- --------------- ---------------- ----------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash paid for acquisitions (928) - - - (928)
Purchase of property and
equipment, net (3,335) - (7) - (3,342)
--------------- --------------- ---------------- ----------------- --------------
Net cash used in
investing activities (4,263) - (7) - (4,270)
--------------- --------------- ---------------- ----------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Reduction of long-term
debt and capital lease (138) - (265) - (403)
obligations
Reduction in preferred stock - - (42) - (42)
--------------- --------------- ---------------- ----------------- --------------
Net cash used in
financing activities (138) - (307) - (445)
--------------- --------------- ---------------- ----------------- --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (7,225) (379) (417) - (8,021)
CASH AND CASH EQUIVALENTS,
beginning of period
14,270 725 1,292 - 16,287
--------------- --------------- ---------------- ----------------- --------------
CASH AND CASH EQUIVALENTS, end
of period $ 7,045 $ 346 $ 875 $ - $ 8,266
=============== =============== ================ ================= ==============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,270 $ 725 $ 1,292 $ - $ 16,287
Accounts receivable, net 1,388 - 147 - 1,535
Amounts due from franchisees
and licensees, net 1,517 659 - - 2,176
Inventories 3,094 - 6 - 3,100
Other current assets and
amounts due from (to)
affiliates, net 6,593 (615) (253) - 5,725
---------- ------------ ------------ --------------- -------------
Total current assets 26,862 769 1,192 - 28,823
PROPERTY AND EQUIPMENT, net 28,907 1 294 - 29,202
INTANGIBLES, net 59,928 17,725 6,041 - 83,694
INVESTMENTS IN SUBSIDIARIES 23,089 - - (23,089) -
OTHER ASSETS 7,902 - 63 - 7,965
---------- ------------ ------------ --------------- -------------
$ 146,688 $ 18,495 $ 7,590 $ (23,089) $ 149,684
========== ============ ============ =============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease
obligations $ - $ - $ 614 $ - $ 614
Accounts payable 3,621 36 148 - 3,805
Accrued liabilities 10,499 25 747 - 11,271
---------- ------------ ------------ --------------- -------------
Total current liabilities 14,120 61 1,509 - 15,690
liabilities
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 100,000 - 467 - 100,467
OTHER ACCRUED LIABILITIES 1,802 - - - 1,802
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK - - 902 - 902
MINORITY INTEREST - - - 58 58
STOCKHOLDER'S EQUITY 30,766 18,434 4,712 (23,147) 30,765
---------- ------------ ------------ --------------- -------------
$ 146,688 $ 18,495 $ 7,590 $ (23,089) $ 149,684
========== ============ ============ =============== =============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 13 WEEKS ENDED JUNE 28, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 26,948 $ 379 $ - $ - $ 27,327
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 15,207 - - - 15,207
Food cost of sales 6,293 - - - 6,293
General and administrative 3,330 252 23 - 3,605
Depreciation and amortization 1,875 276 - - 2,151
--------------- --------------- ---------------- ----------------- ------------
Total operating costs
and expenses 26,705 528 23 - 27,256
--------------- --------------- ---------------- ----------------- -------------
Income (loss)from operations 243 (149) (23) - 71
INTEREST EXPENSE AND
OTHER, net (1,201) (335) - - (1,536)
--------------- --------------- ---------------- ----------------- ------------
Loss before provision for
income taxes and equity in
net loss of consolidated
subsidiaries (958) (484) (23) - (1,465)
PROVISION FOR INCOME TAXES (94) - - - (94)
--------------- --------------- ---------------- ----------------- ------------
Loss before preferred stock
accretion and dividends of
subsidiaries and equity in
net loss of consolidated (484) (23) - (1,559)
subsidiaries (1,052)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - (93) - - (93)
--------------- --------------- ---------------- ----------------- ------------
NET LOSS $ (1,052) $ (577) $ (23) $ - $ (1,652)
=============== =============== ================ ================= ============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 26 WEEKS ENDED JUNE 28, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 55,420 $ 818 $ - $ - $ 56,238
--------------- --------------- ---------------- ----------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 31,298 - - - 31,298
Food cost of sales 12,990 - - - 12,990
General and administrative 6,850 430 23 - 7,303
Depreciation and amortization 3,670 553 - - 4,223
--------------- --------------- ---------------- ----------------- -------------
Total operating costs
and expenses 54,808 983 23 - 55,814
--------------- --------------- ---------------- ----------------- -------------
Income (loss)from operations 612 (165) (23) - 424
INTEREST EXPENSE AND
OTHER, net (2,303) (670) - - (2,973)
--------------- --------------- ---------------- ----------------- -------------
Loss before provision for
income taxes and equity in
net loss of consolidated
subsidiaries (1,691) (835) (23) - (2,549)
PROVISION FOR INCOME TAXES (144) - - - (144)
--------------- --------------- ---------------- ----------------- -------------
Loss before preferred stock
accretion and dividends of
subsidiaries and equity in
net loss of consolidated
subsidiaries (1,835) (835) (23) - (2,693)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - (182) - - (182)
--------------- --------------- ---------------- ----------------- -------------
NET LOSS $ (1,835) $ (1,017) $ (23) $ - $ (2,875)
=============== =============== ================ ================= =============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 26 WEEKS ENDED JUNE 28, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $ (2,088) $ 228 $ 24 $ - $ (1,836)
--------------- --------------- ---------------- ----------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment, net (2,268) - - - (2,268)
--------------- --------------- ---------------- ----------------- -------------
Net cash used in
investing activities (2,268) - - - (2,268)
--------------- --------------- ---------------- ----------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on line of
credit 400 - - - 400
Reduction of long-term
debt and capital lease (56) - - - (56)
obligations
--------------- --------------- ---------------- ----------------- -------------
Net cash used in
financing activities 344 - - - 344
--------------- --------------- ---------------- ----------------- -------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (4,012) 228 24 - (3,760)
CASH AND CASH EQUIVALENTS,
beginning of period 6,121 588 - - 6,709
--------------- --------------- ---------------- ----------------- -------------
CASH AND CASH EQUIVALENTS, end
of period $ 2,109 $ 816 $ 24 $ - $ 2,949
=============== =============== ================ ================= =============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In 1996, an investor group led by Capricorn Investors II, L.P.
("Capricorn") formed Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields'
Brand, Inc. (collectively, "Mrs. Fields" or the "Company") as subsidiaries of
Mrs. Fields' Holding Company, Inc. ("MFH").
On September 17, 1996, the Company initiated operations when it purchased
substantially all of the assets and assumed certain liabilities of Mrs. Fields
Inc. and subsidiaries, The Original Cookie Company, Incorporated ("Original
Cookie"), and the pretzel business of Hot Sam Company, Inc. ("Hot Sam").
The Company set out to increase sales and profitability of its cookie
and pretzel operations by implementing key elements of its business plan coupled
with strategic acquisitions. A key element of the business plan is closing or
franchising certain Company-owned stores that do not meet specific financial and
geographical criteria established by management. Implementation of this element
of the business plan is expected to result in enhanced operating margins as
these stores are franchised or closed. Stores not planned for franchise or
closure are referred to as "core" stores. Core stores will continue to be
operated by the Company into the foreseeable future. As a result of converting
certain stores to franchises, royalty revenues are expected to increase and
general and administrative expenses associated with operating those stores are
expected to be reduced.
The Company is pursuing growth in both its cookie and pretzel
businesses through strategic acquisitions. Management expects that significant
operating synergies, expense leveraging and geographic market share can be
achieved through targeted acquisitions. On July 25, 1997, a subsidiary of MFH,
Mrs. Fields' Pretzel Concepts, Inc. ("MFPC") acquired substantially all of the
assets and assumed certain liabilities of H&M Concepts Ltd. Co. ("H&M"), the
largest franchisee of Pretzel Time, Inc.("Pretzel Time"). On September 2, 1997,
MFH acquired 56% of the common stock of Pretzel Time, the franchisor of the
Pretzel Time concept.
On November 26, 1997, the Company received as a contribution from MFH,
the business of MFPC and 56% of the shares of common stock of Pretzel Time (the
"Pretzel Contributions"). On that same date the Company received as a
contribution from MFH, all of the common stock of The Mrs. Fields' Brand, Inc.
On January 2, 1998 and June 12, 1998, the Company acquired an additional 4% and
10%, respectively, of Pretzel Time common stock, bringing the Company's total
ownership to 70%.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in thousands of
dollars and percentage changes from period to period. Data in the table reflects
the consolidated results of the Company for the 13 and 26 weeks ended July 4,
1998 and June 28, 1997, respectively. As supplemental information the table also
segregates the statement of operations data into a core stores and stores in the
process of being closed or franchised format.
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
---------------------------------- -----------------------------------
% OF % OF
CHG CHG
FROM FROM
JULY JUNE 1997 TO JULY JUNE 1997 TO
4, 1998 28, 1997 1998 4, 1998 28, 1997 1998
------------- ----------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Unaudited Statement of Operations Data: (Dollars in thousands)
Revenues:
Net store sales........ $28,102 $26,197 7.3% $56,647 $53,839 5.2%
Franchising, net....... 1,092 623 75.3 2,213 1,368 61.8
Licensing, net......... 432 379 14.0 683 818 (16.5)
Other revenue, net..... 415 128 224.2 583 213 173.7
------- ------- ------- --------
Total revenues. 30,041 27,327 9.9 60,126 56,238 6.9
------- ------- ------- --------
Operating Costs and Expenses:
Selling and store
occupancy costs....... 16,854 15,207 10.8 33,908 31,298 8.3
Food cost of sales..... 6,618 6,293 5.2 13,359 12,990 2.8
General and
administrative........ 4,116 3,605 14.2 8,198 7,303 12.3
Depreciation and 3,316 2,151 54.2 6,197 4,223 46.7
amortization........... ------- ------- ------- ------
Total operating costs
and expenses...... 30,904 27,256 13.4 61,662 55,814 10.5
------- ------- ------- ------
Other Income (Expense), net:
Interest expense....... (2,870) (1,546) 85.6 (5,626) (3,091) 82.0
------- ------- ------- ------
Interest income........ 241 20 1,105.0 417 128 225.8
------- ------- ------- ------
Other expenses......... (400) (197) 103.0 (556) (336) 65.5
------- ------- ------- ------
Net loss............... $(3,892) $(1,652) 135.6% $(7,301) $(2,875) 153.9%
======== ======== ======= =======
Unaudited Supplemental Information:
Core stores:
Net store sales........... $25,066 $21,710 15.5% $49,655 $44,139 12.5%
------- ------- ------- -------
Operating costs and expenses:
Selling and store
occupancy costs........ 13,967 11,352 23.0 27,550 22,984 19.9
Food cost of sales...... 5,724 4,906 16.7 11,378 10,059 13.1
Depreciation and
amortization........... 1,387 1,297 6.9 2,421 2,106 15.0
------- ------- ------- -------
Total operating costs
and expenses........ 21,078 17,555 20.1 41,349 35,149 17.6
------- ------- ------- -------
Core stores contribution... $ 3,988 $ 4,155 (4.0) $ 8,306 $ 8,990 (7.6)
======= ======= ======= =======
Stores in the process of
being closed or franchised:
Net store sales........... $ 3,036 $ 4,487 (32.3) $ 6,992 $ 9,700 (27.9)
------- ------- ------- -------
Operating costs and expenses:
Selling and store
occupancy costs........ 2,887 3,855 (25.1) 6,358 8,314 (23.5)
Food cost of sales...... 894 1,387 (35.5) 1,981 2,931 (32.4)
Depreciation and
amortization........... 149 195 (23.6) 258 195 32.3
------- ------- ------- -------
Total operating costs
and expenses........ 3,930 5,437 (27.7) 8,597 11,440 (24.9)
------- ------- ------- -------
Stores in the process of
being closed or
franchised contribution.... (894) (950) (5.9) (1,605) (1,740) (7.8)
======= ======= ======= =======
EBITDA.................... $2,453 $2,222 10.4% $ 4,661 $ 4,647 0.3%
======= ======= ======= =======
</TABLE>
<PAGE>
13 Weeks Ended July 4, 1998 Compared to the 13 Weeks Ended June 28, 1997
Company-owned and Franchised or Licensed Store Activity
As of July 4, 1998, there were 470 Company-owned stores and 554
franchised or licensed stores in operation. The store activity for the 13 weeks
ended July 4, 1998 and the 13 weeks ended June 28, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
----- ----
Company- Franchised Company- Franchised
Owned or Licensed Owned or Licensed
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the fiscal year 472 547 463 436
Stores opened (including relocations) 2 20 1 4
Stores closed (including relocations) (2) (13) (3) (15)
Non-core (exit plan) stores closed (September 18, 1996
forward) (2) - (24) -
Stores sold to franchisees (1) 1 (1) 1
Non-core (exit plan) stores franchised (September 18,
1996 forward) (9) 9 (1) 1
Stores acquired from franchisees 10 (10) - -
------ ------- ------- ---------
Stores open as of the end of the period 470 554 435 427
====== ======= ======= =========
</TABLE>
The activity reflected above resulted in 6,123 and 5,873 Company-owned
equivalent store weeks and 7,157 and 5,610 franchisee/licensee equivalent store
weeks during the 13 weeks ended July 4, 1998 and the 13 weeks ended June 28,
1997, respectively.
Revenues
Net Stores Sales. Total net store sales increased $1,905,000, or 7.3%,
from $26,197,000 to $28,102,000 for the 13 weeks ended July 4, 1998 compared to
the 13 weeks ended June 28, 1997.
Net store sales from core stores increased $3,356,000, or 15.5%, from
$21,710,000 to $25,066,000 for the 13 weeks ended July 4, 1998 compared to the
13 weeks ended June 28, 1997. The increase in net store sales from core stores
was primarily attributable to (i) the operation of 69 Pretzel Time core stores
obtained in connection with the Pretzel Acquisitions in July 1997 (ii) an
increase in average ticket from marketing initiatives coupled with the
introduction of new product line extensions and (iii) the Company purchasing 10
core stores back from certain franchisees.
On a comparable store basis, system-wide core store sales were down 1.5%
during the 13 weeks ended July 4, 1998 compared to the same period in 1997
primarily due to declines in sales at the Original Cookie and Hot Sam stores.
However, the Mrs. Fields core stores continue to demonstrate the strength of the
Mrs. Fields brand by posting a 1.9% increase in comparable store sales. The
Pretzel Time stores also posted a 0.5% increase in comparable store sales for
the period.
Net store sales from stores in the process of being closed or
franchised decreased $1,451,000, or 32.3%, from $4,487,000 to $3,036,000 for the
13 weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997. This
decrease results from closing 2 stores and franchising 9 stores during the 13
weeks ended July 4, 1998 and the effect of closing 24 stores during the 13 weeks
ended June 28, 1997. In addition, 29 stores were closed and 10 franchised for
the period June 29, 1997 to April 4, 1998 which were in operation during the 13
weeks ended June 28, 1997.
Franchising Revenues. Franchising revenues increased $469,000, or
75.3%, from $623,000 to $1,092,000 for the 13 weeks ended July 4, 1998 compared
to the 13 weeks ended June 28, 1997. The increase in franchising revenues was
primarily attributable to royalties earned from 141 Pretzel Time franchised
stores obtained in connection with the Pretzel Acquisitions in July 1997, offset
in part by 10 franchised stores purchased by the Company during the period.
Licensing Revenues. Licensing revenues increased $53,000, or 14.0%,
from $379,000 to $432,000 for the 13 weeks ended July 4, 1998 compared to the 13
weeks ended June 28, 1997. The increase in licensing revenues was primarily
attributable to royalties received in connection with the introduction of a Mrs.
Fields branded ice cream sandwich in late June 1997.
Other Revenue, net. Other revenue, net, increased $287,000, or 224.2%,
from $128,000 to $415,000 for the 13 weeks ended July 4, 1998 compared to the 13
weeks ended June 28, 1997. The increase in other revenue, net, was primarily
attributable to area development fees earned from certain Pretzel Time
franchised stores obtained in the Pretzel Acquisitions in July 1997 and an
increase in contribution from the sale of Mrs. Fields branded products through
the Company's mail order division.
Total Revenues. Total revenue increased by $2,714,000, or 9.9%, from
$27,327,000 to $30,041,000 for the 13 weeks ended July 4, 1998 compared to the
13 weeks ended June 28, 1997 primarily due to the combination of factors
discussed above.
<PAGE>
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy
costs increased $1,647,000, or 10.8%, from $15,207,000 to $16,854,000 for the 13
weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997.
Selling and store occupancy costs for core stores increased by
$2,615,000, or 23.0%, from $11,352,000 to $13,967,000 for the 13 weeks ended
July 4, 1998 compared to the 13 weeks ended June 28, 1997. Within this overall
increase, selling expenses increased by $1,218,000, or 25.4%, from $4,798,000 to
$6,016,000 for the 13 weeks ended July 4, 1998 compared to the 13 weeks ended
June 28, 1997. The increase in selling expenses was primarily attributable to
the 69 Pretzel Time core stores obtained in connection with the Pretzel
Contributions in July 1997 and the effect of the minimum wage increasing to
$5.15 from $4.75 on September 1, 1997. Store occupancy costs increased $909,000,
or 18.2%, from $4,997,000 to $5,906,000 for the 13 weeks ended July 4, 1998
compared to the 13 weeks ended June 28, 1997. The increase in store occupancy
costs was primarily attributable to the 69 Pretzel Time core stores obtained in
connection with the Pretzel Contributions in July 1997, coupled with the opening
of two new core stores and the Company re-acquiring 10 core stores from certain
franchisees during the 13 weeks ended July 4, 1998 and lease renewal increases.
Other store expense increased $488,000, or 31.3% from $1,557,000 to $2,045,000
for the 13 weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997
primarily as a result of the Pretzel Contributions in July 1997.
Selling and store occupancy costs for stores in the process of being
closed or franchised decreased $968,000, or 25.1%, from $3,855,000 to $2,887,000
for the 13 weeks ended July 4, 1998 compared to the 13 weeks ended June 28,
1997. This decrease was primarily the result of closing 2 stores and franchising
9 stores during the 13 weeks ended July 4, 1998 and the effect of closing 23
stores during the 13 weeks ended June 28, 1997. In addition, 29 stores were
closed and 10 franchised for the period June 29, 1997 to April 4, 1998 which
were in operation during the 13 weeks ended June 28, 1997.
Food Cost of Sales. Total food cost of sales increased $325,000, or
5.2%, from $6,293,000 to $6,618,000 for the 13 weeks ended July 4, 1998 compared
to the 13 weeks ended June 28, 1997.
Food cost of sales for core stores increased $818,000, or 16.7%, from
$4,906,000 to $5,724,000 for the 13 weeks ended July 4, 1998. This increase was
primarily the result of the addition of 69 Pretzel Time core stores in July
1997. As a percentage of net core store sales, food cost of sales was 22.8% for
the 13 weeks ended July 4, 1998 compared to 22.6% for the 13 weeks ended June
28, 1997. Additionally, the Mrs. Fields brand stores use butter as one of the
main ingredients in its products. The price of butter has increased $0.47/lb.,
from $0.78/lb. at the beginning of 1997 to $1.25/lb. at the beginning of 1998.
As a result food cost of sales at the Mrs. Fields brand stores was negatively
impacted by increased butter cost during the 13 weeks ended July 4, 1998, offset
in part by an aggressive waste control program implemented Company-wide in May
1997.
Food cost of sales for stores in the process of being closed or
franchised decreased $493,000, or 35.5%, from $1,387,000 to $894,000 for the 13
weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997. This
decrease was primarily the result of closing 2 stores and franchising 9 stores
during the 13 weeks ended July 4, 1998 and the effect of closing 24 stores
during the 13 weeks ended June 28, 1997. In addition, 29 stores were closed and
10 franchised for the period June 29, 1997 to April 4, 1998 which were in
operation during the 13 weeks ended June 28, 1997.
General and Administrative Expenses. General and administrative
expenses increased $511,000, or 14.2%, from $3,605,000 to $4,116,000 for the 13
weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997. The
increase in general and administrative expenses was primarily attributable to
the addition of the Pretzel Contributions.
Depreciation and Amortization. Total depreciation and amortization
expense increased by $1,165,000, or 54.2%, from $2,151,000 to $3,316,000 for the
13 weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997. This
increase was primarily attributable to increased goodwill from the Pretzel
Contributions.
Depreciation and amortization expense for core stores increased
$90,000, or 6.9%, from $1,297,000 to $1,387,000 for the 13 weeks ended July 4,
1998 compared to the 13 weeks ended June 28, 1997. This increase in depreciation
and amortization expense was primarily attributable to the addition of 69
Pretzel Time core stores in July 1997 and two newly opened core stores during
the 13 weeks ended July 4, 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $3,648,000, or 13.4%, from $27,256,000 to $30,904,000 for the 13
weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997, for the
reasons discussed above.
<PAGE>
Interest Expense. Interest expense, net, increased $1,324,000, or
85.6%, from $1,546,000 to $2,870,000 for the 13 weeks ended July 4, 1998
compared to the 13 weeks ended June 28, 1997. This increase was primarily
attributable to interest on the $100,000,000 in high yield notes which were put
in place in November 1997.
Interest Income. Interest income, increased $221,000, or 1,105.0%, from
$20,000 to $241,000 for the 13 weeks ended July 4, 1998 compared to the 13 weeks
ended June 28, 1997. This increase was primarily the result interest income
earned on excess cash provided by the $100,000,000 in high yield notes which
were put in place in November 1997.
Other Expenses. Other expenses, increased $203,000, or 103.0%, from
$197,000 to $400,000 for the 13 weeks ended July 4, 1998 compared to the 13
weeks ended June 28, 1997. This increase is primarily the result of the Company
recognizing the minority interest from the net loss at the Pretzel Time
subsidiary for the 13 weeks ended July 4, 1998.
Net Loss. The net loss increased by $2,240,000, or 135.6%, from
$1,652,000 to $3,892,000 for the 13 weeks ended July 4, 1998 compared to the 13
weeks ended June 28, 1997 due to the combination of factors described above.
Contribution from Core Stores. Contribution from core stores decreased
by $167,000, or 4.0%, from $4,155,000 to $3,988,000 for the 13 weeks ended July
4, 1998 compared to the 13 weeks ended June 28, 1997. The decrease is
attibutable to declining comparable store sales at the Company's Original Cookie
and Hot Sam stores, offset in part by increased comparable core store sales at
the Mrs. Fields and Pretzel Time stores and the increase in selling and store
occupancy costs as described above.
Negative Contribution from Stores in the Process of Being Closed or
Franchised. The negative contribution from stores in the process of being closed
or franchised decreased by $56,000, or 5.9%, from $950,000 to $894,000 for the
13 weeks ended July 4, 1998 compared to the 13 weeks ended June 28, 1997. The
decrease in negative contribution was primarily attributable to closing 2 stores
and franchising 9 stores during the 13 weeks ended July 4, 1998 and the effect
of closing 23 stores during the 13 weeks ended June 28, 1997. In addition, 29
stores were closed and 10 franchised for the period June 29, 1997 to April 4,
1998 which were in operation during the 13 weeks ended June 28, 1997.
EBITDA. Earnings before interest, taxes, depreciation and amortization,
preferred stock accretion and dividends of subsidiaries, minority interest and
other income (expense) ("EBITDA") is presented as management believes that
certain investors find it to be a useful tool for measuring the ability to
service debt. EBITDA does not represent net income or cash flows from operations
as these terms are defined by generally accepted accounting principles and does
not necessarily indicate whether cash flows have been or will be sufficient to
fund cash needs. EBITDA increased by $231,000, or 10.4%, from $2,222,000 to
$2,453,000 for the 13 weeks ended July 4, 1998 compared to the 13 weeks ended
June 28, 1997 for the reasons described above.
26 Weeks Ended July 4, 1998 Compared to the 26 Weeks Ended June 28, 1997
Company-owned and Franchised or Licensed Store Activity
As of July 4, 1998, there were 470 Company-owned stores and 554
franchised or licensed stores in operation. The store activity for the 26 weeks
ended July 4, 1998 and the 26 weeks ended June 28, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
----- ----
Company- Franchised Company- Franchised
Owned or Licensed Owned or Licensed
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the fiscal year 481 553 482 418
Stores opened (including relocations) 5 42 2 30
Stores closed (including relocations) (7) (42) (4) (19)
Non-core (exit plan) stores closed (September 18, 1996
forward) (8) - (47) -
Stores sold to franchisees (1) 1 (1) 1
Non-core (exit plan) stores franchised (September 18,
1996 forward) (11) 11 (1) 1
Stores acquired from franchisees 11 (11) 4 (4)
----- ------- ------ -------
Stores open as of the end of the period 470 554 435 427
===== ===== ====== =======
</TABLE>
The activity reflected above resulted in 12,363 and 11,921
Company-owned equivalent store weeks and 14,391 and 10,985 franchisee/licensee
equivalent store weeks during the 26 weeks ended July 4, 1998 and the 26 weeks
ended June 28, 1997, respectively.
Revenues
Net Stores Sales. Total net store sales increased $2,808,000, or 5.2%,
from $53,839,000 to $56,647,000 for the 26 weeks ended July 4, 1998 compared to
the 26 weeks ended June 28, 1997.
<PAGE>
Net store sales from core stores increased $5,516,000, or 12.5%, from
$44,139,000 to $49,655,000 for the 26 weeks ended July 4, 1998 compared to the
26 weeks ended June 28, 1997. The increase in net store sales from core stores
was primarily attributable to the operation of 69 Pretzel Time core stores
obtained in connection with the Pretzel Acquisitions in July 1997, offset in
part by the negative effect of a calendar shift whereby the Company's year end
was December 28 in 1996 and January 3, 1998 in 1997. As a result, the New Year's
holiday week fell in the first quarter of 1997 and again in the fourth quarter
1997. The first quarter of 1998 did not benefit from the New Year's holiday
sales. Had this holiday been in the first quarter of 1998, net store sales from
core stores would have been approximately $800,000 greater or $50,455,000.
On a comparable store basis (adjusted for the calendar shift),
system-wide core store sales were down 0.8% during the 26 weeks ended July 4,
1998 compared to the same period in 1997. However, the Mrs. Fields core stores
continue to demonstrate the strength of the Mrs. Fields brand by posting a 3.4%
increase in comparable store sales.
Net store sales from stores in the process of being closed or
franchised decreased $2,708,000, or 27.9%, from $9,700,000 to $6,992,000 for the
26 weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997. This
decrease results from closing 8 stores and franchising 11 stores during the 26
weeks ended July 4, 1998 and the effect of closing 47 stores during the 26 weeks
ended June 28, 1997. In addition, 31 stores were closed and 19 franchised for
the period June 29, 1997 to April 4, 1998 which were in operation during the 26
weeks ended June 28, 1997.
Franchising Revenues. Franchising revenues increased $845,000, or
61.8%, from $1,368,000 to $2,213,000 for the 26 weeks ended July 4, 1998
compared to the 26 weeks ended June 28, 1997. The increase in franchising
revenues was primarily attributable to royalties earned from 141 Pretzel Time
franchised stores obtained in connection with the Pretzel Contributions.
Licensing Revenues. Licensing revenues decreased $135,000, or 16.5%,
from $818,000 to $683,000 for the 26 weeks ended July 4, 1998 compared to the 26
weeks ended June 28, 1997. The decrease in licensing revenues was primarily
attributable to a Mrs. Fields branded dry cookie mix license fee earned during
the 26 weeks ended June 28, 1997 that did not recur in the 26 weeks ended July
4, 1998 and the net closure of 6 licensed locations during the the period.
Other Revenue, net. Other revenue, net, increased $370,000, or 173.7%,
from $213,000 to $583,000 for the 26 weeks ended July 4, 1998 compared to the 26
weeks ended June 28, 1997. The increase in other revenue, net, was primarily
attributable to area development fees earned from certain Pretzel Time
franchised stores obtained in the Pretzel Contributions in July 1997 and an
increase in contribution from the sale of Mrs. Fields branded products through
the Company's mail order division.
Total Revenues. Despite the holiday calendar shift, total revenues
increased by $3,888,000, or 6.9%, from $56,238,000 to $60,126,000 for the 26
weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997 due to the
addition of the Pretzel Contributions offset by the effects of closed stores.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy
costs increased $2,610,000, or 8.3%, from $31,298,000 to $33,908,000 for the 26
weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997.
Selling and store occupancy costs for core stores increased by
$4,566,000, or 19.9%, from $22,984,000 to $27,550,000 for the 26 weeks ended
July 4, 1998 compared to the 26 weeks ended June 28, 1997. Within this overall
increase, selling expenses increased by $2,141,000, or 22.0%, from $9,724,000 to
$11,865,000 for the 26 weeks ended July 4, 1998 compared to the 26 weeks ended
June 28, 1997. The increase in selling expenses was primarily attributable to
the 69 Pretzel Time core stores obtained in connection with the Pretzel
Contributions in July 1997 and the effect of the minimum wage increasing to
$5.15 from $4.75 on September 1, 1997. Store occupancy costs increased
$1,646,000, or 16.6%, from $9,923,000 to $11,569,000 for the 26 weeks ended July
4, 1998 compared to the 26 weeks ended June 28, 1997. The increase in store
occupancy costs was primarily attributable to the 69 Pretzel Time core stores
obtained in connection with the Pretzel Contributions in July 1997, the Company
re-acquiring 11 core stores from franchisees during the 26 weeks ended July 4,
1998 and lease renewal increases. Other store expense increased $779,000, or
23.3% from $3,337,000 to $4,116,000 for the 26 weeks ended July 4, 1998 compared
to the 26 weeks ended June 28, 1997 primarily as a result of the Pretzel
Contributions in July 1997.
Selling and store occupancy costs for stores in the process of being
closed or franchised decreased $1,956,000, or 23.5%, from $8,314,000 to
$6,358,000 for the 26 weeks ended July 4, 1998 compared to the 26 weeks ended
June 28, 1997. This decrease was primarily the result of closing 8 stores and
franchising 11 stores during the 26 weeks ended July 4, 1998 and the effect of
closing 47 stores during the 26 weeks ended June 28, 1997. In addition, 31
stores were closed and 19 franchised for the period June 29, 1997 to April 4,
1998 which were in operation during the 26 weeks ended June 28, 1997.
<PAGE>
Food Cost of Sales. Total food cost of sales increased $369,000, or 2.8%,
from $12,990,000 to $13,359,000 for the 26 weeks ended July 4, 1998 compared to
the 26 weeks ended June 28, 1997.
Food cost of sales for core stores increased $1,319,000, or 13.1%, from
$10,059,000 to $11,378,000 for the 26 weeks ended July 4, 1998. This increase
was primarily the result of the addition of 69 Pretzel Time core stores in July
1997. Additionally, the Mrs. Fields brand stores use butter as one of the main
ingredients in its products. The price of butter has increased $0.47/lb., from
$0.78/lb. at the beginning of 1997 to $1.25/lb. at the beginning of 1998. As a
result food cost of sales at the Mrs. Fields brand stores was negatively
impacted by the butter increase for the 26 weeks ended July 4, 1998 compared to
the 26 weeks ended June 28, 1997, offset in part by an aggressive waste control
program implemented Company-wide in May 1997.
The market for butter has been in a highly volatile state. In mid-July
1998, the price of butter increased an additional $0.80/lb. to $2.05/lb. from
$1.25/lb. This increase was fueled by the United States Government dispensing
vast quantities of butter to developing third world countries coupled with
severe droughts in the Mid-West which limited milk production. Management
believes that the price of butter will remain at current levels through year-end
and estimates that the increased butter costs will negatively impact food cost
of sales for the remainder of 1998 by approximately $1.0 million.
Food cost of sales for stores in the process of being closed or
franchised decreased $950,000, or 32.4%, from $2,931,000 to $1,981,000 for the
26 weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997. This
decrease was primarily the result of closing 8 stores and franchising 11 stores
during the 26 weeks ended July 4, 1998 and the effect of closing 23 stores
during the 26 weeks ended June 28, 1997. In addition, 31 stores were closed and
19 franchised for the period June 29, 1997 to April 4, 1998 which were in
operation during the 26 weeks ended June 28, 1997.
General and Administrative Expenses. General and administrative
expenses increased $895,000, or 12.3%, from $7,303,000 to $8,198,000 for the 26
weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997. The
increase in general and administrative expenses was primarily attributable to
the addition of the Pretzel Contributions.
Depreciation and Amortization. Total depreciation and amortization
expense increased by $1,974,000, or 46.7%, from $4,223,000 to $6,197,000 for the
26 weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997. This
increase was primarily attributable to increased goodwill from the Pretzel
Contributions.
Depreciation and amortization expense for core stores increased
$315,000, or 15.0%, from $2,106,000 to $2,421,000 for the 26 weeks ended July 4,
1998 compared to the 26 weeks ended June 28, 1997. This increase in depreciation
and amortization expense was primarily attributable to the addition of 69
Pretzel Time core stores in July 1997.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $5,848,000, or 10.5%, from $55,814,000 to $61,662,000 for the 26
weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997, for the
reasons discussed above.
Interest Expense. Interest expense, net, increased $2,535,000, or
82.0%, from $3,091,000 to $5,626,000 for the 26 weeks ended July 4, 1998
compared to the 26 weeks ended June 28, 1997. This increase was primarily
attributable to interest on the $100,000,000 high yield notes which were put
in place in November 1997.
Interest Income. Interest income, increased $289,000, or 225.8%, from
$128,000 to $417,000 for the 26 weeks ended July 4, 1998 compared to the 26
weeks ended June 28, 1997. This increase was primarily the result interest
income on excess cash provided by the $100,000,000 high yield notes which
were put in place in November 1997.
Other Expenses. Other expenses, increased $220,000, or 65.5%, from
$336,000 to $556,000 for the 26 weeks ended July 4, 1998 compared to the 26
weeks ended June 28, 1997. This increase was primarily attributable to the
Company recognizing the minority interest from the net loss at the Pretzel Time
subsidiary for the 26 weeks ended July 4, 1998.
Net Loss. The net loss increased by $4,426,000, or 153.9%, from
$2,875,000 to $7,301,000 for the 26 weeks ended July 4, 1998 compared to the 26
weeks ended June 28, 1997 due to the combination of factors described above.
<PAGE>
Contribution from Core Stores. Contribution from core stores decreased
by $684,000, or 7.6%, from $8,990,000 to $8,306,000 for the 26 weeks ended July
4, 1998 compared to the 26 weeks ended June 28, 1997. Contribution from core
stores during the first quarter of 1998 was negatively impacted by declines in
sales at the Company's Original Cookie and Hot Sam brand stores and by a
calendar shift whereby the Company's year end was December 28 in 1996 and
January 3, 1998 for 1997. As a result, the New Year's holiday week fell in the
first quarter of 1997 and again in the fourth quarter 1997. The first quarter of
1998 did not benefit from the New Year's holiday sales. Had this holiday been in
the first quarter of 1998, contribution from core stores would have been
approximately $600,000 greater or $8,906,000.
Negative Contribution from Stores in the Process of Being Closed or
Franchised. The negative contribution from stores in the process of being closed
or franchised decreased by $135,000, or 7.8%, from $1,740,000 to $1,605,000 for
the 26 weeks ended July 4, 1998 compared to the 26 weeks ended June 28, 1997.
The decrease in negative contribution was primarily attributable to closing 8
stores and franchising 11 stores during the 13 weeks ended July 4, 1998 and the
effect of closing 23 stores during the 26 weeks ended June 28, 1997. In
addition, 31 stores were closed and 19 franchised for the period June 29, 1997
to April 4, 1998 which were in operation during the 26 weeks ended June 28,
1997.
EBITDA. Earnings before interest, taxes, depreciation and amortization,
preferred stock accretion and dividends of subsidiaries, minority interest and
other income (expense) ("EBITDA") is presented as management believes that
certain investors find it to be a useful tool for measuring the ability to
service debt. EBITDA does not represent net income or cash flows from operations
as these terms are defined by generally accepted accounting principles and does
not necessarily indicate whether cash flows have been or will be sufficient to
fund cash needs. EBITDA increased by $14,000, or 0.3%, from $4,647,000 to
$4,661,000 for the 26 weeks ended July 4, 1998 compared to the 26 weeks ended
June 28, 1997 for the reasons discussed above. Had the New Year's holiday week
been in the first quarter of 1998, EBITDA would have been approximately $600,000
greater or $5,261,000.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and available borrowings under the Company's existing
revolving credit facilities. At July 4, 1998, the Company had $8.3 million of
cash and $15.0 million of unused borrowings under its credit facility. It is
expected that the Company's principal uses of cash will be to provide working
capital, finance capital expenditures (including acquisitions and store closure
costs), meet debt service requirements and for other general corporate purposes.
The Company is highly leveraged. Based on current operations and anticipated
cost savings, the Company believes that its sources of liquidity will be
adequate to meet its anticipated requirements for working capital, capital
expenditures (including acquisitions and store closure costs), scheduled debt
service requirements and other general corporate purposes. There can be no
assurance, however, that the Company's business will continue to generate cash
flows at or above current levels or that cost savings can be achieved.
July 4, 1998 Compared to January 3, 1998
As of July 4, 1998, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $11,409,000, a decrease of 42.9%, or
$8,589,000, from January 3, 1998 when liquid assets were $19,998,000. Cash
decreased $8,021,000, or 49.2%, to $8,266,000 at July 4, 1998 from $16,287,000
at January 3, 1998. This decrease was primarily the result of capital
expenditures of $3,342,000 relating to store remodels and renovations and
interest payments of $5,370,000 primarily relating to the $100,000,000 in high
yield notes which were put into place in November 1997, offset in part by
$417,000 in interest income earned during the period on excess cash.
Current assets decreased by $9,352,000, or 32.4% to $19,471,000 at July
4, 1998 from $28,823,000 at January 3, 1998. This decrease was primarily the
result of a decrease in cash of $8,021,000, accounts receivable of $568,000,
inventories of $240,000, and prepaids of $523,000.
Long-term assets decreased $2,924,000, or 2.4%, to $117,937,000 at July
4, 1998 from $120,861,000 at January 3, 1998. This decrease was primarily the
result of normal recurring amortization of goodwill and deferred loan costs.
Current liabilities decreased by $5,063,000, or 32.3% to $10,627,000 at
July 4, 1998 from $15,690,000 at January 3, 1998. This decrease is due to a
reduction in accounts payable, sales tax, lease settlements and store closure
accruals offset by an increase in accrued salaries, wages and benefits.
The Company's working capital decreased by $4,289,000, or 32.7%, to
$8,844,000 at July 4, 1998 from $13,133,000 at January 3, 1998, for the reasons
described above.
<PAGE>
The Company utilized $3,306,000 of cash from operating activities
during the 26 weeks ended July 4, 1998, primarily from paying interest on the
$100,000,000 in high yield notes and from store sales and franchising and
licensing revenues less costs and expenses incurred to generate the store sales
and franchising and licensing revenues.
The Company utilized $4,270,000 of cash from investing activities
during the 26 weeks ended July 4, 1998, primarily for capital expenditures
relating to store remodels and renovations and for acquisition expenses.
The Company utilized $445,000 of cash from financing activities during
the 26 weeks ended July 4, 1998, primarily for the payment of principal related
to various notes and capital lease obligations at Pretzel Time.
The specialty cookie and pretzel businesses do not require the
maintenance of significant receivables or inventories; however, the Company
continually invests in its business by upgrading and remodeling stores and
adding new stores, carts, and kiosks as opportunities arise. Investments in
these long-term assets, which are key to generating current sales, reduce the
Company's working capital. During the 26 weeks ended July 4, 1998 and June 28,
1997, the Company expended $3,342,000 and $2,268,000, respectively for capital
assets and expects to expend approximately $7,800,000 in 1998. Management
anticipates that these expenditures will be funded with cash generated from
operations and short-term borrowings under its credit facility as needed.
Inflation
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of Mrs. Fields' leases contain escalation
clauses (however, such leases are accounted for on a straight-line basis as
required by generally accepted accounting principles which minimizes
fluctuations in operating income) and many of Mrs. Fields' employees are paid
hourly wages at the Federal minimum wage level. Minimum wage increases will
negatively impact Mrs. Fields' payroll costs in the short term, but management
believes such impact can be offset in the long term through operational
efficiency gains and, if necessary, through product price increases.
Seasonality
The Company's sales and store contribution are highly seasonal given
the significant impact of its mall-based locations. The Company's sales tend to
mirror customer traffic flow trends in malls which increase significantly during
the fourth quarter (primarily between Thanksgiving and the end of the calendar
year). Holiday gift purchases are also a significant factor in increased sales
in the fourth quarter.
The seasonality effect on store contribution is even more significant
than on sales. The impact on store contribution is more significant due to the
fixed nature of certain store level costs (occupancy costs, store manager
salaries, etc.). Once these fixed costs are covered by store sales, the flow
through of sales to store contribution becomes greater. Accordingly, the fourth
quarter is a key determinant to overall profitability for the year.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In connection with the GACC acquisition discussions, on or about September
12, 1997, nine franchisees of GACC filed an action in the Superior Court of New
Jersey, Mercer County, against the Company, Capricorn and other defendants,
challenging a possible acquisition of GACC by the Company. Goldberg, et al. v.
Great American Cookie Company, et al., Docket No. MER-L-3502-97 (Super Ct.
Mercer County). The complaint asserts that the proposed sale violates Illinois,
Indiana, Maryland, New Jersey and Virginia franchise law, violates North
Carolina, South Carolina and Texas unfair trade practices acts, breaches the
plaintiffs' franchise contracts and tortiously interferes with the plaintiffs'
actual and prospective contractual relationships. Management believes that it
has good and meritorious defenses to the action and intends to defend the case
vigorously. Currently there are ongoing negotiations between the parties. The
parties have agreed to a stipulation and proposed order extending the time for
the defendants to answer, otherwise plead or move with respect to the complaint
until September 15, 1998. See Item 5 - "Other Information."
In the ordinary course of business, the Company is involved in routine
litigation, including franchise disputes. The Company is not a party to any
legal proceedings which, in the opinion of management of the Company, after
consultation with legal counsel, is material to the Company's business,
financial condition or results of operations beyond amounts provided for in the
accompanying financial statements.
The Company's stores and products are subject to regulation by numerous
governmental authorities, including, without limitation, federal, state and
local laws and regulations governing health, sanitation, environmental
protection, safety and hiring and employment practices.
Item 5. Other Information
On August 13, 1998, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with Cookies USA, Inc. ("Cookies USA"), a
Delaware corporation, and the individuals and entities identified therein,
pursuant to which the Company will acquire all of the outstanding capital stock
and subordinated indebtedness of Cookies USA for an aggregate purchase price of
approximately $18.4 million. Cookies USA is the owner of Great American Cookie
Company, Inc. ("Great American"), a Delaware corporation that is a leading
operator and franchisor of mall-based specialty retail cookie outlets. Upon
consummation of the transactions contemplated by the Purchase Agreement, the
Company will cause Cookies USA to be merged with and into the Company, upon
which Great American will become a wholly-owned subsidiary of the Company. The
Company has also entered into agreements to purchase the stock of two Great
American franchisees, Deblan Corporation (`Deblan") and Chocolate Chip Cookies
of Texas, Inc. ("Chocolate Chip"), together owning and operating a total of 29
Great American franchised stores, for total consideration of approximately $15.0
million (including the repayment of approximately $0.6 million of debt), and an
agreement to purchase eight Great American franchised stores from another
franchisee for a purchase price of approximately $1.75 million. The Company will
cause Deblan and Chocolate Chip to be merged with and into Great American upon
consummation of the Deblan and Chocolate Chip stock purchases. The Company will
use the proceeds of an offering (the "Offering") of $40.0 million aggregate
principal amount of Series C 10 1/8% Senior Notes, together with proceeds of an
offering of unit securities of MFH, which will be contributed to the Company to
fund these acquisitions. The unit securities of MFH consist of senior secured
discount notes and warrants to purchase common stock of MFH.
<PAGE>
On August 14, 1998, the Company commenced a tender offer (the "Great
American Tender Offer") 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
"Great American Senior Notes"). The obligation of the Company to consummate the
acquisition of Great American is subject to satisfactory completion of the Great
American Tender Offer, which requires that holders of not less than $30.0
million in aggregate principal amount (the "Minimum Tender Amount") of the
outstanding Great American Senior Notes shall have tendered, and not withdrawn,
such notes to the Company for purchase and holders of not less than a majority
in aggregate principal amount of Great American Senior Notes outstanding shall
have consented to such amendments to or waivers under, the indenture governing
the Great American Senior Notes as the Company deems necessary to facilitate the
Offering. The obligations of the parties to the Purchase Agreement are subject
to certain other customary conditions. The Company reserves the right to reduce
the Minimum Tender Amount to any amount over $20.0 million, representing a
majority of the Great American Senior Notes. Once the Company has received
tenders and consents representing a majority of the Great American Senior Notes,
the Company may accept payment for all Great American Senior Notes tendered up
to that time and amend the indenture governing the Great American Senior Notes
but in such a case it will accept for payment all subsequently tendered Great
American Senior Notes on the original expiration date, as it may be extended.
The Company has entered into Settlement Agreements and Waivers
(collectively, the "Franchisee Agreement") with the Franchisees selling the
Deblan and Chocolate Chip franchises and certain other Great American
franchisees. It is a condition to the completion of the acquisition of Great
American that in addition to these franchisees, a number of the remaining Great
American franchisees shall execute the Franchise Agreement so that, in total, at
least 80% of the Great American franchisees will have executed the Franchise
Agreement. The Great American franchisees that are parties to the Franchise
Agreement will release, subject to certain exceptions, all of their claims
against the Company, Great American, Capricorn and other parties, including
claims that Great American franchisees brought in 1997 to prevent the sale of
Great American to the Company. The Company will not complete the acquisition of
Great American unless it receives such releases and the litigation is dismissed
with prejudice. As of August 14, 1998, the Company has received the required
number of releases. See "Legal Proceedings." The Franchise Agreement provides
"tag-along" rights to owners of at least five Great American franchises in such
circumstances.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ---------- -----------
27 Financial data schedule (for SEC use only)
(b) Forms 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MRS. FIELDS' ORIGINAL COOKIES, INC.
/s/Larry A. Hodges August 17, 1998
- ------------------------------------- ---------------
Larry A. Hodges, President & CEO Date
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001043482
<NAME> MRS. FIELDS' ORIGINAL COOKIES, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<EXCHANGE-RATE> 1.00
<CASH> 8,266
<SECURITIES> 0
<RECEIVABLES> 3,726
<ALLOWANCES> 583
<INVENTORY> 2,860
<CURRENT-ASSETS> 19,471
<PP&E> 36,612
<DEPRECIATION> 7,628
<TOTAL-ASSETS> 137,408
<CURRENT-LIABILITIES> 10,627
<BONDS> 100,000
1,081
0
<COMMON> 0
<OTHER-SE> 23,464
<TOTAL-LIABILITY-AND-EQUITY> 137,408
<SALES> 56,647
<TOTAL-REVENUES> 60,126
<CGS> 13,359
<TOTAL-COSTS> 61,662
<OTHER-EXPENSES> 144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,626
<INCOME-PRETAX> (6,889)
<INCOME-TAX> 14
<INCOME-CONTINUING> (7,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,301)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
