<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-------------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended: July 3, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number: 333-45179
MRS. FIELDS' ORIGINAL COOKIES, INC.
----------------------------------
(Exact name of registrant specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 87-0552899
- --------------------------------------------- ----------------------------------------------------
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121-7050
- --------------------------------------------- ----------------------------------------------------
(Address of principal executive offices) (Zip code)
</TABLE>
(801) 736-5600
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X yes _____ no
---
The registrant had 400 shares of common stock, $0.01 par value, outstanding at
August 15, 1999.
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
- -------------------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 3, 1999 and January 2, 1999.................... 3
Condensed Consolidated Statements of Operations for the 13 weeks
ended July 3, 1999 and July 4, 1998............................................................. 5
Condensed Consolidated Statements of Operations for the 26 weeks
ended July 3, 1999 and July 4, 1998............................................................. 6
Condensed Consolidated Statements of Cash Flows for the 26 weeks
ended July 3, 1999 and July 4, 1998............................................................. 7
Notes to Condensed Consolidated Financial Statements............................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 19
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings............................................................................... 27
Item 6. Exhibits and Reports on Form 8-K................................................................ 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,645 $ 4,751
Accounts receivable, net of allowance for doubtful accounts of $69 and $74,
respectively 1,570 3,208
Amounts due from franchisees and licensees, net of allowance for doubtful
accounts of $897 and $1,078, respectively 4,808 6,003
Inventories 4,913 5,503
Prepaid rent and other 3,868 4,017
Deferred income tax assets, current portion 861 861
-------- --------
Total current assets 20,665 24,343
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 32,889 29,914
Equipment and fixtures 11,913 17,108
Land 240 240
-------- --------
45,042 47,262
Less accumulated depreciation and amortization (15,487) (15,465)
-------- --------
Net property and equipment 29,555 31,797
-------- --------
DEFERRED INCOME TAX ASSETS, net of current portion 2,638 2,638
-------- --------
GOODWILL, net of accumulated amortization of $16,446 and $11,231,
respectively 140,417 145,782
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $3,239
and $2,615, respectively 13,772 14,296
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of $2,341 and
$1,320, respectively 11,852 11,718
-------- --------
OTHER ASSETS 414 1,332
-------- --------
$219,313 $231,906
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ 2,902 $ 4,133
Current portion of long-term debt 929 8,046
Current portion of capital lease obligations 444 299
Line of credit 7,000 -
Accounts payable 10,436 10,723
Accrued liabilities 2,878 3,597
Current portion of store closure reserve 4,577 4,577
Accrued salaries, wages and benefits 3,065 3,155
Accrued interest payable 1,298 1,260
Sales taxes payable 378 962
Deferred income 192 318
-------- --------
Total current liabilities 34,099 37,070
LONG-TERM DEBT, net of current portion 141,424 141,647
STORE CLOSURE RESERVE, net of current portion 8,419 10,134
CAPITAL LEASE OBLIGATIONS, net of current portion 1,229 997
-------- --------
Total liabilities 185,171 189,848
-------- --------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI (a wholly owned
subsidiary), aggregate liquidation preference of $1,525 and $1,495,
respectively 1,440 1,261
-------- --------
MINORITY INTEREST 123 119
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized and 400 shares
outstanding - -
Additional paid-in capital 61,899 59,899
Accumulated deficit (29,320) (19,221)
-------- --------
Total stockholder's equity 32,579 40,678
-------- --------
$219,313 $231,906
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
4
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
July 3, 1999 July 4, 1998
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store and food sales $34,786 $29,031
Franchising, net 5,146 1,608
Licensing, net 241 432
------- -------
Total revenues 40,173 31,071
------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 19,725 16,854
Cost of sales 9,925 7,427
General and administrative 5,549 4,337
Depreciation and amortization 5,867 3,316
------- -------
Total operating costs and expenses 41,066 31,934
------- -------
Loss from operations (893) (863)
------- -------
OTHER INCOME (EXPENSE), net:
Interest expense (4,349) (2,870)
Interest income 40 241
Other expense (3) (131)
------- -------
Total other expense, net (4,312) (2,760)
------- -------
Loss before provision for income taxes, preferred stock
accretion and dividends of subsidiaries and minority
interest (5,205) (3,623)
PROVISION FOR INCOME TAXES (106) (4)
------- -------
Loss before preferred stock accretion and dividends of
subsidiaries and minority interest (5,311) (3,627)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES (111) (111)
MINORITY INTEREST (3) (154)
------- -------
Net loss $(5,425) $(3,892)
======= =======
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
July 3, 1999 July 4, 1998
------------ ------------
(Unaudited)
REVENUES:
<S> <C> <C>
Net store and food sales $ 71,915 $58,687
Franchising, net 11,562 2,971
Licensing, net 688 683
-------- -------
Total revenues 84,165 62,341
-------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 41,118 33,908
Cost of sales 21,856 15,185
General and administrative 10,873 8,587
Depreciation and amortization 11,263 6,197
-------- -------
Total operating costs and expenses 85,110 63,877
-------- -------
Loss from operations (945) (1,536)
-------- -------
OTHER INCOME (EXPENSE), net:
Interest expense (8,686) (5,626)
Interest income 78 417
Other expense (110) (144)
-------- -------
Total other expense, net (8,718) (5,353)
-------- -------
Loss before provision for income taxes, preferred stock
accretion and dividends of subsidiaries and minority
interest (9,663) (6,889)
PROVISION FOR INCOME TAXES (210) (14)
-------- -------
Loss before preferred stock accretion and dividends of
subsidiaries and minority interest (9,873) (6,903)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES
(222) (222)
MINORITY INTEREST (4) (176)
-------- -------
Net loss $(10,099) $(7,301)
======== =======
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
July 3, 1999 July 4, 1998
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,099) $(7,301)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 11,263 6,197
Amortization of deferred loan costs 1,021 427
Loss on sale of assets 117 144
Preferred stock accretion and dividends of subsidiaries 222 222
Minority interest 4 176
Changes in assets and liabilities:
Accounts receivable, net 1,638 387
Amounts due from franchisees and licensees, net 1,195 181
Inventories 590 240
Prepaid rent and other 149 523
Other assets 918 261
Accounts payable and accrued liabilities (1,006) (2,518)
Bank overdraft (1,231) -
Store closure reserve (1,311) (946)
Accrued salaries, wages and benefits (90) 32
Accrued interest payable 38 (171)
Sales taxes payable (584) (562)
Deferred income (126) (598)
-------- -------
Net cash provided by (used in) operating activities 2,708 (3,306)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisition expenses (100) (928)
Purchase of property and equipment (2,604) (3,342)
-------- -------
Net cash used in investing activities (2,704) (4,270)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (5,340) -
Payment of debt financing costs (1,155) -
Borrowings under line of credit 7,000 -
Collection of common stock subscriptions receivable - (265)
Principal payments on capital lease obligations (572) (138)
Reduction in preferred stock (43) (42)
-------- -------
Net cash used in financing activities (110) (445)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (106) (8,021)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 4,751 16,287
-------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,645 $ 8,266
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,588 $ 5,370
======== =======
Cash paid for income taxes $ 164 $ 36
======== =======
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
7
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared by Mrs. Fields' Original Cookies, Inc. and subsidiaries ("Mrs. Fields")
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 condensed consolidated financial statements reflect
all adjustments, which consist only of normal recurring adjustments necessary to
present fairly the financial position of Mrs. Fields as of July 3, 1999 and
January 2, 1999, and the results of its operations and its cash flows as of and
for the periods presented herein. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the fiscal year ended January 2, 1999
contained in Mrs. Fields' Annual Report on Form 10-K.
The results of operations for the 13 and 26 weeks ended July 3, 1999 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending January 1, 2000. Loss per share is not presented as Mrs.
Fields is wholly owned by Mrs. Fields' Holding Company, Inc. ("Mrs. Fields'
Holding") and therefore, its shares are not publicly traded.
(2) RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the prior period's condensed
consolidated financial statements to conform with the current period's
presentation.
(3) PRO FORMA RESULTS OF OPERATIONS
-------------------------------
The following unaudited pro forma information presents a summary of the
consolidated results of operations of Mrs. Fields assuming the Great American,
Deblan, Chocolate Chip, Karp, Cookie Conglomerate and Pretzelmaker acquisitions
and related financings had occurred at the beginning of the 26 weeks ended July
4, 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 26
weeks ended July 4, 1998.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
July 4, 1998 July 4, 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Total revenues 45,582 $92,640
Income from operations 418 630
Net loss (4,075) (8,064)
</TABLE>
8
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) REPORTABLE SEGMENTS
-------------------
Management evaluates performance at Mrs. Fields using two reportable
operating segments; namely, (1) company-owned stores and related activity and
(2) franchising and licensing activity. The segments are determined by revenue
source; direct sales or royalties and license fees. The company-owned stores
segment consists of both cookie and pretzel stores owned and operated by Mrs.
Fields. The franchising and licensing segment consists of cookie and pretzel
stores, which are owned and operated by third parties who pay Mrs. Fields an
initial franchise fee and monthly royalties based on a percentage of gross sales
and other licensing activity not related to cookie or pretzel stores. Sales and
transfers between segments are eliminated in consolidation.
Mrs. Fields evaluates performance of each segment based on contribution
margin. Mrs. Fields does not allocate any interest income, interest expense,
depreciation and amortization or assets to its reportable operating segments.
Segment revenue and contribution margin are presented in the following table.
<TABLE>
<CAPTION>
Company-owned Stores Franchising and Licensing Total
-------------------- ------------------------- -----
<S> <C> <C> <C>
13 weeks ended July 3, 1999
- ---------------------------
Total revenues $34,786 $ 5,387 $40,173
Contribution margin 7,403 3,120 10,523
13 weeks ended July 4, 1998
- ---------------------------
Total revenues $29,031 $ 2,040 $31,071
Contribution margin 4,750 2,040 6,790
26 weeks ended July 3, 1999
- ---------------------------
Total revenues $71,915 $12,250 $84,165
Contribution margin 13,404 7,787 21,191
26 weeks ended July 4, 1998
- ---------------------------
Total revenues $58,687 $ 3,654 $62,341
Contribution margin 9,594 3,654 13,248
</TABLE>
The reconciliation of contribution margin to net loss is as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contribution margin $10,523 $ 6,790 $ 21,191 $13,248
General and
administrative expense (5,549) (4,337) (10,873) (8,587)
Depreciation and amortization (5,867) (3,316) (11,263) (6,197)
Interest expense (4,349) (2,870) (8,686) (5,626)
Other income (expense), net (183) (159) (468) (139)
------- ------- -------- -------
Net loss $(5,425) $(3,892) $(10,099) $(7,301)
======= ======= ======== =======
</TABLE>
9
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Geographic segment information is as follows:
<TABLE>
<CAPTION>
International Domestic International
Domestic Company- Company- Franchising and Franchising
owned Stores owned Stores Licensing and Licensing
------------ ------------ --------- -------------
<S> <C> <C> <C> <C>
Total revenues
- --------------
13 weeks ended July 3, 1999 $34,786 - $ 5,276 $111
13 weeks ended July 4, 1998 28,984 $47 1,948 92
26 weeks ended July 3, 1999 71,894 21 12,050 200
26 weeks ended July 4, 1998 58,609 78 3,467 187
</TABLE>
Revenues from international franchising and licensing are generated from
Canada and Australia with no other countries having material representation.
Revenues from international company-owned stores are immaterial. As of July 3,
1999 there are no remaining international company-owned stores.
There were no customers who accounted for more than 10% of Mrs. Fields'
total revenues or either segment's revenues.
(5) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
----------------------------------------------------------
Mrs. Fields' obligation related to its $140,000,000 aggregate principal amount
of 10 1/8 percent Series A, B and C Senior Notes due 2004 is fully and
unconditionally guaranteed (the "Guarantee") on a senior basis by four of Mrs.
Fields' wholly owned subsidiaries. The Guarantee is a general unsecured
obligation of The Mrs. Fields' Brand, Inc., Great American Cookies, Inc.,
Pretzel Time, Inc. and Pretzelmaker Holdings, Inc. (the "Guarantors"), rank
senior in right of payment to all subordinated indebtedness of the Guarantors
and rank equal in right of payment with all existing and future senior
indebtedness of the Guarantors. There are no restrictions on Mrs. Fields'
ability to obtain cash dividends or other distributions of funds from the
Guarantors, except those imposed by applicable law. The following supplemental
financial information sets forth, on a condensed consolidating basis, balance
sheets, statements of operations and statements of cash flows for Mrs. Fields'
Original Cookies, Inc. (the "Parent Company"), the Guarantor Subsidiaries and
the Non-guarantor Subsidiaries (which include Mrs. Fields' Cookies Australia,
Mrs. Fields' Cookies (Canada) Ltd., Pretzelmaker of Canada, H & M Canada, and
Fairfield Foods, Inc. and three partially owned subsidiaries). Mrs. Fields has
not presented separate financial statements and other disclosures concerning the
Guarantors because management has determined that such information is not
material.
10
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 3, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,636 $ 1,892 $ 117 $ - $ 4,645
Accounts receivable, net 1,558 - 12 - 1,570
Amounts due from franchisees
and licensees, net 996 3,812 - - 4,808
Inventories 3,957 950 6 - 4,913
Other current assets and 24,017 (18,561) (727) - 4,729
amounts due from (to)
affiliates, net
-------- ------------ ------------- ------------ ------------
Total current assets 33,164 (11,907) (592) - 20,665
PROPERTY AND EQUIPMENT, net 27,923 1,462 170 - 29,555
INTANGIBLES, net 80,878 84,865 298 - 166,041
INVESTMENT IN SUBSIDIARIES 64,984 - (64,984) -
OTHER ASSETS 2,895 125 32 - 3,052
-------- ------------ ------------- ------------ ------------
$209,844 $ 74,545 $ (92) $ (64,984) $ 219,313
======== ============ ============= ============ ============
LIABILITIES AND STOCKHOLDER'S
- -----------------------------
EQUITY (DEFICIT)
- -----------------
CURRENT LIABILITIES:
Current portion of
long-term debt and
capital lease obligations $ 8,105 $ 268 $ - $ - $ 8,373
Accounts payable 11,724 1,636 (22) - 13,338
Accrued liabilities 10,458 1,930 - - 12,388
-------- ------------ ------------- ------------ ------------
Total current liabilities 30,287 3,834 (22) - 34,099
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 142,539 114 - - 142,653
OTHER ACCRUED LIABILITIES 8,419 - - - 8,419
MANDATORILY REDEEMABLE
CUMULATIVE PREFERRED STOCK - 1,440 - - 1,440
MINORITY INTEREST - 4 119 123
STOCKHOLDER'S EQUITY (DEFICIT) 28,599 69,157 (74) (65,103) 32,579
-------- ------------ ------------- ------------ ------------
$209,844 $ 74,545 $ (92) $ (64,984) $ 219,313
======== ============ ============= ============ ============
</TABLE>
11
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
------------------------------------------------------------
FOR THE 13 WEEKS ENDED JULY 3, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES $ 36,108 $ 6,129 $ 45 $ (2,109) $ 40,173
---------------- ---------------- ---------------- ---------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 20,002 - 37 (314) 19,725
Cost of sales 10,457 1,246 17 (1,795) 9,925
General and administrative 5,549 - - - 5,549
Depreciation and amortization 4,222 1,645 5,867
---------------- ---------------- ---------------- ---------------- ----------------
Total operating costs and
expenses 40,230 2,891 54 (2,109) 41,066
---------------- ---------------- ---------------- ---------------- ----------------
(Loss) income from operations (4,122) 3,238 (9) - (893)
INTEREST EXPENSE AND
OTHER, net (4,259) (53) - - (4,312)
---------------- ---------------- ---------------- ---------------- ----------------
(Loss) income before provision for
income taxes and equity in net
loss of consolidated subsidiaries (8,381) 3,185 (9) - (5,205)
PROVISION FOR INCOME TAXES (106) - - - (106)
---------------- ---------------- ---------------- ---------------- ----------------
(Loss) income before preferred
stock accretion and dividends of
subsidiaries and equity in net loss
of consolidated subsidiaries (8,487) 3,185 (9) - (5,311)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - (111) - - (111)
EQUITY IN NET (LOSS) INCOME OF
CONSOLIDATED SUBSIDIARIES 3,065 - - (3,068) (3)
---------------- ---------------- ---------------- ---------------- ----------------
NET (LOSS) INCOME $ (5,422) $ 3,074 $ (9) $ (3,068) $ (5,425)
================ ================ ================ ================ ================
</TABLE>
12
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 26 WEEKS ENDED JULY 3, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES $ 74,365 $12,764 $104 $(3,068) $ 84,165
---------------- ---------------- ---------------- ---------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs
Cost of sales 41,634 - 120 (636) 41,118
General and administrative 19,787 4,463 38 (2,432) 21,856
Depreciation and amortization 10,819 54 - - 10,873
7,967 3,296 - - 11,263
---------------- ---------------- ---------------- ---------------- ----------------
Total operating costs and
expenses 80,207 7,813 158 (3,068) 85,110
(Loss) income from operations (5,842) 4,951 (54) - (945)
INTEREST EXPENSE AND
OTHER, net (8,638) (80) - - (8,718)
---------------- ---------------- ---------------- ---------------- ----------------
(Loss) income before provision for
income taxes and equity in net
loss of consolidated subsidiaries (14,480) 4,871 (54) - (9,663)
PROVISION FOR INCOME TAXES (210) - - - (210)
---------------- ---------------- ---------------- ---------------- ----------------
(Loss) income before preferred
stock accretion and dividends of
subsidiaries and equity in net loss
of consolidated subsidiaries (14,690) 4,871 (54) - (9,873)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - (222) - - (222)
EQUITY IN NET (LOSS) INCOME OF
CONSOLIDATED SUBSIDIARIES 4,595 - - (4,599) (4)
---------------- ---------------- ---------------- ---------------- ----------------
NET (LOSS) INCOME $(10,095) $ 4,649 $(54) $(4,599) $(10,099)
================ ================ ================ ================ ================
</TABLE>
13
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 3, 1999
-----------------------------------
(Unaudited)
(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 $ 1,138 $1,531 $ 39 $ - $ 2,708
------- ------ ---- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition Expenses (100) - - - (100)
Purchase of property and
equipment, net (2,520) (84) - - (2,604)
------- ------ ---- ------- -------
Net cash used in investing
activities (2,620) (84) - - (2,704)
------- ------ ---- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Reduction of long-term debt
and capital lease obligations (5,291) (621) - - (5,912)
Payment of debt financing fees (1,130) (25) - - (1,155)
Reduction in preferred stock - (43) - - (43)
Proceeds from line of credit 7,000 - - - 7,000
------- ------ ---- ------- -------
Net cash used in financing
activities 579 (689) - - (110)
------- ------ ---- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (903) 758 39 - (106)
CASH AND CASH EQUIVALENTS,
beginning of the period 3,539 1,134 78 - 4,751
------- ------ ---- ------- -------
CASH AND CASH EQUIVALENTS, end of
the period $ 2,636 $1,892 $117 $ $ 4,645
======= ====== ==== ======= =======
</TABLE>
14
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------- ------------ ------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 3,539 $ 1,134 $ 78 $ - $ 4,751
Accounts receivable, net 2,860 304 44 - 3,208
Amounts due from franchisees
and licensees, net 1,297 4,706 - - 6,003
Inventories 4,631 863 9 - 5,503
Other current assets and
amounts due from (to)
affiliates, net 39,368 (33,898) (592) - 4,878
-------- ------------ ------------- ------------ ------------
Total current assets 51,695 (26,891) (461) - 24,343
PROPERTY AND EQUIPMENT, net 29,900 1,654 243 - 31,797
INTANGIBLES, net 75,875 95,601 320 - 171,796
INVESTMENT IN SUBSIDIARIES 66,484 - - (66,484) -
OTHER ASSETS 3,688 252 30 - 3,970
-------- ------------ ------------- ------------ ------------
$227,642 $ 70,616 $ 132 $ (66,484) $ 231,906
======== ============ ============= ============ ============
LIABILITIES AND STOCKHOLDER'S
- -----------------------------
EQUITY (DEFICIT)
- ----------------
CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease
obligations $ 7,141 $ 1,204 $ - $ - $ 8,345
Accounts payable 14,223 564 69 - 14,856
Accrued liabilities 10,956 2,895 18 - 13,869
-------- ------------ ------------- ------------ ------------
Total current liabilities 32,320 4,663 87 - 37,070
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 142,367 216 61 - 142,644
OTHER ACCRUED LIABILITIES 10,134 - - - 10,134
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK - 1,261 - - 1,261
MINORITY INTEREST - - - 119 119
STOCKHOLDER'S EQUITY (DEFICIT) 42,821 64,476 (16) (66,603) 40,678
-------- ------------ ------------- ------------ ------------
$227,642 $ 70,616 $ 132 $ (66,484) $ 231,906
======== ============ ============= ============ ============
</TABLE>
15
<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 $ 29,814 $ 432 $ 1,121 $ (296) $ 31,071
----------- ------------- --------------- -------------- --------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy
costs 16,972 - 178 (296) 16,854
Food cost of sales 7,384 - 43 - 7,427
General and administrative 3,755 278 304 - 4,337
Depreciation and amortization 2,882 321 113 - 3,316
----------- ------------- --------------- -------------- --------------
Total operating costs and
expenses 30,993 599 638 (296) 31,934
----------- ------------- --------------- -------------- --------------
(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 (3,950) (161) 488 - (3,623)
subsidiaries
PROVISION FOR INCOME TAXES (4) - - - (4)
----------- ------------- --------------- -------------- --------------
(Loss) income before preferred
stock accretion and dividends
of 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) INCOME OF
CONSOLIDATED SUBSIDIARIES 62 - (154) (62) (154)
----------- ------------- --------------- -------------- --------------
NET (LOSS) INCOME $ (3,892) $ (161) $ 223 $ (62) $ (3,892)
=========== ============= =============== ============== ==============
</TABLE>
16
<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 $ 60,370 $ 683 $ 1,867 $ (579) $ 62,341
------------ ------------- ------------- -------------- --------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy
costs 34,309 - 178 (579) 33,908
Food cost of sales 15,142 - 43 - 15,185
General and administrative 7,261 554 772 - 8,587
Depreciation and amortization 5,331 640 226 - 6,197
------------ ------------- ------------- -------------- --------------
Total operating costs and
expenses 62,043 1,194 1,219 (579) 63,877
------------ ------------- ------------- -------------- --------------
(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 consolidated
subsidiaries (7,045) (497) 653 - (6,889)
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) INCOME OF
CONSOLIDATED SUBSIDIARIES (242) - (176) 242 (176)
------------ ------------- ------------- -------------- --------------
NET (LOSS) INCOME $ (7,301) $ (497) $ 255 $ 242 $ (7,301)
============ ============= ============= ============== ==============
</TABLE>
17
<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 obligations (138) - (265) - (403)
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>
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields''), a Delaware
corporation, is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc.
("Mrs. Fields' Holding"). Mrs. Fields' Holding is a majority owned subsidiary of
Capricorn Investors II, L.P. (''Capricorn''). Mrs. Fields has seven wholly owned
operating subsidiaries; namely, Great American Cookie Company, Inc., The Mrs.
Fields' Brand, Inc., Pretzel Time, Inc., Pretzelmaker Holdings, Inc., Mrs.
Fields' Cookies Australia, Mrs. Fields' Cookies (Canada) Ltd., and Pretzelmaker
of Canada; and three partially owned subsidiaries.
Mrs. Fields primarily operates and franchises retail stores, which sell
freshly baked cookies, brownies, pretzels and other food products through six
specialty retail chains. As of July 3, 1999, Mrs. Fields owned and operated 139
Mrs. Fields Cookies stores, 105 Original Cookie Company stores, 100 Great
American Cookies stores, 56 Hot Sam Pretzels stores, 88 Pretzel Time stores, and
4 Pretzelmaker stores in the United States. Additionally, Mrs. Fields has
franchised or licensed 876 stores in the United States and 125 stores in several
other countries. As of July 3, 1999, Mrs. Fields owned and operated 420 core
stores and 72 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 2000.
Mrs. Fields' business follows seasonal trends and is also affected by
weather conditions. Because Mrs. Fields' stores are heavily concentrated in
shopping malls, the Mrs. Fields' sales performance is significantly dependent on
the performance of those malls. Mrs. Fields experiences its highest revenues in
the fourth quarter of the calendar year due to the holiday season.
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of Mrs. Fields expressed in thousands of
dollars and percentage changes from period to period. Data in the table reflects
the consolidated results of Mrs. Fields for the 13 and 26 weeks ended July 3,
1999 and the 13 and 26 weeks ended July 4, 1998. 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
---------------------------- ------------------------------
% CHG % CHG
FROM FROM
July 3, July 4, 1998 TO July 3, July 4, 1998 TO
1999 1998 1999 1999 1998 1999
------- ------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net store and food sales................. $34,786 $29,031 19.8% $ 71,915 $58,687 22.5%
Franchising, net......................... 5,146 1,608 220.0 11,562 2,971 289.2
Licensing, net........................... 241 432 (44.2) 688 683 0.7
------- ------- -------- -------
Total revenues.......................... 40,173 31,071 29.3 84,165 62,341 35.0
------- ------- -------- -------
Operating Costs and Expenses:
Selling and store occupancy costs........ 19,725 16,854 17.0 41,118 33,908 21.3
Cost of sales............................ 9,925 7,427 33.6 21,856 15,185 43.9
General and administrative............... 5,549 4,337 27.9 10,873 8,587 26.6
Depreciation and amortization 5,867 3,316 76.9 11,263 6,197 81.7
------- ------- -------- -------
Total operating costs and expenses 41,066 31,934 28.6 85,110 63,877 33.2
------- ------- -------- -------
Other Income (Expense):
Interest expense......................... (4,349) (2,870) 51.5 (8,686) (5,626) 54.4
Interest income.......................... 40 241 (83.4) 78 417 (81.3)
Other expenses, net...................... (223) (400) (44.3) (546) (556) (1.8)
------- ------- -------- -------
Total other expense, net (4,532) (3,029) 49.6 (9,154) (5,765) 58.8
------- ------- -------- -------
Net loss................................ $(5,425) $(3,892) 39.4% $(10,099) $(7,301) 38.3%
======= ======= ======== =======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
% CHG % CHG
FROM FROM
July July 1998 TO July July 1998 TO
3, 1999 4, 1998 1999 3, 1999 4, 1998 1999
-------- -------- ------- -------- -------- -------
Supplemental Information
- ------------------------
Core stores:
Net store and food sales.................. $ 31,304 $ 25,995 20.4% $ 63,905 $ 51,695 23.6%
-------- -------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs....... 17,094 13,967 22.4 34,866 27,550 26.6
Cost of sales........................... 6,651 6,533 1.8 14,962 13,204 13.3
Depreciation and amortization........... 2,558 1,387 84.4 4,528 2,421 87.0
-------- -------- -------- --------
Total operating costs and
expenses............................... 26,303 21,887 20.2 54,356 43,175 25.9
-------- -------- -------- --------
Core stores contribution $ 5,001 $ 4,108 21.7% $ 9,549 $ 8,520 12.1%
======== ======== ======== ========
Stores in the process of being closed or
franchised:
Net store and food sales.................. $ 3,482 $ 3,036 14.7% $ 8,010 $ 6,992 14.6%
-------- -------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs......... 2,631 2,887 (8.9) 6,252 6,358 (1.7)
Cost of sales............................. 1,007 894 12.6 2,431 1,981 22.7
Depreciation and amortization............. 89 149 (40.3) 190 258 (26.4)
-------- -------- -------- --------
Total operating costs and
expenses............................... 3,727 3,930 (5.2) 8,873 8,597 3.2
-------- -------- -------- --------
Stores in the process of being
closed or franchised contribution $ (245) $ (894) (72.6)% $ (863) $ (1,605) (46.2)%
======== ======== ======== ========
</TABLE>
13 Weeks Ended July 3, 1999 Compared to the 13 Weeks Ended July 4, 1998
As of July 3, 1999, there were 492 Company-owned stores and 1,001
franchised or licensed stores in operation. The store activity for the 13 weeks
ended July 3, 1999 is summarized as follows:
<TABLE>
<CAPTION>
Company-owned and Franchised or Licensed Store Activity July 3, 1999 July 4, 1998
----------------------- -----------------------
Company- Franchised Company- Franchised
Owned Or Licensed Owned Or Licensed
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the 13 weeks ended 516 991 472 547
Stores opened (including relocations) 4 18 2 20
Stores closed (including relocations) (7) (19) (2) (13)
Stores sold to franchisees (4) 4 (1) 1
Non-core (exit plan) stores closed (September 18, 1996 forward) (10) - (2) -
Non-core (exit plan) stores franchised (September 18, 1996 forward) (8) 8 (9) 9
Stores acquired from franchisees 1 (1) 10 (10)
--- ----- --- ---
Stores open as of the end of the 13 weeks ended 492 1,001 470 554
=== ===== === ===
</TABLE>
Revenues
Net Store and Food Sales. Total net store sales increased $5,755,000, or
19.8%, from $29,031,000 to $34,786,000 for the 13 weeks ended July 3, 1999
compared to the 13 weeks ended July 4, 1998.
Net store sales from core stores increased $5,309,000, or 20.4%, from
$25,995,000 to $31,304,000 for the 13 weeks ended July 3, 1999 compared to the
13 weeks ended July 4, 1998. The increase in net store sales from core stores
was primarily attributable to the operation of 66 Great American and 2
Pretzelmaker core stores obtained in connection with the acquisitions of these
companies in August and November 1998, respectively.
Net store sales from stores in the process of being closed or franchised
increased $446,000, or 14.7%, from $3,036,000 to $3,482,000 for the 13 weeks
ended July 3, 1999 compared to the 13 weeks ended July 4, 1998. This increase
results from the addition of 41 to be closed stores and 13 to be franchised
stores in the fourth quarter 1998.
20
<PAGE>
Franchising Revenues. Franchising revenues increased $3,538,000, or 220.0%,
from $1,608,000 to $5,146,000 for the 13 weeks ended July 3, 1999 compared to
the 13 weeks ended July 4, 1998. The increase in franchising revenues was
primarily attributable to batter sales made to franchisees from the Atlanta
batter facility purchased in August 1998 and the addition of 201 Great American
and 205 Pretzelmaker franchisees due to the acquisition of these companies in
August and November 1998, respectively.
Licensing Revenues. Licensing revenues decreased $191,000, or 44.2%, from
$432,000 to $241,000 for the 13 weeks ended July 3, 1999 compared to the 13
weeks ended July 4, 1998. The decrease in licensing revenues for the 13 weeks
ended July 3, 1999 was primarily attributable to timing differences related to
the recognition of Mrs. Fields branded dry cookie mix license fees.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $2,871,000, or 17.0%, from $16,854,000 to $19,725,000 for the 13 weeks
ended July 3, 1999 compared to the 13 weeks ended July 4, 1998.
Selling and store occupancy costs for core stores increased by $3,127,000,
or 22.4%, from $13,967,000 to $17,094,000 for the 13 weeks ended July 3, 1999
compared to the 13 weeks ended July 4, 1998. Within this overall increase,
selling expenses increased by $1,172,000 or 29.7%, from $3,945,000 to $5,117,000
for the 13 weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998.
Store occupancy costs increased $778,000 or 13.2%, from $5,906,000 to $6,684,000
for the 13 weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998.
These increases were primarily attributable to the 66 Great American and 2
Pretzelmaker core stores obtained in connection with the acquisition of these
companies in August and November 1998, respectively, coupled with lease renewal
increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $256,000, or 8.9%, from $2,887,000 to $2,631,000 for the
13 weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998. This
decrease was primarily the result of closing or franchising 18 stores during the
13 weeks ended July 3, 1999.
Cost of Sales. Total food cost of sales increased $2,498,000, or 33.6%,
from $7,427,000 to $9,925,000 for the 13 weeks ended July 3, 1999 compared to
the 13 weeks ended July 4, 1998.
Food cost of sales for core stores increased $118,000, or 1.8%, from
$6,533,000 to $6,651,000 for the 13 weeks ended July 3, 1999. This increase was
primarily the result of the addition of 66 Great American and 2 Pretzelmaker
core stores in August and November 1998, respectively.
Food cost of sales for stores in the process of being closed or franchised
increased $113,000, or 12.6%, from $894,000 to $1,007,000 for the 13 weeks ended
July 3, 1999 compared to the 13 weeks ended July 4, 1998. This increase was
primarily the result of the addition of 41 to be closed stores and 13 to be
franchised stores in the fourth quarter 1998.
General and Administrative Expenses. General and administrative expenses
increased $1,212,000, or 27.9%, from $4,337,000 to $5,549,000 for the 13 weeks
ended July 3, 1999 compared to the 13 weeks ended July 4, 1998. The increase in
general and administrative expenses was primarily attributable to the
acquisitions of Great American and Pretzelmaker. During the quarter, the
Company incurred unanticipated consulting and other costs related to the
Company's product offering and marketing programs as well as additional
compensation and other expenses incurred by the Company due to the resignation
of its Chief Financial Officer.
Depreciation and Amortization. Total depreciation and amortization expense
increased by $2,551,000, or 76.9%, from $3,316,000 to $5,867,000 for the 13
weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998. This
increase was primarily attributable to increased goodwill and fixed assets from
the Great American and Pretzelmaker acquisitions.
Depreciation and amortization expense for core stores increased $1,171,000,
or 84.4%, from $1,387,000 to $2,558,000 for the 13 weeks ended July 3, 1999
compared to the 13 weeks ended July 4, 1998. This increase in depreciation and
amortization expense was primarily attributable to the acquisitions of 66 Great
American and 2 Pretzelmaker core stores in August and November 1998,
respectively.
Interest Expense. Interest expense increased $1,479,000, or 51.5%, from
$2,870,000 to $4,349,000 for the 13 weeks ended July 3, 1999 compared to the 13
weeks ended July 4, 1998. This increase was primarily attributable to interest
on the $40,000,000 in high yield notes issued in August 1998.
21
<PAGE>
Interest Income. Interest income decreased $201,000, or 83.4%, from
$241,000 to $40,000 for the 13 weeks ended July 3, 1999 compared to the 13 weeks
ended July 4, 1998. This decrease was primarily the result of interest income
earned in 1998 on excess cash provided by the $100,000,000 in high yield notes
which were put in place in November 1997 that was not earned in fiscal 1999.
Other Expenses. Other expenses decreased $177,000, or 44.3%, from $400,000
to $223,000 for the 13 weeks ended July 3, 1999 compared to the 13 weeks ended
July 4, 1998. This decrease was primarily attributable to the minority interest
from the net loss at the Pretzel Time subsidiary for the 13 weeks ended July 4,
1998, there was no minority interest in Preztel Time during the 13 weeks ended
July 3, 1999.
Net Loss. The net loss increased by $1,533,000, or 39.4%, from $3,892,000
to $5,425,000 for the 13 weeks ended July 3, 1999 compared to the 13 weeks ended
July 4, 1998 due to the combination of factors described above.
Contribution from Core Stores. Contribution from core stores increased by
$893,000, or 21.7%, from $4,108,000 to $5,001,000 for the 13 weeks ended July 3,
1999 compared to the 13 weeks ended July 4, 1998, primarily due to the operation
of 66 Great American and 2 Pretzelmaker core stores obtained in connection with
the acquisitions in August and November 1998, respectively.
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 $649,000, or 72.6%, from $894,000 to $245,000 for the
13 weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998. This
decrease was primarily the result of closing 10 stores and franchising 8 stores
during the 13 weeks ended July 3, 1999 and the effect of closing or franchising
11 stores during the 13 weeks ended July 4, 1998. In addition, 22 stores were
closed and 4 franchised over the remainder of fiscal year 1998, which were in
operation during the 13 weeks ended July 4, 1998.
26 Weeks Ended July 3, 1999 Compared to the 26 Weeks Ended July 4, 1998
As of July 3, 1999, there were 492 Company-owned stores and 1,001
franchised or licensed stores in operation. The store activity for the 26 weeks
ended July 3, 1999 is summarized as follows:
<TABLE>
<CAPTION>
Company-owned and Franchised or Licensed Store Activity July 3, 1999 July 4, 1998
------------ ------------
Company- Franchised Company- Franchised
Owned or Licensed Owned or Licensed
--------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the 26 weeks ended 566 972 481 553
Stores opened (including relocations) 10 49 5 42
Stores closed (including relocations) (23) (38) (7) (42)
Stores sold to franchisees (7) 7 (1) 1
Non-core (exit plan) stores closed (September 18, 1996 forward) (43) - (8) -
Non-core (exit plan) stores franchised (September 18, 1996 forward) (14) 14 (11) 11
Stores acquired from franchisees 3 (3) 11 (11)
--- ----- --- ---
Stores open as of the end of the 26 weeks ended 492 1,001 470 554
=== ===== === ===
</TABLE>
Revenues
Net Store and Food Sales. Total net store sales increased $13,228,000, or
22.5%, from $58,687,000 to $71,915,000 for the 26 weeks ended July 3, 1999
compared to the 26 weeks ended July 4, 1998.
Net store sales from core stores increased $12,210,000, or 23.6%, from
$51,695,000 to $63,905,000 for the 26 weeks ended July 3, 1999 compared to the
26 weeks ended July 4, 1998. The increase in net store sales from core stores
was primarily attributable to the operation of 66 Great American and 2
Pretzelmaker core stores obtained in connection with the acquisitions in August
and November 1998, respectively.
Net store sales from stores in the process of being closed or franchised
increased $1,018,000, or 14.6%, from $6,992,000 to $8,010,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. This increase
results from the addition of 41 to be closed stores and 13 to be franchised
stores in the fourth quarter 1998.
Franchising Revenues. Franchising revenues increased $8,591,000, or 289.2%,
from $2,971,000 to $11,562,000 for the 26 weeks ended July 3, 1999 compared to
the 26 weeks ended July 4, 1998. The increase in franchising revenues was
primarily attributable to batter sales made to franchisees from the Atlanta
batter facility purchased in August 1998 and the addition of 201 Great American
and 205 Pretzelmaker franchisees due to the acquisitions of these companies in
August and November 1998, respectively.
22
<PAGE>
Licensing Revenues. Licensing revenues increased $5,000, or 0.7%, from
$683,000 to $688,000 for the 26 weeks ended July 3, 1999 compared to the 26
weeks ended July 4, 1998.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $7,210,000, or 21.3%, from $33,908,000 to $41,118,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998.
Selling and store occupancy costs for core stores increased by $7,316,000,
or 26.6%, from $27,550,000 to $34,866,000 for the 26 weeks ended July 3, 1999
compared to the 26 weeks ended July 4, 1998. Within this overall increase,
selling expenses increased by $4,047,000, or 34.1%, from $11,865,000 to
$15,912,000 for the 26 weeks ended July 3, 1999 compared to the 26 weeks ended
July 4, 1998. Store occupancy costs increased $2,112,000, or 18.3%, from
$11,569,000 to $13,681,000 for the 26 weeks ended July 3, 1999 compared to the
26 weeks ended July 4, 1998. These increases were primarily attributable to the
66 Great American and 2 Pretzelmaker core stores obtained in connection with the
acquisitions in August and November 1998, respectively, coupled with lease
renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $106,000, or 1.7%, from $6,358,000 to $6,252,000 for the
26 weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998. This
decrease was primarily the result of closing or franchising 57 stores during the
26 weeks ended July 3, 1999.
Cost of Sales. Total food cost of sales increased $6,671,000 , or 43.9%,
from $15,185,000 to $21,856,000 for the 26 weeks ended July 3, 1999 compared to
the 26 weeks ended July 4, 1998.
Food cost of sales for core stores increased $1,758,000 , or 13.3%, from
$13,204,000 to $14,962,000 for the 26 weeks ended July 3, 1999. This increase
was primarily the result of the addition of 66 Great American and 2 Pretzelmaker
core stores in August and November 1998, respectively.
Food cost of sales for stores in the process of being closed or franchised
increased $450,000, or 22.7%, from $1,981,000 to $2,431,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. This increase
was primarily the result of the addition of 41 to be closed stores and 13 to be
franchised stores in the fourth quarter 1998.
General and Administrative Expenses. General and administrative expenses
increased $2,286,000, or 26.6%, from $8,587,000 to $10,873,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. The increase in
general and administrative expenses was primarily attributable to the
acquisitions of Great American and Pretzelmaker. During the 26 weeks ended July
3,1999, the Company incurred unanticipated consulting and other costs related to
the Company's product offering and marketing programs as well as additional
compensation and other expenses incurred by the Company due to the resignation
of its Chief Financial Officer.
Depreciation and Amortization. Total depreciation and amortization expense
increased by $5,066,000, or 81.7%, from $6,197,000 to $11,263,000 for the 26
weeks ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. This
increase was primarily attributable to increased goodwill and fixed assets from
the Great American and Pretzelmaker acquisitions.
Depreciation and amortization expense for core stores increased $2,107,000,
or 87.0%, from $2,421,000 to $4,528,000 for the 26 weeks ended July 3, 1999
compared to the 26 weeks ended July 4, 1998. This increase in depreciation and
amortization expense was primarily attributable to the acquisitions of 66 Great
American and 2 Pretzelmaker core stores in August and November 1998,
respectively.
Interest Expense. Interest expense increased $3,060,000, or 54.4%, from
$5,626,000 to $8,686,000 for the 26 weeks ended July 3, 1999 compared to the 26
weeks ended July 4, 1998. This increase was primarily attributable to interest
on the $40,000,000 in high yield notes, which were issued in August 1998.
Interest Income. Interest income decreased $339,000, or 81.3%, from
$417,000 to $78,000 for the 26 weeks ended July 3, 1999 compared to the 26 weeks
ended July 4, 1998. This decrease was primarily the result of interest income
earned in 1998 on excess cash provided by the $100,000,000 in high yield notes
which were put in place in November 1997 that was not earned in fiscal 1999.
Other Expenses. Other expenses for the 26 weeks ended July 3, 1999 were
comparable to the 26 weeks ended July 4, 1998.
23
<PAGE>
Net Loss. The net loss increased by $2,798,000 , or 38.3%, from $7,301,000
to $10,099,000 for the 26 weeks ended July 3, 1999 compared to the 26 weeks
ended July 4, 1998 due to the combination of factors described above.
Contribution from Core Stores. Contribution from core stores increased by
$1,029,000, or 12.1%, from $8,520,000 to $9,549,000 for the 26 weeks ended July
3, 1999 compared to the 26 weeks ended July 4, 1998, primarily due to the
operation of 66 Great American and 2 Pretzelmaker core stores obtained in
connection with the acquisitions in August and November 1998, respectively.
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 $742,000, or 46.2%, from $1,605,000 to $863,000 for
the 26 weeks ended July 3, 1999 compared to the 26 weeks ended July 4, 1998.
This decrease was primarily the result of closing 43 stores and franchising 14
stores during the 26 weeks ended July 3, 1999 and the effect of closing or
franchising 19 stores during the 26 weeks ended July 4, 1998. In addition, 22
stores were closed and 4 franchised over the remainder of fiscal year 1998,
which were in operation during the 26 weeks ended July 4, 1998.
Liquidity and Capital Resources
General
Mrs. Fields' principal sources of liquidity are cash flows from operations,
cash on hand and available borrowings under Mrs. Fields' existing lease and
revolving credit facilities. As of July 3, 1999, Mrs. Fields has $4,645,000 of
cash and cash equivalents on hand and $276,000 additional borrowings allowable
under its revolving credit facility. Mrs. Fields expects to use its existing
cash, cash flows from operating activities and its credit facilities to provide
working capital, finance capital expenditures and to meet debt service
requirements. Based on current operations and anticipated cost savings, Mrs.
Fields believes that its sources of liquidity will be adequate to meet its
anticipated requirements for working capital, capital expenditures, scheduled
debt service requirements and other general corporate purposes. There can be no
assurance, however, that Mrs. Fields' business will continue to generate cash
flows at or above current levels or that cost savings can be achieved.
July 3, 1999 Compared to January 2, 1999
As of July 3, 1999, Mrs. Fields had liquid assets (cash and cash
equivalents and accounts receivable) of $11,023,000, a decrease of 21.0%, or
$2,939,000, from January 2, 1999 when liquid assets were $13,962,000. Cash
decreased $106,000, or 2.2%, to $4,645,000 at July 3, 1999 from $4,751,000 at
January 2, 1999. Accounts receivable decreased $2,833,000, or 30.8%, to
$6,378,000 at July 3, 1999 from $9,211,000 at January 2, 1999 due to the
seasonality of the business and improved collections.
Mrs. Fields' working capital decreased by $707,000 to a negative
$13,434,000 at July 3, 1999 from a negative $12,727,000 at January 2, 1999. This
decrease is due to decreases in current assets, as discussed above, which more
than offset decreases in current liabilities.
Long-term assets decreased $8,915,000, or 4.3%, to $198,648,000 at July 3,
1999 from $207,563,000 at January 2, 1999. This decrease was primarily the
result of scheduled depreciation and amortization of fixed assets, goodwill and
deferred loan costs.
During the 26 weeks ended July 3, 1999, Capricorn Investors II, L.P., the
majority shareholder in Mrs. Fields Holdings, Mrs. Fields' 100% owner, assumed a
$2,000,000 contract payment due in the future. This transaction enhanced Mrs.
Fields' tax planning and financial flexibility.
Mrs. Fields' cash flows from operating activities of $2,708,000 for the 26
weeks ended July 3, 1999, resulted primarily from store sales and franchising
and licensing revenues net of costs and expenses incurred to generate these
sales and better management of cash flows.
Mrs. Fields utilized $2,704,000 of cash in investing activities during the
26 weeks ended July 3, 1999, primarily for capital expenditures relating to
store remodels and renovations.
24
<PAGE>
Mrs. Fields utilized $110,000 of cash in financing activities during the 26
weeks ended July 3, 1999, primarily for the payment of debt related to the
Pretzel Time acquisition.
The specialty cookie and pretzel businesses do not require the maintenance
of significant receivables or inventories; however, Mrs. Fields 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 Mrs. Fields' working
capital. During the 26 weeks ended July 3, 1999 and July 4, 1998, Mrs. Fields
expended $2,604,000 and $3,342,000, respectively, for capital assets and expects
to expend a total of approximately $7,000,000 in 1999. Management anticipates
that these expenditures will be funded with cash generated from operating
activities and short-term borrowings under its credit facility as needed.
Year 2000
Management has assessed the Year 2000 issue and has determined that all
internal information technology systems including financial software, corporate
networks, the AS400 system and all other systems are Year 2000 compliant with
the exception of systems used for collecting and communicating sales data from
retail locations. This assessment was based primarily on independent, third-
party verification from Mrs. Fields' vendors and suppliers.
Mrs. Fields is currently replacing its sales collection systems with
software and hardware that is Year 2000 compliant. Programming and development
of the software is complete and has been installed in approximately 80% of its
stores. Mrs. Fields projects installation will be complete by August 1999. The
estimated cost of this project is $1.9 million and includes software development
and new store computers and registers. The costs to complete this project are
included in Mrs. Fields' 1999 budget. Funding for this project is being provided
by internal cash flow and by a lease finance company.
Upgrades of the plant production and distribution software were completed
in the first and second quarters of 1999 at an estimated cost of $10,000. No
information technology projects have been deferred as a result of Mrs. Field's
Year 2000 efforts.
Mrs. Fields is not dependent on the proper operation of the sales
collection systems to run the day-to-day operations of the business. Therefore,
failure or malfunction of these systems due to untimely or incomplete
remediation would not have a material adverse effect on its results of
operations.
Mrs. Fields is in the process of assessing Year 2000 issues with respect to
its significant vendors and financial institutions as to their compliance plans
and whether any Year 2000 issues will impede the ability of such vendors to
continue providing goods and services to Mrs. Fields. Failure of Mrs. Fields'
key suppliers to remedy their own Year 2000 issues could delay shipments of
essential products, thereby disrupting Mrs. Fields' operations. Furthermore,
Mrs. Fields relies on various service providers, such as utility and
telecommunication service companies, which are beyond its control. This
assessment is 100% complete. Based upon the results of the assessment, Mrs.
Fields is not aware of any Year 2000 issues relating to its significant vendors,
financial institutions or its non-information technology systems.
Mrs. Fields does not have a contingency plan in place to address untimely
or incomplete remediation of Year 2000 issues, but it is currently developing
contingency plans. These contingency plans are expected to address issues
related to significant vendors and financial institutions.
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.
25
<PAGE>
Forward-looking Information
This report contains certain forward-looking statements based on our
current expectations and projections about future events, developed from the
information currently available to us. The forward-looking statements include,
among other things, our expectations and estimates about Mrs. Fields' future
financial performance, including growth in net sales and earnings, cash flows
from operations, capital expenditures, the ability to refinance indebtedness,
and the sale of assets. These forward-looking statements are subject to risks,
uncertainties and assumptions, including the following:
. Our ability to combine the businesses of companies acquired during the
year with Mrs. Fields and to realize the expected benefits and cost savings
from our acquisitions;
. Our ability to meet our debt and interest obligations,
. Performance by franchisees and licensees;
. Difficulties or delays in developing and introducing anticipated new
products or failure of customers to accept new product offerings;
. Changes in consumer preferences and our ability to adequately anticipate
such changes;
. The seasonal nature of our operations;
. Changes in general economic and business conditions;
. Actions by competitors, including new product offerings and marketing and
promotional successes;
. Claims which might be made against Mrs. Fields, including product liability
claims;
. Changes in business strategy, new product lines, changes in raw ingredient
and employee labor costs;
. Changes in our relationships with our franchisees and licensees;
. Changes in mall customer traffic and
. The inability of our vendors, service providers and financial institutions
to resolve Year 2000 issues in a timely manner.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report may not occur.
26
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
In the ordinary course of business, Mrs. Fields is involved in routine
litigation, including franchise disputes. Mrs. Fields is not a party to any
legal proceedings which, in the opinion of management of Mrs. Fields, after
consultation with legal counsel, is material to Mrs. Fields' business, financial
condition or results of operations beyond amounts provided for in the
accompanying financial statements.
Mrs. Fields' 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
- ----------- -----------
27.1 Financial data schedule (for SEC use only)
(b) Forms 8-K
None
27
<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 15, 1999
- ------------------ ----------------
Larry A. Hodges, President & CEO Date
/s/Mark S. Tanner August 15, 1999
- ----------------- ----------------
Mark S. Tanner, Chief Financial Officer Date
(Principal Accounting Officer)
28
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