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: April 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)
462 West Bearcat Drive
Salt Lake City, Utah 84115
(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 May 15, 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 April 4, 1998 and January 3, 1998.........................................3
Condensed Consolidated Statements of Operations for the thirteen-week periods
ended April 4, 1998 and March 29, 1997.......................................5
Condensed Consolidated Statements of Cash Flows for the thirteen-week periods
ended April 4, 1998 and March 29, 1997.......................................6
Notes to Condensed Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page 1 of 2
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,015 $ 16,287
Accounts receivable, net of allowance for doubtful accounts of $41 and $32,
respectively 1,240 1,535
Amounts due from franchisees and licensees, net of allowance for doubtful
accounts of $620 and $582, respectively 1,746 2,176
Inventories 2,972 3,100
Prepaid rent and other 2,669 2,960
Deferred income tax assets, current portion 2,765 2,765
----------- -----------
Total current assets 26,407 28,823
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 21,313 21,099
Equipment and fixtures 14,924 14,100
Land 128 128
------------- ------------
36,365 35,327
Less accumulated depreciation and amortization (7,464) (6,125)
----------- -----------
Net property and equipment 28,901 29,202
---------- ----------
DEFERRED INCOME TAX ASSETS, net of current portion 734 734
------------ ------------
GOODWILL, net of accumulated amortization of $6,098 and $4,980, respectively
67,466 68,501
--------- ----------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $1,704 and
$1,409, respectively 14,898 15,193
--------- ----------
DEFERRED LOAN COSTS, net of accumulated amortization of $281 and
$70, respectively 5,695 5,906
----------- -----------
OTHER ASSETS 1,258 1,325
----------- -----------
$145,359 $149,684
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
Page 2 of 2
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 472 $ 472
Current portion of capital lease obligations 151 142
Accounts payable 2,918 3,805
Accrued liabilities 1,617 2,826
Store closure reserve, current portion 2,960 3,664
Accrued salaries, wages and benefits 2,074 1,891
Accrued interest payable 3,613 1,082
Sales taxes payable 389 937
Deferred income 630 871
---------- ----------
Total current liabilities 14,824 15,690
LONG-TERM DEBT, net of current portion 100,089 100,284
STORE CLOSURE RESERVE, net of current portion 1,802 1,802
CAPITAL LEASE OBLIGATIONS, net of current portion 221 183
----------- -----------
Total liabilities 116,936 117,959
-------- --------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI (a majority owned
subsidiary), aggregate liquidation preference of $1,437 and $1,451,
respectively 992 902
----------- -----------
MINORITY INTEREST 75 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 (3,487) (78)
----------- -------------
Total stockholder's equity 27,356 30,765
---------- ----------
$145,359 $149,684
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these 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
April 4, 1998 March 29, 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store sales $28,545 $27,642
Franchising, net 1,121 745
Licensing, net 251 439
Other, net 168 85
---------- -----------
Total revenues 30,085 28,911
-------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 17,054 16,091
Food cost of sales 6,741 6,697
General and administrative 4,082 3,698
Depreciation and amortization 2,881 2,072
--------- ---------
Total operating costs and expenses 30,758 28,558
-------- --------
(Loss) income from operations (673) 353
---------- ----------
OTHER INCOME (EXPENSE), net
Interest expense (2,756) (1,545)
Interest income 176 108
Other expense (13) -
----------- -----------
Total other income (expense), net (2,593) (1,437)
-------- --------
Loss before provision for income taxes (3,266) (1,084)
PROVISION FOR INCOME TAXES (10) (50)
--------- ----------
Loss before preferred stock accretion and dividends of subsidiaries
and minority interest (3,276) (1,134)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES
(111) (89)
MINORITY INTEREST (22) -
---------- --------------
Net loss $(3,409) $ (1,223)
======= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirteen Weeks Ended
April 4, 1998 March 29, 1997
------------- --------------
(Unaudited)
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,409) $ (1,223)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities, net of effects from acquisitions:
Depreciation and amortization 2,881 2,072
Amortization of deferred loan costs 211 -
Loss on sale of assets 13 -
In-kind interest expense on note payable to stockholder - 89
Preferred stock accretion and dividends of subsidiaries 111 89
Minority interest 22 -
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 295 163
Amounts due from franchisees and licensees 430 286
Inventories 128 (496)
Prepaid rent and other 291 1,131
Other assets 67 (6)
Accounts payable and accrued liabilities (1,948) (1,301)
Store closure reserve (704) (442)
Accrued salaries, wages and benefits 183 (196)
Accrued interest payable 2,531 (249)
Sales taxes payable (548) (282)
Deferred income (241) 202
--------- ----------
Net cash provided by (used in) operating activities 313 (163)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions expenses (53) -
Purchase of property and equipment, net of effects from acquisitions (1,226) (1,206)
--------- ----------
Net cash used in investing activities (1,279) (1,206)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (195) (29)
Principal payments on capital lease obligations (90) -
Reduction in preferred stock (21) -
----------- -------------
Net cash used in by financing activities (306) (29)
---------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,272) (1,398)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 16,287 6,709
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $15,015 $ 5,311
======= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $14 and $1,704 for the 13 weeks ended
April 4, 1998 and March 29, 1997, respectively.
The accompanying notes to condensed consolidated financial statements are an
integral part of these 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 60 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 April 4, 1998, the Company owned and operated 146 "Mrs. Fields Cookies"
stores, 145 "Original Cookie Company" stores, 100 "Hot Sam Pretzels" stores and
81 "Pretzel Time" stores, all of which are located in the United States.
Additionally, the Company has franchised or licensed 469 stores in the United
States and 78 stores in 10 other countries. As of April 4, 1998, the Company
operated 377 core stores and operated 95 stores which are in the process of
being sold 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 April 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 Registration
Statement on Form S-4, as amended, for the fiscal year ended January 3, 1998.
The results of operations for the thirteen week period ended April 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 13 weeks ended April 4, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income.". SFAS No. 130 requires an "all-inclusive" 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 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
April 4, 1998 March 29, 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
Total Revenues............. $30,085 $33,914
(Loss) income from
operations............... (673) 632
Net loss................... $(3,409) $(1,970)
</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 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 obligations of The Mrs.
Fields' Brand, Inc. ("the Guarantor"), rank senior in right of payment to all
subordinated indebtedness of the Guarantor Subsidiary and rank pari passu in
right of payment with all existing and future senior indebtedness of the
Guarantor Subsidiary. 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. (the
"Guarantor Subsidiary") 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 60 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.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. 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 APRIL 4, 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 $ 13,948 $ 411 $ 656 $ - $ 15,015
Accounts receivable, net 857 - 383 - 1,240
Amounts due from franchisees
and licensees, net 1,036 577 133 - 1,746
Inventories 2,972 - - - 2,972
Other current assets and
amounts due from (to) --------------- --------------- ---------------- ----------------- ------------
affiliates, net 5,623 (275) 86 - 5,434
Total current assets 24,436 713 1,258 - 26,407
PROPERTY AND EQUIPMENT, net 28,751 1 149 - 28,901
INTANGIBLES, net 59,306 17,405 5,653 - 82,364
INVESTMENT IN SUBSIDIARIES 25,098 - - (25,098) -
OTHER ASSETS 7,587 - 100 - 7,687
$ 145,151 $ 18,119 $ 7,187 $ (25,098) $ 145,359
============ ============== ================ ================== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
====================================
CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease $ 151 $ - $ 472 $ - $ 623
obligations
Accounts payable 2,761 - 157 - 2,918
Accrued liabilities 10,416 21 846 - 11,283
Total current 13,328 21 1,475 - 14,824
liabilities
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 100,221 - 89 - 100,310
OTHER ACCRUED LIABILITIES 1,802 - - - 1,802
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK - - 992 - 992
MINORITY INTEREST 123 - 22 (70) 75
STOCKHOLDER'S EQUITY 29,677 18,098 4,609 (25,028) 27,356
=============== =============== ================ ================= =================
$ 145,151 $ 18,119 $ 7,187 $ (25,098) $ 145,359
=============== =============== ================ ================= =================
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 13 WEEKS ENDED APRIL 4, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 29,088 $ 251 $ 746 $ - $ 30,085
-------------- ------------ -------------- --------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy 17,054 - - - 17,054
costs
Food cost of sales 6,741 - - - 6,741
General and administrative 3,338 276 468 - 4,082
Depreciation and amortization 2,449 319 113 - 2,881
------------- ----------- ------------- ---------------- -------------
Total operating costs
and expenses 29,582 595 581 - 30,758
(Loss) income from operations (494) (344) 165 - (673)
INTEREST EXPENSE AND
OTHER, net (2,601) 8 - - (2,593)
------------ ----------- ------------- --------------- -------------
(Loss) income before
provision for income taxes
and equity in net loss of
consolidated subsidiaries (3,095) (336) 165 - (3,266)
PROVISION FOR INCOME TAXES (10) - - - (10)
------------ ------------ ------------- --------------- -------------
(Loss) income before
preferred stock accretion
and dividends of
subsidiaries and equity in
net loss of consolidated
subsidiaries (3,105) (336) 165 - (3,276)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - - (111) - (111)
EQUITY IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES (22) - - - (22)
------------ ------------ -------------- --------------- ------------
NET (LOSS) INCOME $ (3,105) $ (336) $ 32 $ - $ (3,409)
============ ============ ============== =============== ============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 13 WEEKS ENDED APRIL 4, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 627 $ (314) $ - $ - $ 313
---------------- --------------- ---------------- ----------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash paid for
acquisitions (53) - - - (53)
Purchase of property and
equipment, net (1,221) - (5) - (1,226)
--------------- --------------- ---------------- ----------------- --------------
Net cash used in
investing
activities (1,274) - (5) - (1,279)
--------------- --------------- ---------------- ----------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Reduction of long-term
debt and capital lease
obligations (90) - (195) - (285)
Reduction in preferred
stock - - (21) - (21)
--------------- --------------- ---------------- ----------------- --------------
Net cash used in
financing activities (90) - (216) - (306)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (737) (314) (221) - (1,272)
CASH AND CASH EQUIVALENTS,
beginning of period 14,685 725 877 - 16,287
--------------- --------------- ---------------- ----------------- --------------
CASH AND CASH EQUIVALENTS, end
of period $ 13,948 $ 411 $ 656 $ - $ 15,015
=============== =============== ================ ================= ==============
</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
-------------- -------------- ---------------- --------------- ---------------
ASSETS
<S> <C> <C> <C> <C> <C>
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
INVESTMENT 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
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 MARCH 29, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 28,472 $ 439 $ - $ - $ 28,911
-------------- ------------ ---------------- -------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy 16,091 - - - 16,091
costs
Food cost of sales 6,697 - - - 6,697
General and administrative 3,520 178 - - 3,698
Depreciation and amortization 1,795 277 - - 2,072
-------------- ------------ ---------------- --------------- -------------
Total operating costs
and expenses 28,103 455 - - 28,558
-------------- ------------ ---------------- --------------- -------------
Income (loss) from
operations 369 (16) - - 353
INTEREST EXPENSE AND
OTHER, net (1,102) (335) - - (1,437)
------------- ----------- ----------------- ---------------- -------------
Loss before provision for
income taxes and equity in
net loss of consolidated
subsidiaries (733) (351) - - (1,084)
PROVISION FOR INCOME TAXES (50) - - - (50)
------------- ------------ ---------------- ---------------- ------------
Loss before preferred stock
accretion and dividends of
subsidiaries and equity in
net loss of consolidated
subsidiaries (783) (351) - - (1,134)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - (89) - - (89)
-------------- ------------ --------------- ----------------- ------------
NET LOSS $ (783) $ (440) $ - $ - $ (1,223)
============== ============ =============== ================= ============
</TABLE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 13 WEEKS ENDED MARCH 29, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------------- --------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH USED IN OPERATING
ACTIVITIES $ (42) $ (121) $ - $ - $ (163)
--------------- --------------- ---------------- ----------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment, net
(1,206) - - - (1,206)
--------------- --------------- ---------------- ----------------- ------------
Net cash used in
investing
activities (1,206) - - - (1,206)
--------------- --------------- ---------------- ----------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Reduction of long-term
debt and capital lease
obligations (29) - - - (29)
--------------- --------------- ---------------- ----------------- ------------
Net cash used in
financing
activities (29) - - - (29)
--------------- --------------- ---------------- ----------------- ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,277) (121) - - (1,398)
CASH AND CASH EQUIVALENTS,
beginning of period 6,121 588 - - 6,709
--------------- --------------- ---------------- ----------------- ------------
CASH AND CASH EQUIVALENTS, end
of period $ 4,844 $ 467 $ - $ - $ 5,311
=============== =============== ================ ================= ============
</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, the Company acquired an additional 4% of Pretzel Time common
stock, bringing the Company's total ownership percentage to 60%.
The Company has recently been in discussions concerning the possible
acquisition by the Company of Great American Cookie Company, Inc. ("GACC") for
some of its owned or franchised stores. GACC is a publicly reporting company
(under the Exchange Act). As of May 15, 1998, no agreement with respect to such
a transaction has been concluded, and there can be no assurance that such an
agreement will be concluded.
<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 weeks ended April 4, 1998 and
the 13 weeks ended March 29, 1997. 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
------------------------------
% OF
CHG
FROM
APRIL MARCH 1997
4, 1998 29, 1997 TO 1998
------------------------------
(Dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C>
Revenues:
Net store sales........ $28,545 $27,642 3.3%
Franchising, net....... 1,121 745 50.5
Licensing, net......... 251 439 (42.8)
Other revenue, net..... 168 85 97.6
------- -------
Total revenues. 30,085 28,911 4.1
------- -------
Operating Costs and Expenses:
Selling and store
occupancy costs...... 17,054 16,091 6.0
Food cost of sales..... 6,741 6,697 0.7
General and administrative 4,082 3,698 10.4
Depreciation and
amortization........ 2,881 2,072 39.0
Total operating
costs and expenses 30,758 28,558 7.7
Other Income (Expense), net:
Interest expense...... (2,756) (1,545) 78.4
-------- -------
Interest income....... 176 108 63.0
-------- -------
Other expenses........ (156) (139) 12.2
-------- -------
Net loss.............. $(3,409) $(1,223) 178.7%
======== ========
---------------------------------------------------------------
Supplemental Information
Core stores:
Net store sales........... $24,589 $22,429 9.6%
-------- --------
Operating costs and
expenses:
Selling and store
occupancy costs........ 13,583 11,632 16.8
Food cost of sales..... 5,654 5,153 9.7
Depreciation and
amortization........... 1,034 809 27.8
-------- -------
Total operating
costs and expenses. 20,271 17,594 15.2
-------- -------
Core store
contribution...... 4,318 4,835 (10.7)
======== =======
Stores in the process of being
closed or franchised:
Net store sales........... 3,956 5,213 (24.1)
-------- -------
Operating costs and
expenses:
Selling and store
occupancy costs....... 3,471 4,459 (22.2)
Food cost of sales..... 1,087 1,544 (29.6)
Depreciation and
amortization.......... 109 - N/A
Total operating
costs and expenses.. 4,667 6,003 (22.3)
-------- ------
Stores in the
process of
being closed
or franchised....... (711) (790) (10.0)
======== =======
EBITDA................. 2,208 2,425 (9.8)%
======== =======
</TABLE>
<PAGE>
13 Weeks Ended April 4, 1998 Compared to the 13 Weeks Ended March 29, 1997
Company-owned and Franchised or Licensed Store Activity
As of April 4, 1998, there were 472 Company-owned stores and 547
franchised or licensed stores in operation. The store activity for the 13 weeks
ended April 4, 1998 and the 13 weeks ended March 29, 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) 3 22 1 26
Stores closed (including relocations) (5) (29) (1) (4)
Non-core (exit plan) stores closed (September 18, 1996 (6) - (23) -
forward)
Stores sold to franchisees - - - -
Non-core (exit plan) stores franchised (September 18,
1996 forward) (2) 2 - -
Stores acquired from franchisees 1 (1) 4 (4)
------ ------ ---- -----
Stores open as of the end of the period 472 547 463 436
====== ====== ==== =====
</TABLE>
The activity reflected above resulted in 6,195 and 6,143 Company-owned
equivalent store weeks and 7,150 and 5,551 franchisee/licensee equivalent store
weeks during the 13 weeks ended April 4, 1998 and the 13 weeks ended March 29,
1997, respectively.
Revenues
Net Stores Sales. Total net store sales increased $903,000, or 3.3%,
from $27,642,000 to $28,545,000 for the 13 weeks ended April 4, 1998 compared to
the 13 weeks ended March 29, 1997.
Net store sales from core stores increased $2,160,000, or 9.6%, from
$22,429,000 to $24,589,000 for the 13 weeks ended April 4, 1998 compared to the
13 weeks ended March 29, 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 Contributions in July 1997, offset in
part by the negative effect of two calendar shifts; (i) 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, and (ii) in addition, Easter was March 30 in 1997 but April 12 in
1998. As a result, Easter holiday sales were in the first quarter of 1997 but
will be in the second quarter of 1998. Had these two holiday weeks been in the
first quarter of 1998, net store sales from core stores would have been
approximately $1,000,000 greater or $25,589,000.
On a comparable store basis (adjusted for the calendar shifts),
system-wide core store sales were down 0.5% during the 13 weeks ended April 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 4.0%
increase in comparable store sales. This increase is in addition to a 3.1%
increase for the first quarter of 1997.
Net store sales from stores in the process of being closed or
franchised decreased $1,257,000, or 24.1%, from $5,213,000 to $3,956,000 for the
13 weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 1997. This
decrease results from closing 6 stores and franchising 2 stores during the 13
weeks ended April 4, 1998 and the effect of closing 23 stores during the 13
weeks ended March 29, 1997. In addition, 47 stores were closed and 9 franchised
over the remainder of fiscal year 1997 which were in operation during the 13
weeks ended March 29, 1997.
Franchising Revenues. Franchising revenues increased $376,000, or
50.5%, from $745,000 to $1,121,000 for the 13 weeks ended April 4, 1998 compared
to the 13 weeks ended March 29, 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.
Licensing Revenues. Licensing revenues decreased $188,000, or 42.8%,
from $439,000 to $251,000 for the 13 weeks ended April 4, 1998 compared to the
13 weeks ended March 29, 1997. The decrease in licensing revenues was primarily
attributable to a Mrs. Fields branded dry cookie mix license fee earned during
the 13 weeks ended March 29, 1997 that did not recur in the 13 weeks ended April
4, 1998.
Other Revenue, net. Other revenue, net, increased $83,000, or 97.6%,
from $85,000 to $168,000 for the 13 weeks ended April 4, 1998 compared to the 13
weeks ended March 29, 1997. The increase in other revenue, net, was primarily
attributable to a 13% increase in contribution from the sale of Mrs. Fields
branded products through the Company's mail order division, once again showing
the strong demand for the brand's quality.
<PAGE>
Total Revenues. Depsite the holiday calendar shifts, total revenue
increased by $1,174,000, or 4.1%, from $28,911,000 to $30,085,000 for the 13
weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 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 $963,000, or 6.0%, from $16,091,000 to $17,054,000 for the 13
weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 1997.
Selling and store occupancy costs for core stores increased by $1,951,000,
or 16.8%, from $11,632,000 to $13,583,000 for the 13 weeks ended April 4, 1998
compared to the 13 weeks ended March 29, 1997. Within this overall increase,
selling expenses increased by $1,214,000, or 18.1%, from $6,706,000 to
$7,920,000 for the 13 weeks ended April 4, 1998 compared to the 13 weeks ended
March 29, 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. Store occupancy costs increased $737,000, or 15.0%,
from $4,926,000 to $5,663,000 for the 13 weeks ended April 4, 1998 compared to
the 13 weeks ended March 29, 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 three
new core stores during the 13 weeks ended April 4, 1998 and lease renewal
increases.
Selling and store occupancy costs for stores in the process of being
closed or franchised decreased $988,000, or 22.2%, from $4,459,000 to $3,471,000
for the 13 weeks ended April 4, 1998 compared to the 13 weeks ended March 29,
1997. This decrease was primarily the result of closing 6 stores and franchising
2 stores during the 13 weeks ended April 4, 1998 and the effect of closing 23
stores during the 13 weeks ended March 29, 1997. In addition, 47 stores were
closed and 9 franchised over the remainder of fiscal year 1997 which were in
operation during the 13 weeks ended March 29, 1997.
Food Cost of Sales. Total food cost of sales increased $44,000, or
0.7%, from $6,697,000 to $6,741,000 for the 13 weeks ended April 4, 1998
compared to the 13 weeks ended March 29, 1997.
Food cost of sales for core stores increased $501,000, or 9.7%, from
$5,153,000 to $5,654,000 for the 13 weeks ended April 4, 1998. This increase was
primarily the result of the addition of 69 Pretzel Time core stores in July
1997.
Food cost of sales for stores in the process of being closed or
franchised decreased $457,000, or 29.6%, from $1,544,000 to $1,087,000 for the
13 weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 1997. This
decrease was primarily the result of closing 6 stores and franchising 2 stores
during the 13 weeks ended April 4, 1998 and the effect of closing 23 stores
during the 13 weeks ended March 29, 1997. In addition, 47 stores were closed and
9 franchised over the remainder of fiscal year 1997 which were in operation
during the 13 weeks ended March 29, 1997.
General and Administrative Expenses. General and administrative
expenses increased $384,000, or 10.4%, from $3,698,000 to $4,082,000 for the 13
weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 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 $809,000, or 39.0%, from $2,072,000 to $2,881,000 for the
13 weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 1997. This
increase was primarily attributable to increased goodwill from the Pretzel
Contributions.
Depreciation and amortization expense for core stores increased
$225,000, or 27.8%, from $809,000 to $1,034,000 for the 13 weeks ended April 4,
1998 compared to the 13 weeks ended March 29, 1997. This increase in
depreciation and amortization expense was primarily attributable to the addition
of 69 Pretzel Time core stores in July 1997 and three newly opened core stores
during the 13 weeks ended April 4, 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $2,200,000, or 7.7%, from $28,558,000 to $30,758,000 for the 13
weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 1997, for the
reasons discussed above.
Interest Expense. Interest expense, net, increased $1,211,000, or
78.4%, from $1,545,000 to $2,756,000 for the 13 weeks ended April 4, 1998
compared to the 13 weeks ended March 29, 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.
<PAGE>
Interest Income. Interest income, increased $68,000, or 63.0%, from
$108,000 to $176,000 for the 13 weeks ended April 4, 1998 compared to the 13
weeks ended March 29, 1997. This increase was primarily the result interest
income 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 $17,000, or 12.2%, from
$139,000 to $156,000 for the 13 weeks ended April 4, 1998 compared to the 13
weeks ended March 29, 1997. This increase was primarily attributable to the
Company recognizing the minority interest from the net loss at the Pretzel Time
subsidiary for the 13 weeks ended April 4, 1998.
Net Loss. The net loss increased by $2,186,000, or 178.7%, from
$1,223,000 to $3,409,000 for the 13 weeks ended April 4, 1998 compared to the 13
weeks ended March 29, 1997 due to the combination of factors described above.
Contribution from Core Stores. Contribution from core stores decreased
by $517,000, or 10.7%, from $4,835,000 to $4,318,000 for the 13 weeks ended
April 4, 1998 compared to the 13 weeks ended March 29, 1997. Contribution from
core stores during the first quarter of 1998 was negatively impacted by two
calendar shifts; (i) 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 of 1997. The first quarter of
1998 did not benefit from the New Year's holiday sales, and (ii) in addition,
Easter was March 30 in 1997 but April 12 in 1998. As a result, Easter holiday
sales were in the first quarter of 1997 but will be in the second quarter of
1998. Had these two holiday weeks been in the first quarter of 1998,
contribution from core stores would have been approximately $800,000 greater or
$5,118,000.
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 $79,000, or 10.0%, from $790,000 to $711,000 for the
13 weeks ended April 4, 1998 compared to the 13 weeks ended March 29, 1997. The
decrease in negative contribution was primarily attributable to closing 6 stores
and franchising 2 stores during the 13 weeks ended April 4, 1998 and the effect
of closing 23 stores during the 13 weeks ended March 29, 1997. In addition, 47
stores were closed and 9 franchised over the remainder of fiscal year 1997 which
were in operation during the 13 weeks ended March 29, 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 decreased by $217,000, or 9.8%, from $2,425,000 to
$2,208,000 for the 13 weeks ended April 4, 1998 compared to the 13 weeks ended
March 29, 1997. Had the two holiday weeks been in the first quarter of 1998,
EBITDA would have been approximately $800,000 greater or $3,008,000.
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 April 4, 1998, the Company had $15.0 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.
April 4, 1998 Compared to January 3, 1998
As of April 4, 1998, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $17,987,000, a decrease of 10.1%, or
$2,011,000, from January 3, 1998 when liquid assets were $19,998,000. Cash
decreased $1,272,000, or 7.8%, to $15,015,000 at April 4, 1998 from $16,287,000
at January 3, 1998. This decrease was primarily the result of capital
expenditures of $1,226,000 during the period relating to store remodels and
renovations. Accounts receivable decreased $774,000, or 20.7%, to $2,972,000 at
April 4, 1998 from $3,711,000 at January 3, 1998 due to the seasonality of the
business and improved collections.
<PAGE>
Current assets decreased by $2,416,000, or 8.4% to $26,407,000 at April
4, 1998 from $28,823,000 at January 3, 1998. This decrease was primarily the
result of a decrease in cash of $1,272,000, accounts receivable of $774,000, and
prepaids of $242,000.
Long-term assets decreased $1,909,000, or 1.6%, to $118,952,000 at
April 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 $866,000, or 5.5% to $14,824,000 at
April 4, 1998 from $15,690,000 at January 3, 1998. This decrease is due to the
Company liquidating liabilities relating to accounts payable, sales tax, lease
settlements and store closures offset by an increase in accrued interest.
The Company's working capital decreased by $1,530,000 to $11,583,000 at
April 4, 1998 from $13,113,000 at January 3, 1998, for the reasons described
above.
The Company's cash flow from operating activities of $313,000 for the
13 weeks ended April 4, 1998, resulted primarily 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 $1,279,000 of cash from investing activities
during the 13 weeks ended April 4, 1998, primarily for capital expenditures
relating to store remodels and renovations.
The Company utilized $306,000 of cash from financing activities during
the 13 weeks ended April 4, 1998, primarily from 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 13 weeks ended April 4, 1998 and March 29,
1997, the Company expended $1,226,000 and $1,206,000, 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 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
vigoursly. Currently there are ongoing negotiations between the parties. An
extension date of June 12, 1998 was granted to the defendant to file an answer.
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 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 May 15, 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> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<EXCHANGE-RATE> 1.00
<CASH> 15,015
<SECURITIES> 0
<RECEIVABLES> 3,647
<ALLOWANCES> 661
<INVENTORY> 2,972
<CURRENT-ASSETS> 26,407
<PP&E> 36,365
<DEPRECIATION> 7,464
<TOTAL-ASSETS> 145,359
<CURRENT-LIABILITIES> 14,824
<BONDS> 100,000
992
0
<COMMON> 0
<OTHER-SE> 27,356
<TOTAL-LIABILITY-AND-EQUITY> 145,359
<SALES> 28,545
<TOTAL-REVENUES> 30,085
<CGS> 24,938
<TOTAL-COSTS> 30,758
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,756
<INCOME-PRETAX> (3,266)
<INCOME-TAX> 10
<INCOME-CONTINUING> (3,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,409)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
