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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: January 1, 2000
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.
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(Exact name of registrant specified in its charter)
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DELAWARE 87-0552899
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(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121-7050
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(Address of principal executive offices) (Zip code)
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(801) 736-5600
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Company had 400 shares of common stock outstanding at March 31, 2000.
Documents incorporated by reference: None
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MRS. FIELDS' ORIGINAL COOKIES, INC.
TABLE OF CONTENTS
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PART I.
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Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 11
Item 3. Legal Proceedings....................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders..................................... 11
PART II.
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 12
Item 6. Selected Financial Data................................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 24
Item 8. Financial Statements and Supplementary Data............................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... II-1
PART III.
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Item 10. Directors and Executive Officers of the Registrant...................................... II-1
Item 11. Executive Compensation.................................................................. II-3
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... II-5
Item 13. Certain Relationships and Related Transactions.......................................... II-6
PART IV.
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ II-8
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PART I
FORWARD-LOOKING INFORMATION
This report contains 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' Original Cookies, Inc.
("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 realize the expected benefits and cost savings from our prior
acquisitions;
. 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; and
. Changes in mall customer traffic.
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.
Item 1. Business
History
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of Mrs. Fields Inc., The Original Cookie
Company, Inc. ("Original Cookie Company") and Hot Sam Company Inc,. ("Hot Sam")
by Mrs. Fields' Holding Company, Inc. ("Mrs. Fields' Holding"), a subsidiary of
Capricorn Investors II, L.P. ("Capricorn"). Capricorn retained Mr. Larry Hodges
as Chief Executive Officer of Mrs. Fields and as of March 31, 2000, Capricorn
had invested more than $30 million in Mrs. Fields through Mrs. Fields' Holding.
In November 1997, Mrs. Fields received as a contribution from Mrs. Fields'
Holding all of the common stock of The Mrs. Fields' Brand, Inc. ("Mrs. Fields'
Brand"). On the same date, Mrs. Fields' Holding also contributed the business of
Mrs. Fields' Pretzel Concepts and 56% of the shares of common stock of Pretzel
Time, Inc. ("Pretzel Time"). In conjunction with this transaction, the Company
issued $100 million of 10 1/8% Series A Senior Notes. In January, June and
December 1998, Mrs. Fields acquired an additional 4%, 10% and the final 30%,
respectively, of Pretzel Time's common stock.
In August 1998, Mrs. Fields consummated an add-on offering of 10 1/8%
Series C Senior Notes and received a capital contribution from Mrs. Fields'
Holding of $29.1 million, which were all of the net proceeds of a concurrent
offering of notes by Mrs. Fields' Holding. Mrs. Fields used the proceeds from
the offering, the capital contribution and other available cash to:
. finance the acquisition of Cookies USA, Inc., the parent of Great
American Cookie Company, Inc. ("Great American")
. finance the acquisition of the stock of two Great American franchisees,
Deblan and Chocolate Chip
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. finance a tender offer and consent solicitation for all the outstanding
$40 million in total principal amount of Great American's 10 7/8% Senior
Secured Notes due 2001
In September 1998, Mrs. Fields, in connection with the purchase of Great
American, purchased eight additional Great American franchised stores ("Karp")
for $1.9 million.
In October 1998, Mrs. Fields purchased all the retail cookie and related
business and operations of eleven Great American franchised stores ("Cookie
Conglomerate") for $2.8 million.
In November 1998, Mrs. Fields purchased all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. ("Pretzelmaker") for approximately $5.4
million and assumed indebtedness of approximately $1.6 million.
On February 9, 2000, an affiliate of our parent company, Capricorn, entered
into an agreement to acquire TCBY Enterprises, Inc. ("TCBY"), a retail snack
food company. It is expected that, if this acquisition is completed, Mrs. Fields
will enter into a management agreement to provide management services to TCBY.
If completed, this acquisition would occur no earlier than the second quarter of
2000. We cannot be sure that this acquisition will be completed, and there has
been no agreement signed regarding the terms of the management agreement.
Management of Mrs. Fields believes that, if completed, the agreement will be on
terms consistent with what could have been obtained from an unaffiliated third
party and this acquisition would offer Mrs. Fields the opportunity to sell its
products in TCBY stores.
General
Today, Mrs. Fields is one of the largest retailers in the premium snack-
food industry (based on number of units), with cookies and pretzels as its major
product lines. Mrs. Fields is the largest retailer of baked on-premises cookies
(based on the number of units) and the second largest retailer of baked on-
premises pretzels (based on the number of units) in the United States. In
addition, Mrs. Fields is one of the most widely recognized and respected brand
names in the premium cookie industry. Mrs. Fields operates in two industry
segments determined by revenue source: (1) company-owned stores and (2)
franchised and licensed stores and related activity.
Business Strategy. Our objective is to increase sales and profitability at our
continuing company-owned and franchised stores by implementing the key elements
of our long-term business strategy, which include the following:
. Build the Mrs. Fields brand in retail venues other than our traditional
mall-based locations
. Grow concept and product licensing programs and revenues
. Enhance the quality of our company-owned store base
. Improve the productivity of our continuing company-owned stores
. Capitalize on the strong "Mrs. Fields", "Great American", "Pretzel Time"
and "Pretzelmaker" brand names
. Develop new company-owned and franchised stores
. Pursue further strategic acquisitions of related businesses
. Perpetuate franchise growth in all core concepts, including company-owned
cookie and pretzel stores that management has determined to franchise.
We also intend to capitalize on our brand recognition and the perception of
quality among consumers to expand the product line to include products sold in
other retail environments through licensing agreements with other companies.
Product Offerings. The product offerings in our stores consist primarily of (1)
fresh baked cookies, brownies, muffins, and other baked goods and (2) fresh
baked sweet dough and "Bavarian" style pretzels. During fiscal year 1999, our
store revenue mix consisted of the following:
Cookies and Brownies............................................ 63%
Pretzels........................................................ 17%
Beverages....................................................... 19%
Other........................................................... 1%
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Baked products are made using only pure and high quality vanilla,
chocolate, raisins, nuts and other ingredients. To maintain product quality and
consistency at both company-owned and franchised stores, Mrs. Fields and
Original Cookie stores use centrally manufactured frozen dough, which is
manufactured by outside suppliers according to our proprietary formulas. Great
American stores use refrigerated batter that is shipped daily from our Atlanta
production facility. Pretzel Time uses a dry mix batter that is shipped to the
stores from selected distributors. All products must pass strict quality
assurance and control steps at both the manufacturing plants and the stores.
Product Development. We maintain a product development department which
continually creates and tests new products to attract new customers and
revitalize the interest of current customers. Once a new product is identified,
we develop prototypes to determine the initial formula. Once the product has
been successfully produced, ingredient specifications, formulas, manufacturing
processes, finished product specifications, shelf life, storage and distribution
procedures are established. The new product is either immediately launched
throughout the system, as in the case of seasonal items or simple line
extensions, or test marketed in a limited number of stores. After a trial period
to evaluate both consumer response and store operations' ability to handle the
new product, it is fully commercialized, modified or discontinued.
Marketing and Advertising. We market our products using an in-house marketing
department. Our marketing programs emphasize product sampling, local store
marketing and brand name identification. At the store level, we advertise using
the aroma of fresh-baked cookies, sampling, posters and the attractive
arrangement of finished products to create a store ambiance that is conducive to
sales. We also promote products by offering special packaging and selling other
promotional items We cultivate local customer loyalty by offering regular 20%
discounts to employees in malls where stores are located and occasional other
discounts. Historically, we have spent relatively little on paid advertising,
relying mainly on in-store signage and promotions. We are currently working on
developing catered corporate accounts for both company-owned and franchised
stores and will be building awareness of products geared toward corporate
accounts at the store level for the local market area and through catalogue
sales. We also promote our products as gifts, particularly at holiday time.
Store Operations
Cookies. We operate, franchise and license 943 retail cookie stores: 542 under
the Mrs. Fields brand, 93 under the Original Cookie brand, and 308 under the
Great American brand. The Great American stores are concentrated in the
southeastern and south central states and Mrs. Fields and Original Cookie stores
are strongly represented in the western, midwestern and eastern states. There is
little overlap between Mrs. Fields, Original Cookie and Great American stores
with a dual presence in 18 of the 723 malls in which we have cookie stores.
These stores offer over 50 different types of cookies, brownies and muffins,
which are baked continuously and served fresh throughout the day.
Management believes that Mrs. Fields and Great American have more well-
recognized brand names than does Original Cookie. As a result, we intend to
continue selectively converting our Original Cookie stores to the Mrs. Fields
and Great American brand stores. We will also test the success of converting
selected Great American company-owned stores to Mrs. Fields brand stores. In
addition, any Great American franchisee will have the option to convert its
stores to Mrs. Fields brand franchise stores at its sole expense in areas where
there is no overlap with existing Mrs. Fields brand franchise stores.
Pretzels. We operate and franchise 500 retail pretzel stores: 234 under the
Pretzel Time name, 52 under the Hot Sam name and 214 under the Pretzelmaker
name. Pretzel Time and Pretzelmaker's primary product is an all natural, hand-
rolled soft pretzel, freshly baked at each store location. The Hot Sam pretzel
stores specialize in the Bavarian style pretzel. This product has declined in
popularity in recent years as sweet dough pretzel sales have grown dramatically.
We intend to continue selectively converting Hot Sam stores to Pretzel Time or
Pretzelmaker stores, which we believe will result in an increase in net sales,
comparable store sales and store contribution.
The retail pretzel business has grown more quickly than the retail cookie
business in recent years. We believe that the retail pretzel business has
similar operating characteristics to the retail cookie business that will permit
some co-branding of our products.
We are also growing our business in non-traditional locations that are not
located in shopping malls, but include any high pedestrian traffic areas, such
as second locations within malls, airport concourses, office building
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lobbies, hospitals, universities, stadiums, and supermarket foyers, that have
easy proximity to pedestrian traffic flow and take advantage of the impulse
nature of our business.
Configuration. We have developed a number of retail configurations that have
wide application and adaptability to a variety of retail environments. In
addition to the stores that have been designed for prime mall locations, we have
developed other formats intended to extend the Company's presence within and
beyond mall locations.
All of the retail store configurations include the same high-quality
marketing, merchandising and design features which customers have come to expect
from Mrs. Fields. The store designs are bright with high-profile trademark
identity. All products are baked throughout the day on the premises with ovens
located in full view of the customer to support the "fresh-baked" image. All
cookie stores are uniformly designed in accordance with the Mrs. Fields,
Original Cookie or Great American prototype. All pretzel stores are uniformly
designed in accordance with the Pretzel Time or Pretzelmaker prototype. Mrs.
Fields and its franchisees also operate cookie kiosks and carts in certain malls
on a year-round basis. Through licensed locations, we also operate kiosks and
carts at airports, universities, stadiums, hospitals and office building
lobbies. Because of their small size, carts and other kiosks do not have baking
equipment, and are supplied with cookie products by a fully equipped store
usually located in the same mall.
Average store size based on square footage is as follows:
Store Type Average Square Footage
Cookie Store 350 - 800
Typical Company-Owned Cookie Store 600 - 700
Pretzel Store 500
Kiosks 100 - 250
Carts 30 - 92
Store Base. As of January 1, 2000, Mrs. Fields' store portfolio consisted of
462 company-owned stores, 722 domestic franchised locations, 133 international
franchised locations and 126 licensed locations. By product, the stores are
distributed as follows:
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Company-Owned
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To be To be Domestic International
Continuing Closed Franchised Franchised Franchised Licensed Total
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Mrs. Fields.............. 113 3 18 206 88 114 542
Original Cookie.......... 93 -- -- -- -- -- 93
Great American........... 86 6 1 215 -- -- 308
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Cookie Subtotal.......... 292 9 19 421 88 114 943
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Pretzel Time............. 85 -- 1 148 -- -- 234
Pretzelmaker............. 4 -- -- 153 45 12 214
Hot Sam.................. 52 -- -- -- -- -- 52
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Pretzel Subtotal......... 141 -- 1 301 45 12 500
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Totals................... 433 9 20 722 133 126 1,443
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As of January 1, 2000, our domestic stores were located in 48 states, Guam
and Washington DC as follows:
Mrs. Fields' Original Cookies, Inc.
Store Geography List
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% of
Company- Retail
State Owned Franchised Licensed Total Outlets
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California 66 91 15 172 11.9%
Texas 43 55 5 103 7.1%
New York 32 24 11 67 4.6%
Ohio 47 13 7 67 4.6%
Florida 17 41 7 65 4.5%
Illinois 27 22 8 57 4.0%
Georgia 13 33 3 49 3.4%
Michigan 25 20 3 48 3.3%
Missouri 3 35 2 40 2.8%
Pennsylvania 15 12 13 40 2.8%
Virginia 17 18 2 37 2.6%
Arizona 12 18 3 33 2.3%
North Carolina 4 23 3 30 2.1%
Colorado 3 23 3 29 2.0%
New Jersey 9 16 3 28 1.9%
Indiana 13 10 4 27 1.9%
Iowa 3 24 -- 27 1.9%
Utah 6 20 1 27 1.9%
Washington 8 17 -- 25 1.7%
Louisiana 12 10 2 24 1.7%
Connecticut 8 11 4 23 1.6%
Wisconsin 16 7 -- 23 1.6%
Alabama -- 19 3 22 1.5%
Tennessee 2 18 2 22 1.5%
Maryland 12 6 3 21 1.5%
Minnesota 3 16 -- 19 1.3%
Massachusetts 6 7 5 18 1.2%
South Carolina 8 6 3 17 1.2%
Nevada 3 8 3 14 1.0%
Kansas 2 10 -- 12 0.8%
Kentucky 3 8 1 12 0.8%
Nebraska 3 9 -- 12 0.8%
Oklahoma 3 7 2 12 0.8%
West Virginia 4 5 1 10 0.7%
Oregon 1 8 -- 9 0.6%
Hawaii 1 7 -- 8 0.6%
Idaho 2 6 -- 8 0.6%
North Dakota -- 7 1 8 0.6%
Arkansas 3 3 1 7 0.5%
New Mexico 1 3 2 6 0.4%
South Dakota 1 5 -- 6 0.4%
New Hampshire 1 4 -- 5 0.3%
Wyoming 1 4 -- 5 0.3%
Mississippi -- 4 -- 4 0.3%
Alaska -- 2 -- 2 0.1%
Delaware 2 -- -- 2 0.1%
Guam -- 2 -- 2 0.1%
Maine 1 1 -- 2 0.1%
Montana -- 2 -- 2 0.1%
Washington DC -- 2 -- 2 0.1%
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Subtotal 462 722 126 1,310 90.8%
International Locations -- -- 133 133 9.2%
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TOTAL 462 722 259 1,443 100.0%
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Ingredients, Supplies and Distribution
Ingredients and Supplies. We rely primarily on outside suppliers and
distributors for the ingredients used in our products as well as other items
used in our stores. Mrs. Fields' stores receive frozen products, made according
to our proprietary recipes, from our primary supplier, Pennant Food Corporation,
who currently supplies approximately 98% of Mrs. Fields and Original Cookie
frozen bakery product. The majority of our Hot Sam stores receive frozen pretzel
dough from J&J Foods, Inc. Pennant and J&J use stringent quality controls in
testing ingredients and manufacturing, and products are not released for
distribution unless they pass all quality control steps, including an evaluation
of the finished baked product. Pennant's contract for making frozen products for
Mrs. Fields is renewable every three years. We have identified alternative
suppliers for frozen dough at Mrs. Fields, Original Cookie and Hot Sam.
Our Pretzel Time stores buy a proprietary dry mix from selected
distributors and then mix and bake pretzels at each individual store.
Franchisees buy from various distributors. Pretzelmaker receives frozen pretzel
dough from two separate suppliers.
Great American stores receive "ready-to-bake" refrigerated batter from our
batter facility in Atlanta, which we acquired in the Great American acquisition.
The batter, which has a shelf life of about 90 days, is stored at the batter
facility for an average of one to three weeks, depending on demand, before being
shipped.
Most supplies other than dough (such as beverages and paper products) are
ordered from distributors by either Mrs. Fields or the franchisee and are
directly shipped to the store. We sell Coca Cola soft drinks in our stores under
an exclusive agreement with Coca-Cola USA Fountain.
Distribution. Regional distributors handle distribution of perishable and non-
perishable items to Mrs. Fields and Original Cookie stores weekly. The regional
distributors own and maintain all of the inventory, but are authorized to
purchase inventory items only from authorized vendors at prices that have been
negotiated by Mrs. Fields. Hot Sam and Pretzelmaker distribute perishable and
non-perishable items weekly to stores through selected distribution companies.
Great American stores receive batter from the Atlanta batter facility by
refrigerated common carrier and Pretzel Time and Pretzelmaker franchisees
receive items from a variety of distributors. We ship equipment related items,
including smallwares, equipment and oven parts, directly from public warehouses.
Store Management
Management Structure. We monitor all company-owned and franchised stores with a
staff of regional sales managers. Regional sales managers are responsible for
monitoring all cookie and pretzel stores in their territory. Each regional sales
manager is responsible for overseeing the company-owned or franchised cookie and
pretzel stores within his or her region and reports to one of four regional
vice-presidents of store operations. The field staff is also responsible for
introducing new products and processes to the stores, ensuring proper
implementation and quality control. Each store has an on-site management team
consisting of a manager and an assistant manager. The store manager is
responsible for hiring, training and motivating store personnel.
Management Incentives. Each manager of a company-owned store is eligible for
salary increases and bonuses based upon the performance of his or her store,
including sales, profits and store appearance. We believe that our incentive and
other programs for management have achieved a strong retention rate for
managers. 72% of Mrs. Fields' regional sales managers have been with Mrs. Fields
for at least four years (67% for over five years), and 51% of Mrs. Fields' store
managers have been with Mrs. Fields for at least four years (40% for over five
years).
Training. We believe that store managers are a critical component in creating
an effective retail environment, and accordingly have developed ongoing programs
to improve the quality and effectiveness of our store managers and to increase
retention rates. New store managers are required to attend a two-week training
program at our Salt Lake City training facility and ongoing training courses in
new products, standards, and procedures are made available throughout the year
to all our personnel. New franchisees and store managers of Great American are
required to attend a one-week training program at Great American's Atlanta
training facility, known as "Cookie University." In addition, training courses
are available throughout the year to all Great American and franchisee
personnel.
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Franchise Operations
In accordance with our business strategy, we have been selling, and expect
to continue to sell, selected company-owned stores to franchisees to reduce
costs, increase profitability and to provide for liquidity and the development
of additional stores in the future. We are also actively seeking to franchise
new stores.
Cookies. Each franchisee pays Mrs. Fields an initial franchising fee of $25,000
per Mrs. Fields or Great American store location and is responsible for funding
the building-out of the new store and purchasing initial dough inventory and
supplies, at a total cost of approximately $200,000 and $164,000, respectively
(including the initial franchise fee), although the cost of opening a new store
can vary based on individual operating and location costs. After a store is set
up, a Mrs. Fields franchisee pays royalty fees to us of 6% of the franchised
store's annual gross sales, and a marketing fee of 1% of annual gross sales.
Great American franchisees pay royalty fees of 7% of the franchised store's
annual gross sales. We do not currently anticipate franchising Original Cookie
stores.
Franchisees come from a wide variety of business backgrounds and bring with
them different operating styles and business objectives. Among our franchisees
are full-time store operators, passive investors, retired professionals and
people seeking a second source of income. The majority of our franchisees own
one store. As of January 1, 2000, the 15 largest Mrs. Fields franchisees
operated 160 stores, and the largest Mrs. Fields franchisee operated 16 stores.
Pretzels. Each franchisee pays Pretzel Time an initial franchising fee of
$25,000 per new Pretzel Time store location and is responsible for funding the
building-out of the new store and supplies, at a total cost of approximately
$190,000 to $240,000 (including the initial franchise fee), although the cost of
opening a new store can vary based on individual operating and location costs.
After a store is set up, a franchisee pays royalty fees to Pretzel Time of 7% of
the franchised store's annual gross sales, and a marketing fee of 1% of annual
gross sales.
Each Pretzelmaker franchisee pays an initial franchising fee of $20,000 per
store location and is responsible for funding the building-out of the new store
and supplies, at a total cost of approximately $90,000 to $208,000 (including
the initial franchise fee), although the cost of opening a new store can vary
based on individual operating and location costs. After a store is set up, a
franchisee pays royalty fees of 5% of the franchised store's annual gross sales,
and a marketing fee of 1 1/2% of annual gross sales. We do not franchise Hot Sam
stores.
Franchisee Recruiting and Training. We have been successful in recruiting
franchisees and completing franchise transactions and believe we will continue
to realize significant cash flow from franchising by (1) emphasizing the use of
proprietary dough that minimizes product quality issues and ensures a consistent
product across all outlets, (2) frequent quality, service and cleanliness
evaluations of franchised stores by operations support staff and (3) initial and
continuing training of franchisees to improve their financial and retail sales
skills.
We believe our franchisees are a critical component in creating an
effective retail environment, and accordingly make our ongoing training programs
available to franchisees to improve their quality and effectiveness. Franchisees
are required to attend a two-week training program at our Salt Lake City or
Atlanta training facilities and ongoing training courses in new products,
standards, and procedures are available throughout the year to all franchisee
personnel.
Licensing
In the past few years, we have utilized a "branding" strategy which has
capitalized on the highly-recognized Mrs. Fields brand to build traffic, expand
sales, improve market share, and to increase profits through cultivating
alternative channels of distribution. The following is a list of branding
options, with examples of current licensees within Mrs. Fields' system:
Concept Licensing. We have developed a licensing program for non-mall retail
outlets that enables us to enter difficult-to-reach markets and facilitate brand
exposure through "presence" and "prestige" marketing. Our licensees duplicate
the Mrs. Fields store concept and purchase dough from our various distributors.
Several of these licensees are contract management companies that manage and
operate food service in host locations. Our licensees and their respective
distribution channels include Host Marriott (airports and travel plazas),
ARAMark (stadiums and convention centers) and Holiday Inn Worldwide (hotels).
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Retail Licensing. We plan to capitalize on our brand recognition and the
perception of quality among consumers to expand the product line to include
products sold in other retail environments, including refrigerated dough, dry-
mix and non-food products, and other applications outside the original scope of
our retail cookie store concept. A current example is Maxfield's Chocolates,
which has the exclusive North American rights to sell boxed chocolates and
chocolate candy bars and offers Mrs. Fields' chocolates throughout the
supermarket industry.
Supply Licensing. We currently have an agreement with United Airlines under
which our mail order division sells cookies to the airline and allows the
airline to promote the Mrs. Fields' brand and products to its first-class
customers. We are pursuing similar relationships to compete with other
manufacturers' brands selling in this channel of business.
Mail Order Business
Our mail order division markets a variety of fresh-baked cookies,
chocolates and other gift items through its mail order gift catalog using toll
free telephone numbers, including "1-800-COOKIES." In February 2000, we also
added fresh, hand-cut flowers to our product line. We believe that there is
significant potential in the mail order business and are developing this
division by targeting both corporate customers and individuals with a history of
purchases at Mrs. Fields stores. We also market our products through our web
site at www.mrsfields.com. Internet sales increased 222% in fiscal year 1999 to
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$1.2 million from $373,000 in fiscal year 1998. Overall, the mail order
division had $6.4 million in revenues in fiscal year 1999 representing an
increase of approximately 23.1% over sales for fiscal year 1998.
Trademarks
We are the holder of numerous trademarks that have been federally
registered in the United States and in other countries located throughout the
world. We are a party to disputes with respect to trademarks, none of which, in
the opinion of management of Mrs. Fields, is material to Mrs. Fields' business,
financial condition or results of operations.
Competition
We compete for both leasing opportunities and customers with other cookie
and pretzel retailers, as well as other confectionery, sweet snack and specialty
food retailers, including cinnamon rolls, yogurt, ice cream, baked goods and
candy shops. The specialty retail food and snack industry is highly competitive
with respect to price, service, location and food quality, and there are many
well-established competitors with greater resources than those of Mrs. Fields.
We compete with these retailers on the basis of price, quality, location and
service. We face competition from a wide variety of sources, including such
companies as Cinnabon, Auntie Anne's Soft Pretzels and Baskin-Robbins 31
Flavors.
Employees
As of January 1, 2000, we had approximately 3,893 employees in company-
owned stores, of whom approximately 691 were store managers and assistant store
managers and 3,202 were part-time sales assistants. Our typical store employs 5
to 13 employees. During the period from November through February, we may hire
as many as 750 additional part-time employees to handle additional mall traffic.
Most employees are paid on an hourly basis, except store managers. Our employees
are not unionized. We have never experienced any significant work stoppages and
believe that our employee relations are good.
Many of our employees are paid hourly rates based upon the federal minimum
wage. As of January 1, 2000, 602 of our 3,893 employees in company-owned stores
earned the federal minimum wage. Minimum wage increases are expected to
negatively impact our labor costs, but management believes this impact can be
negated in the long-term through increased efficiencies in its operations and,
as necessary, through retail price increases.
10
<PAGE>
Seasonality
Our sales and profitability in both the cookie business and the pretzel
business are subject to seasonal fluctuation and are traditionally higher during
the Thanksgiving and Christmas holiday seasons and other gift-giving holidays
due to increased mall traffic and holiday gift purchases.
Management Information Systems
We have made a substantial investment in developing our point-of-sale
management information system, which gathers information transmitted daily to
corporate headquarters from most of the Mrs. Fields brand continuing company-
owned stores. The system tracks sales from the point of purchase through a
central mid-range computer to store, district and corporate management, allowing
management to track performance data and react quickly to developments at the
store level. We installed our upgraded back-office system, along with point-of-
sale registers and new computers in our continuing company-owned Original Cookie
stores, Hot Sam stores, Pretzelmaker stores, Pretzel Time stores and selected
Great American stores as of December 1999.
We have replaced our sales collection systems with software and hardware
that is Year 2000 compliant at a cost of approximately $1.9 million. Funding for
this project was provided by internal cash flow and by a lease finance company.
Prior to January 1, 2000, management assessed Year 2000 issues with respect
to our significant vendors and financial institutions as to their compliance
plans and whether any Year 2000 issues would impede the ability of such vendors
to continue providing goods and services to Mrs. Fields. We did not experience
any disruptions of our operations due to Year 2000 issues or Year 2000 issues
experienced by any of our vendors.
Government Regulation
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 2. Properties
As of January 1, 2000, Mrs. Fields leased 787 retail stores, of which 331
were subleased to franchisees under terms which cover all obligations of Mrs.
Fields thereunder. Under its franchise agreements, Mrs. Fields has certain
rights to gain control of a retail site in the event of default under the lease
or the franchise agreement. Most of Mrs. Fields' operating leases provide for
the payment of lease rents plus real estate taxes, utilities, insurance, common
area charges and certain other expenses, as well as contingent rents which
generally range from 8% to 10% of net retail store sales in excess of stipulated
amounts.
Mrs. Fields currently leases approximately 50,000 square feet of office
space in Salt Lake City, Utah for its corporate headquarters, product
development, training and mail order operations. Mrs. Fields also owns a 40,000
square foot batter facility in Atlanta, Georgia. Substantially all of the
equipment used in company-owned retail outlets, the batter facility and the
corporate headquarters are owned by Mrs. Fields.
Item 3. Legal Proceedings
In the ordinary course of business, Mrs. Fields is involved in routine
litigation, including franchise disputes and trademark 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 its business,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information and Number of Stockholders. Mrs. Fields' Original
Cookies, Inc. is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc.
("Mrs. Fields' Holding"). There is no established trading market for Mrs. Fields
or Mrs. Fields' Holding's common stock.
Dividends. For the fiscal years ended January 2, 1999 and January 1, 2000,
Mrs. Fields did not declare or pay cash dividends. During the fiscal year ended
January 3, 1998, the Company declared and paid a cash dividend of $1,065,000 to
Mrs. Fields' Holding. Mrs. Fields typically does not declare and pay cash
dividends to its common stockholders and has no intention of declaring such
dividends into the foreseeable future.
Item 6. Selected Financial Data
The following table presents historical financial data for Mrs. Fields'
Original Cookies, Inc. and subsidiaries and its predecessors; namely, Mrs.
Fields Inc. and subsidiaries, The Original Cookie Company, Incorporated and the
pretzel business of Hot Sam Company, Inc. as of the dates and for the periods
indicated. The selected historical financial data has been derived from the
audited financial statements of Mrs. Fields and its predecessors. Due to the
acquisitions of the net assets of Mrs. Fields Inc., Original Cookie and Hot Sam
on September 17, 1996, the financial data is not comparable for all periods.
However, in order for the presentations to be meaningful for the periods
presented, certain statement of operations information for the predecessors has
been reclassified to be consistent with the Mrs. Fields historical financial
statement presentation. The selected historical financial data should be read in
conjunction with ''Management's Discussion and Analysis of Financial Condition
and Results of Operations'' and the historical financial statements and the
related notes to it, contained elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Predecessors
--------------------------------------------------------------------
The Original Cookie
Company, Incorporated
and the Carved-Out Portion
Mrs. Fields Inc. and of Hot Sam Company, Inc.
Subsidiaries(1) Combined(1)
--------------------------------------------------------------------
December
31, 1995 December 31,
52 Weeks Ended through 52 Weeks Ended 1995 through
December 30, September 17, December 30, September 17,
1995 (2) 1996 (2) 1995 (2) 1996 (2)
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net store and food sales.................................... $ 59,956 $ 31,115 $ 85,581 $ 54,366
Net store contribution(3)................................... 6,591 3,747 13,063 5,854
Franchising and licensing, net.............................. 5,993 3,836 -- --
General and administrative expenses......................... 15,612 8,984 9,216 7,538
Income (loss) from operations............................... (3,526) (1,742) 2,435 (2,772)
Net loss.................................................... (2,368) (2,304) (2,096) (5,645)
Other Data:
Interest expense............................................ 51 80 4,356 2,895
Total depreciation and amortization......................... 3,525 1,911 6,902 4,937
Capital expenditures........................................ 4,146 1,054 568 1,200
Store contribution for stores in the process of.............
being closed or franchised(3).............................. $ (802) $ (695) $ (1,542) $ (1,751)
Ratio of earnings to fixed charges(4)....................... -- -- -- --
Balance Sheet Data:
Working capital (deficit)................................... $ (3,114) $ (21,704) $ 128 $ (3,640)
Total assets................................................ 23,033 19,144 66,282 59,024
Debt and capital lease obligations, including
current portion............................................ 21,226 21,224 32,357 30,977
Total stockholders' equity (deficit)........................ (28,017) (30,318) 22,588 16,943
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Mrs. Fields(1)
----------------------------------------------------------
September 18, 53 Weeks 52 Weeks 52 Weeks
1996 through Ended Ended Ended
December 28, January 3, January 2, January 1,
1996(2) 1998(2) 1999(2) 2000(2)
------- ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net store and food sales.............................................. $ 40,849 $127,845 $140,235 $152,268
Net store contribution(3)............................................. 9,707 25,044 20,166 20,802
Franchising and licensing............................................. 1,267 6,563 14,001 28,669
General and administrative expenses................................... 4,035 16,192 19,017 21,972
Store closure provision (benefit)..................................... -- 538 7,303 (1,579)
Income (loss) from operations......................................... 5,649 8,415 (5,389) 10,381
Net income (loss)..................................................... 1,961 (974) (19,143) (8,221)
Other Data:
Interest expense...................................................... 1,867 7,830 13,197 17,880
Total depreciation and amortization................................... 2,344 10,403 19,820 24,206
Capital expenditures.................................................. 1,638 4,678 8,235 5,157
Store contribution for stores in the process of being
closed or franchised(3)............................................ $ 513 $ (1,798) $ (2,054) $ (312)
Ratio of earnings to fixed charges(4)................................. 2.85x -- -- --
Balance Sheet Data:
Working capital (deficit)............................................. $ (2,889) $ 13,133 $(12,727) $ (3,786)
Total assets.......................................................... 110,055 149,684 231,906 208,410
Mandatorily redeemable cumulative preferred stock of subsidiaries..... 3,597 902 1,261 1,070
Debt and capital lease obligations, including current portion......... 67,563 101,081 150,989 146,485
Total stockholder's equity............................................ 16,961 30,765 40,678 34,457
</TABLE>
(1) On September 17, 1996, Mrs. Fields completed the acquisitions of
substantially all of the assets and assumed certain liabilities of the
predecessors. As a result of purchase accounting adjustments related to the
acquisitions, the Mrs. Fields' financial statements are not directly
comparable to the predecessors' financial statements.
(2) Mrs. Fields and its predecessors operate using a 52/53-week year ending
near December 31.
(3) Store contribution is determined by subtracting all store operating
expenses including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. Store contribution for stores in the process of being closed or
franchised as a separate caption is not in accordance with accounting
principles generally accepted in the United States. Store contribution may
not be comparable to other similarly titled measures.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued
and net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For fiscal year 1995 and the period December 31, 1995
through September 17, 1996, Mrs. Fields Inc. and subsidiaries' earnings
were insufficient to cover fixed charges by $2,127,000 and $2,099,000,
respectively. For fiscal year 1995 and the period December 31, 1995 through
September 17, 1996, Original Cookie and Hot Sam (combined) earnings were
insufficient to cover fixed charges by $1,833,000 and $5,645,000,
respectively. For the 53 weeks ended January 3, 1998, and the 52 weeks
ended January 2, 1999 and January 1, 2000, Mrs. Fields' earnings were
insufficient to cover fixed charges by $319,000, $18,827,000 and $8,003,000
respectively.
13
<PAGE>
Item 7. 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. formed Mrs.
Fields' Original Cookies, Inc. and The Mrs. Fields' Brand, Inc. as subsidiaries
of Mrs. Fields' Holding Company, Inc.
On September 17, 1996, Mrs. Fields 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 and the pretzel
business of Hot Sam Company, Inc.
Mrs. Fields set out to increase the 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 has been and
continues to be the closing or franchising of certain company-owned stores that
do not meet specific financial and geographical criteria established by
management. Implementation of this element of the business plan has resulted in
enhanced operating margins as these stores are franchised or closed. In some of
our tables we refer to stores not planned to be franchised or closed as "core"
stores, meaning continuing company-owned stores. Continuing company-owned stores
will be operated by Mrs. Fields into the foreseeable future. As a result of
converting certain stores to franchises, royalty revenues have and are expected
to continue to increase and net store sales and overhead expenses associated
with operating those stores are expected to decrease.
As Mrs. Fields exits stores it has identified for closure through closing
or franchising, results from operations are expected to improve on both a short-
term and long-term basis. With respect to these specific stores both ongoing
operating losses and negative cash flows are expected to cease.
Cash payments to landlords for early lease termination costs negatively
impact our immediate liquidity position. However, our overall financial position
is expected to be strengthened over time as cash flows from operating activities
increase. As cash is used to fund the store closure plans, corresponding store
closure reserves are reduced which has a neutral impact on working capital and
financial position. Should Mrs. Fields' cost estimates for exiting the remaining
stores not prove sufficient, it would have a negative impact on both liquidity
and results of operations.
Mrs. Fields believes that it has sufficient liquidity to complete its store
closure plans. A complete analysis of Mrs. Fields' store closure plans are
included in Note 5 to the Consolidated Financial Statements.
Mrs. Fields 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 Mrs. Fields'
Holding, Mrs. Fields' Pretzel Concepts, Inc., acquired substantially all of the
assets and assumed certain liabilities of H&M Concepts Ltd. Co., the largest
franchisee of Pretzel Time, Inc. On September 2, 1997, Mrs. Fields' Holding
acquired 56% of the common stock of Pretzel Time, the franchisor of the Pretzel
Time concept.
On November 26, 1997, Mrs. Fields received as a contribution from Mrs.
Fields' Holding of all of the common stock of The Mrs. Fields' Brand, Inc., the
business of Mrs. Fields' Pretzel Concepts and 56% of the shares of common stock
of Pretzel Time. On January 2, 1998 and June 12, 1998, Mrs. Fields acquired an
additional 4% and 10%, respectively, of Pretzel Time common stock, bringing its
total ownership to 70%. On December 9, 1998, Mrs. Fields purchased three percent
of Pretzel Time common stock for $0.5 million in cash and on December 30, 1998
Mrs. Fields completed the acquisition of the remaining outstanding common stock
of Pretzel Time under a stock purchase agreement, for a purchase price of
approximately $4.7 million.
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital
stock and subordinated indebtedness of Cookies USA, the parent company of Great
American Cookie Company, Inc., for a total purchase price of $18.4 million. Mrs.
Fields also retired approximately $38.9 million of outstanding Great American
notes. Concurrently, Cookies USA was merged with and into Mrs. Fields, at which
time Great American became a wholly owned subsidiary of Mrs. Fields. At the same
time Mrs. Fields also purchased the stock of two Great American franchisees,
Deblan Corporation and Chocolate Chip Cookies of Texas, Inc., together owning
and operating 29 Great American
14
<PAGE>
franchised stores, for total consideration of $14.4 million. Deblan and
Chocolate Chip were merged with and into Great American at that time. On
September 9, 1998, Mrs. Fields acquired eight Great American franchise stores
(Karp) from a Great American franchisee, for a purchase price of $1.9 million.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and
related business and operations of eleven Great American franchise stores
(Cookie Conglomerate) from a Great American franchisee for a total purchase
price of $2.8 million.
On November 19, 1998, Mrs. Fields, under a stock purchase agreement among
Pretzelmaker Holdings, Inc., holders of all outstanding capital stock of
Pretzelmaker, and Mrs. Fields, acquired all of the outstanding capital stock of
Pretzelmaker for $5.4 million and assumed liabilities of $1.6 million related to
severance payments in lieu of outstanding stock options and other liabilities.
Year 2000
Prior to January 1, 2000, management assessed the Year 2000 issue and
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 our vendors and
suppliers.
Mrs. Fields replaced its sales collection systems with software and
hardware that is Year 2000 compliant. The approximate cost of this project was
$1.9 million and included software development and new store computers and
registers. Funding for this project was provided by internal cash flow and by a
lease finance company. No information technology projects were deferred as a
result of our Year 2000 efforts.
Prior to January 1, 2000, we completed an assessment of Year 2000 issues
with respect to our significant vendors and financial institutions as to their
compliance plans and whether any Year 2000 issues would impede the ability of
such vendors to continue providing goods and services to us. Failure of our key
suppliers to remedy their own Year 2000 issues could have delayed shipments of
essential products, thereby disrupting our operations. Furthermore, we rely on
various service providers, such as utility and telecommunication service
companies, which are beyond our control. We did not experience any disruptions
of our operations due to Year 2000 issues or Year 2000 issues experienced by any
of our vendors.
Results of Operations of Mrs. Fields
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.
15
<PAGE>
<TABLE>
<CAPTION>
% %
For the 53 For the 52 Change For the 52 Change
Weeks Ended Weeks Ended From Weeks Ended From
January 3, January 2, 1997 to January 1, 1998 to
1998 1999 1998 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (Dollars in thousands)
Revenues:
Net store and food sales..................................... $127,845 $140,235 9.7% $152,268 8.6%
Franchising.................................................. 4,535 12,464 174.8 24,782 98.8
Licensing.................................................... 2,028 1,537 (24.2) 3,887 152.9
-------- -------- --------
Total revenues.............................................. 134,408 154,236 14.8 180,937 17.3
-------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs............................ 66,832 75,003 12.2 79,634 6.2
Cost of sales................................................ 32,028 38,482 20.2 46,323 20.4
General and administrative expenses.......................... 16,192 19,017 17.4 21,972 15.5
Store closure provision (benefit)............................ 538 7,303 1,257.4 (1,579) (121.6)
Depreciation and amortization................................ 10,403 19,820 90.5 24,206 22.1
-------- -------- --------
Total operating costs and expenses.......................... 125,993 159,625 26.7 170,556 6.8
-------- -------- --------
Interest expense.............................................. (7,830) (13,197) 68.5 (17,880) 35.5
Interest income............................................... 246 623 153.3 53 (91.5)
Other expense, net............................................ (1,805) (1,180) (34.6) (775) (34.3)
-------- -------- --------
Net loss...................................................... $ (974) $(19,143) 1,865.4% $ (8,221) (57.1)%
======== ======== ========
Supplemental Information:
Continuing Company-owned Stores:
Net store and food sales..................................... $108,174 $122,713 13.4% $136,821 11.5%
-------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs............................ 50,858 60,900 19.7 68,564 12.6
Cost of sales................................................ 26,578 33,621 26.5 36,916 9.8
Depreciation and amortization................................ 3,896 5,972 53.3 10,227 71.2
-------- -------- --------
Total operating costs and expenses.......................... 81,332 100,493 23.6 115,707 15.1
-------- -------- --------
Continuing company-owned store contribution................... $ 26,842 $ 22,220 (17.2) $ 21,114 (5.0)
======== ======== ========
Stores in the Process of Being Closed or Franchised:
Net store and food sales...................................... $ 19,671 $ 17,522 (10.9) $ 15,447 (11.8)
-------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs............................ 15,974 14,103 (11.7) 11,070 (21.5)
Cost of sales................................................ 5,450 4,861 (10.8) 4,529 (6.8)
Depreciation and amortization................................ 45 612 1,260.0 160 (73.9)
-------- -------- --------
Total operating costs and expenses.......................... 21,469 19,576 (8.8) 15,759 (19.5)
-------- -------- --------
Stores in the process of being closed or franchised loss...... $ (1,798) $ (2,054) 14.2% $ (312) (84.8)%
======== ======== ========
</TABLE>
16
<PAGE>
52 Weeks Ended January 1, 2000 ("Fiscal 1999") Compared to the 52 Weeks Ended
January 2, 1999 ("Fiscal 1998")
Company-owned and Franchised or Licensed Store Activity
As of January 1, 2000, there were 462 company-owned stores and 981
franchised or licensed stores in operation. The store activity for fiscal 1998
and fiscal 1999 is summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1999
----------------------- ------------------------
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.......... 481 553 566 972
Stores opened (including relocations and acquisitions)...... 128 504 13 100
Stores closed (including relocations)....................... (20) (78) (26) (123)
Non-continuing company-owned (exit plan) stores closed
(September 18, 1996 forward)............................... (30) -- (59) --
Stores sold to franchisees.................................. (11) 11 (13) 13
Non-continuing company-owned (exit plan) stores franchised
(September 18, 1996 forward)............................... (15) 15 (24) 24
Stores acquired from franchisees............................ 33 (33) 5 (5)
--- --- --- ----
Stores open as of the end of the fiscal year................ 566 972 462 981
=== === === ====
</TABLE>
Revenues
Net Store and Food Sales. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $12,033,000, or 8.6%,
from $140,235,000 to $152,268,000 for fiscal 1999 compared to fiscal 1998.
Net store sales from continuing company-owned stores and mail order
increased $14,108,000, or 11.5%, from $122,713,000 to $136,821,000 for fiscal
1999 compared to fiscal 1998. The increase in net store sales from continuing
company-owned stores was primarily attributable to:
(1) the operation for a full year of 66 Great American stores
acquired in connection with the acquisitions of Great American,
Deblan, Chocolate Chip and Karp in August and September 1998,
(2) the operation of two Pretzelmaker continuing company-owned stores
acquired in connection with the Pretzelmaker acquisition in
November 1998,
(3) a 21% increase in mail order sales.
(4) the introduction of a refrigerated cookie dough product for sale
in retail supermarkets.
The increase in net store sales was also offset in part by negative same
store sales. Based on stores that have been open for at least two years
(adjusted for the calendar shift), system-wide continuing company-owned store
sales were down 1% during the fiscal 1999 compared to the same period in fiscal
1998.
Net store sales from stores in the process of being closed or franchised
decreased $2,075,000, or 11.8%, from $17,522,000 to $15,447,000 for fiscal 1999
compared to fiscal 1998. This decrease results from closing or franchising 150
stores during fiscal 1999.
Franchising Revenues. Franchising revenues increased $12,318,000, or 98.8%,
from $12,464,000 to $24,782,000 for fiscal 1999 compared to fiscal 1998. The
increase in franchising revenues was primarily attributable to royalties earned
from the 211 Great American franchised stores obtained in connection with the
acquisitions of Great American, Deblan, Chocolate Chip and Karp in August and
September 1998, the 199 Pretzelmaker franchised stores acquired in November 1998
and the additional stores that were franchised by the Company in 1999.
17
<PAGE>
Licensing Revenues. Licensing revenues increased $2,350,000, or 152.9%,
from $1,537,000 to $3,887,000 for fiscal 1999 compared to fiscal 1998. The
increase in licensing revenues was attributable to license fees on new contracts
entered into in 1999 and royalties earned on existing licensing agreements. The
increase was partially offset by a decrease in the number of licensed locations
during 1999.
Total Revenues. Total revenues increased by $26,701,000, or 17.3%, from
$154,236,000 to $180,937,000 for fiscal 1999 compared to fiscal 1998 due to the
reasons discussed above.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $4,631,000, or 6.2%, from $75,003,000 to $79,634,000 for fiscal 1999
compared to fiscal 1998.
Selling and store occupancy costs for continuing company-owned stores
increased by $7,664,000, or 12.6%, from $60,900,000 to $68,564,000 for fiscal
1999 compared to fiscal 1998. Within this overall increase, selling expenses for
continuing company-owned stores increased by $4,222,000, or 15.7%, from
$26,930,000 to $31,152,000 for the fiscal 1999 compared to fiscal 1998. The
increase in selling expenses was primarily attributable to the 66 Great American
continuing company-owned stores acquired in connection with the acquisitions of
Great American, Deblan, Chocolate Chip and Karp in August and September 1998 and
the two Pretzelmaker stores acquired in November 1998. Store occupancy costs for
continuing company-owned stores increased $3,442,000, or 10.1%, from $33,970,000
to $37,412,000 for fiscal 1999 compared to fiscal 1998. The increase in store
occupancy costs was primarily attributable to the increase in the number of
stores discussed above, rent escalations in existing leases and lease renewal
increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $3,033,000, or 21.5%, from $14,103,000 to $11,070,000
for fiscal 1999 compared to fiscal 1998. This decrease was primarily the result
of closing 150 stores throughout fiscal 1999.
Cost of Sales. Total cost of sales increased $7,841,000, or 20.4%, from
$38,482,000 to $41,455,000 for fiscal 1999 compared to fiscal 1998.
Cost of sales for continuing company-owned stores increased $3,295,000, or
9.8%, from $33,621,000 to $36,916,000 for fiscal 1999 compared to fiscal 1998.
This increase was primarily the result of the addition 65 Great American
continuing company-owned stores acquired in connection with the acquisitions of
Great American, Deblan, Chocolate Chip and Karp in August and September 1998 and
2 Pretzelmaker stores acquired in November 1998. Mail order cost of sales
increased consistent with the increased mail order sales.
Cost of sales for stores in the process of being closed or franchised
decreased $332,000, or 6.8%, from $4,861,000 to $4,529,000 for fiscal 1999
compared to fiscal 1998. This decrease was primarily the result of closing or
franchising 150 stores during fiscal 1999.
General and Administrative Expenses. General and administrative expenses
increased $2,955,000, or 15.5%, from $19,017,000 to $21,972,000 for fiscal 1999
compared to fiscal 1998. The decrease in general and administrative expenses was
primarily attributable an effort on the part of the Company to reduce expenses.
Store Closure Provision. During the fourth quarter of 1998, the Company
recorded an additional $7,303,000 in store closure reserves to cover early lease
termination costs under a plan to close or franchise 54 existing stores that
were not earning acceptable levels of contribution. During 1999, the Company was
successful in closing certain of these stores at a negotiated cost less than had
been provided for in the plan. A total of $1,579,000 of costs in excess of the
amounts required to close the stores have been reversed in 1999. See Note 5 to
the Consolidated Financial Statements for a detailed explanation of the store
closure reserve.
Depreciation and Amortization Expense. Total depreciation and amortization
expense increased by $4,386,000, or 22.1%, from $19,820,000 to $24,206,000 for
fiscal 1999 compared to fiscal 1998. This increase was primarily attributable to
increased goodwill amortization from the acquisitions of H&M and Pretzel Time in
fiscal 1997 and the acquisitions of Great American, Deblan, Chocolate Chip and
Pretzelmaker in fiscal 1998.
18
<PAGE>
During fiscal 1999, the Company wrote down, to net realizable value,
approximately $1,645,000 of impaired long-lived assets. This expense is included
in depreciation and amortization expense. The Company also assessed the
realization of goodwill associated with these stores and recorded an impairment
of goodwill totaling $237,000.
Depreciation and amortization expense for stores in the process of being
closed or franchised decreased $452,000, or 73.9%, from $612,000 to $160,000 for
fiscal 1999 compared to fiscal 1998. This decrease in depreciation and
amortization expense was primarily attributable to closing or franchising 150
stores in fiscal 1999. Substantially all of the long-lived assets had been
written down to their net realizable value in fiscal 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $10,931,000, or 6.8%, from $159,625,000 to $170,556,000 for fiscal
1999 compared to fiscal 1998 for the reasons discussed above.
Interest Expense. Interest expense increased $4,683,000, or 35.5%, from
$13,197,000 to $17,880,000 for fiscal 1999 compared to fiscal 1998. This
increase was primarily attributable to interest expense for a full fiscal year
on the $40,000,000 senior notes issued in August 1998, increased levels of
capital leases and usage of the Company's line of credit.
Interest Income. Interest income decreased $570,000, or 91.5%, from
$623,000 to $53,000 for fiscal 1999 compared to fiscal 1998. In 1998, the
Company earned interest on excess cash provided by the $100,000,000 senior notes
that were placed in November 1997 and the $40,000,000 senior notes placed in
August 1998. This excess cash was used to acquire Great American and
Pretzelmaker and, therefore, was not available for investment in 1999.
Other Expenses. Other expenses for fiscal 1999 were comparable to fiscal
1998.
Net Loss. The net loss decreased by $10,922,000, or 57.1%, from $19,143,000
to $8,221,000 for fiscal 1999, compared to fiscal 1998 due to the combination of
factors described above.
Income from Continuing Company-Owned Stores. Income from continuing
company-owned stores decreased $1,106,000, or 5.0%, from $22,220,000 in fiscal
1998 to $21,114,000 in fiscal 1999. Depreciation and amortization from the
stores acquired in fiscal 1998 increased $4,255,000.
Loss from Stores in the Process of Being Closed or Franchised. The loss
from stores in the process of being closed or franchised decreased by
$1,742,000, or 84.8%, from $2,054,000 to $312,000 for fiscal 1999 compared to
fiscal 1998. The decreased loss was primarily attributable to closing 150 stores
in fiscal 1999.
52 Weeks Ended January 2, 1999 ("Fiscal 1998") Compared to the 53 Weeks Ended
January 3, 1998 ("Fiscal 1997")
Company-owned and Franchised or Licensed Store Activity
As of January 2, 1999, there were 566 company-owned stores and 972
franchised or licensed stores in operation. The store activity for fiscal 1997
and fiscal 1998 is summarized as follows:
19
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
------------------------ ------------------------
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.......... 482 418 481 553
Stores opened (including relocations and acquisitions)...... 86 217 128 504
Stores closed (including relocations)....................... (7) (89) (20) (78)
Non-continuing company-owned (exit plan) stores closed
(September 18, 1996 forward)............................... (73) -- (30) --
Stores sold to franchisees.................................. (3) 3 (11) 11
Non-continuing company-owned (exit plan) stores franchised
(September 18, 1996 forward)............................... (9) 9 (15) 15
Stores acquired from franchisees............................ 5 (5) 33 (33)
--- --- --- ---
Stores open as of the end of the fiscal year................ 481 553 566 972
=== === === ===
</TABLE>
Revenues
Net Store and Food Sales. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $12,390,000, or 9.7%,
from $127,845,000 to $140,235,000 for fiscal 1998 compared to fiscal 1997.
Net store sales from continuing company-owned stores and mail order
increased $14,539,000, or 13.4%, from $108,174,000 to $122,713,000 for fiscal
1998 compared to fiscal 1997. The increase in net store sales from continuing
company-owned stores was primarily attributable to:
(1) the operation of 85 Pretzel Time continuing company-owned stores
acquired in connection with the acquisition of H&M and Pretzel
Time in July 1997,
(2) the operation of 65 Great American stores acquired in connection
with the acquisitions of Great American, Deblan, Chocolate Chip,
and Karp in August and September 1998,
(3) a 35.5% increase in mail order sales.
This increase in net store sales from continuing company-owned stores was
offset in part by the negative effect of a calendar shift. Mrs. Fields' year end
was December 28 in 1996 and January 3, 1998 in 1997. As a result, the New Year's
holiday week fell in the first quarter of fiscal 1997 and again in the fourth
quarter of fiscal 1997. The first quarter of 1998 did not benefit from the New
Year's holiday sales.
The increase in net store sales was also offset in part by negative same
store sales. Based on stores that have been open for at least two years
(adjusted for the calendar shift), system-wide continuing company-owned store
sales were down 1.8% during fiscal 1998 compared to fiscal 1997. Additionally,
there were only 52 weeks in fiscal 1998 compared to 53 weeks in fiscal 1997.
Net store sales from stores in the process of being closed or franchised
decreased $2,149,000, or 10.9%, from $19,671,000 to $17,522,000 for fiscal 1998
compared to fiscal 1997. This decrease results from closing or franchising 45
stores during fiscal 1998 and the effect of closing or franchising 82 stores
during fiscal 1997.
Franchising Revenues. Franchising revenues increased $7,929,000, or 174.8%,
from $4,535,000 to $12,464,000 for fiscal 1998 compared to fiscal 1997. The
increase in franchising revenues was primarily attributable to royalties earned
from 141 Pretzel Time franchised stores obtained in connection with the
acquisition of H&M and Pretzel Time in 1997, the 211 Great American franchised
stores obtained in connection with the acquisitions of Great American, Deblan,
Chocolate Chip and Karp in August and September 1998 and the 199 Pretzelmaker
franchised stores acquired in November 1998.
Licensing Revenues. Licensing revenues decreased $491,000, or 24.2%, from
$2,028,000 to $1,537,000 for fiscal 1998 compared to fiscal 1997. The decrease
in licensing revenues was primarily attributable to reduced concept licensing
royalties.
20
<PAGE>
Total Revenues. Total revenues increased by $19,828,000, or 14.8%, from
$134,408,000 to $154,236,000 for fiscal 1998 compared to fiscal 1997 due to the
reasons discussed above.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $8,171,000, or 12.2%, from $66,832,000 to $75,003,000 for fiscal 1998
compared to fiscal 1997.
Selling and store occupancy costs for continuing company-owned stores
increased by $10,042,000, or 19.7%, from $50,858,000 to $60,900,000 for fiscal
1998 compared to fiscal 1997. Within this overall increase, selling expenses for
continuing company-owned stores increased by $4,836,000, or 21.9%, from
$22,094,000 to $26,930,000 for fiscal 1998 compared to fiscal 1997. The increase
in selling expenses was primarily attributable to the 85 Pretzel Time continuing
company-owned stores acquired in connection with the acquisitions of H&M and
Pretzel Time in 1997, the 65 Great American continuing company-owned stores
acquired in connection with the acquisitions of Great American, Deblan,
Chocolate Chip and Karp in August and September 1998, the 2 Pretzelmaker stores
acquired in November 1998, and the effect of the minimum wage increasing to
$5.15 from $4.75 on September 1, 1997. Store occupancy costs for continuing
company-owned stores increased $5,206,000, or 18.1%, from $28,764,000 to
$33,970,000 for fiscal 1998 compared to fiscal 1997. The increase in store
occupancy costs was primarily attributable to the increase in the number of
stores discussed above, Mrs. Fields' reacquiring 33 continuing company-owned
stores from franchisees during fiscal 1998, rent escalations in existing leases
and lease renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $1,871,000, or 11.7%, from $15,974,000 to $14,103,000
for fiscal 1998 compared to fiscal 1997. This decrease was primarily the result
of closing or franchising 45 stores during fiscal 1998 and the effect of closing
or franchising 82 stores during fiscal 1997.
Cost of Sales. Total cost of sales increased $6,454,000, or 20.2%, from
$32,028,000 to $38,482,000 for fiscal 1998 compared to fiscal 1997.
Cost of sales for continuing company-owned stores increased $7,043,000, or
26.5%, from $26,578,000 to $33,621,000 for fiscal 1998. This increase was
primarily the result of the addition of 85 Pretzel Time continuing company-owned
stores in July 1997, 65 Great American continuing company-owned stores acquired
in connection with the acquisitions of Great American, Deblan, Chocolate Chip
and Karp in August and September 1998 and 2 Pretzelmaker stores acquired in
November 1998. Cost of sales also increased due to the addition of the Great
American batter facility in August 1998 which produces batter for the Great
American stores, food costs associated with increased mail order sales and the
increasing cost of butter. Butter is one of the main ingredients in a variety of
our products and is a condiment for other products. The price of butter has
increased from $0.78/lb. at the beginning of fiscal 1997 to a peak of $2.92/lb.
in September 1998. Additionally, distribution costs increased during fiscal 1998
as Mrs. Fields' changed distributors to improve product availability and the
reliability of service to the stores.
Cost of sales for stores in the process of being closed or franchised
decreased $589,000, or 10.8%, from $5,450,000 to $4,861,000 for fiscal 1998
compared to fiscal 1997. This decrease was primarily the result of closing or
franchising 45 stores during fiscal 1998 and the effect of closing or
franchising 82 stores during fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased $2,825,000, or 17.4%, from $16,192,000 to $19,017,000 for fiscal 1998
compared to fiscal 1997. The increase in general and administrative expenses was
primarily attributable to the acquisitions of H&M and Pretzel Time in 1997, the
acquisitions of Great American, Deblan, Chocolate Chip, Karp and Pretzelmaker in
1998.
Store Closure Provision. During the fourth quarter of 1998, management
reassessed its strategy with respect to acceptable levels of contribution from
certain existing stores. This resulted in management setting out a plan to close
or franchise 54 existing stores. The Company recorded an additional $7,303,000
in store closure reserves to cover early lease termination costs. Management
believes that the level of store closure reserves is adequate to provide for all
closure costs for these stores.
21
<PAGE>
Depreciation and Amortization Expense. Total depreciation and amortization
expense increased by $9,417,000, or 90.5%, from $10,403,000 to $19,820,000 for
fiscal 1998 compared to fiscal 1997. This increase was primarily attributable to
increased goodwill amortization from the acquisitions of H&M and Pretzel Time in
fiscal 1997 and the acquisitions of Great American, Deblan, Chocolate Chip and
Pretzelmaker in fiscal 1998.
For stores with negative contribution that were determined to be closed or
franchised, the Company wrote down the related long-lived assets to net
realizable value. This expense is included in depreciation and amortization in
the fiscal 1998 statement of operations and totaled $3,098,000. The Company also
assessed the realization of goodwill associated with these stores and recorded
an impairment of goodwill totaling $1,033,000 during fiscal 1998.
Depreciation and amortization expense for continuing company-owned stores
increased $ 2,076,000, or 53.3%, from $3,896,000 to $5,972,000 for fiscal 1998
compared to fiscal 1997. This increase in depreciation and amortization expense
was primarily attributable to the addition of 85 Pretzel Time continuing
company-owned stores in July 1997, 65 Great American continuing company-owned
stores in August and September 1998 and the acquisition of 2 Pretzelmaker
continuing company-owned stores in 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $33,632,000, or 26.7%, from $125,993,000 to $159,625,000 for fiscal
1998 compared to fiscal 1997 for the reasons discussed above.
Interest Expense. Interest expense increased $5,367,000, or 68.5%, from
$7,830,000 to $13,197,000 for fiscal 1998 compared to fiscal 1997. This increase
was primarily attributable to interest expense on the $100,000,000 senior notes
that were placed in November 1997 and the $40,000,000 senior notes placed in
August 1998.
Interest Income. Interest income increased $377,000, or 153.3%, from
$246,000 to $623,000 for fiscal 1998 compared to fiscal 1997. This increase was
primarily the result of interest earned on excess cash provided by the
$100,000,000 senior notes that were placed in November 1997 and the $40,000,000
senior notes placed in August 1998.
Other Expenses. Other expenses decreased $625,000, or 34.6%, from
$1,805,000 to $1,180,000 for fiscal 1998 compared to fiscal 1997. This decrease
was primarily attributable to minority interest from the acquisitions of H&M and
Pretzel Time in 1997 and a decrease in the income tax provision during fiscal
1998.
Net Loss. The net loss increased by $18,169,000, or 1,865.4%, from $974,000
to $19,143,000 for fiscal 1998 compared to fiscal 1997 due to the combination of
factors described above.
Income from Continuing Company-Owned Stores. Income from continuing
company-owned stores decreased by $4,622,000, or 17.2%, from $26,842,000 to
$22,220,000 for fiscal 1998 compared to fiscal 1997. Income from continuing
company-owned stores was negatively impacted by a 1.8% decline in sales from
stores that have been open at least two years and by the increases in selling
and store occupancy costs, food cost of sales and depreciation and amortization
described above. Income from continuing company-owned stores was also negatively
impacted by a calendar shift whereby Mrs. Fields' year end was December 28 for
fiscal 1996 and January 3, 1998 for fiscal 1997. As a result, the New Year's
holiday week fell in the first quarter of 1997 and again in the fourth quarter
fiscal 1997. The first quarter of fiscal 1998 did not benefit from the New
Year's holiday sales. Additionally, there were only 52 weeks in fiscal year 1998
compared to 53 weeks in fiscal 1997.
Loss from Stores in the Process of Being Closed or Franchised. The loss
from stores in the process of being closed or franchised increased by $256,000,
or 14.2%, from $1,798,000 to $2,054,000 for fiscal 1998 compared to fiscal 1997.
The increased loss was primarily attributable to the addition of 65 stores from
the acquisitions of Great American, Deblan, Chocolate Chip and Karp in August
and September 1998, offset in part by closing or franchising 45 stores during
fiscal 1998.
22
<PAGE>
Liquidity and Capital Resources
General
Mrs. Fields' principal sources of liquidity are cash flows from operating
activities, cash on hand and available borrowings under Mrs. Fields' existing
revolving credit facility. At January 1, 2000, Mrs. Fields had $4,919,000 of
cash and cash equivalents and a $15,000,000 credit facility. However, at January
1, 2000, the availability under this facility was limited by the bond indenture
to $8,055,000. During fiscal 2000, Mrs. Fields expects that its principal uses
of cash will be for working capital, capital expenditures, store closure costs,
debt service requirements and other general corporate purposes. Mrs. Fields is
highly leveraged. Mrs. Fields believes that its sources of cash will be adequate
to meet its anticipated requirements through at least fiscal 2000. There can be
no assurance, however, that Mrs. Fields' operating activities will continue to
generate cash flows at or above current levels. In addition, given borrowing
restrictions on the bond indenture and maintenance covenants in the revolving
credit facility, the ability for Mrs. Fields to make additional borrowings is
limited. Accordingly, Mrs. Fields may choose to defer capital expenditure plans
and extend vendor payments for additional cash flow flexibility.
January 1, 2000 Compared to January 2, 1999
As of January 1, 2000, Mrs. Fields had liquid assets (cash and cash
equivalents and accounts receivable) of $12,922,000, a decrease of 7.4%, or
$1,040,000, from January 2, 1999 when liquid assets were $13,962,000. Current
assets decreased by $3,748,000, or 15.4%, to $20,595,000 at January 1, 2000 from
$24,343,000 at January 2, 1999. This decrease was primarily the result of a
decrease in accounts receivable from franchisees and licensees, inventories and
prepaid rents, partially offset by an increase in accounts receivable.
Long-term assets decreased $19,748,000, or 9.5%, to $187,815,000 at January
1, 2000 from $207,563,000 at January 2, 1999. This decrease was primarily the
result of depreciation and amortization of property and equipment, goodwill and
other intangible assets.
Current liabilities decreased by $12,689,000, or 34.2%, to $24,381,000 at
January 1, 2000 from $37,070,000 at January 2, 1999. This decrease is due to
payments of debt due in 1999, the elimination of the bank overdraft and a
decrease in the current portion of the store closure reserve.
Mrs. Fields' working capital deficit decreased by $8,941,000, or 70.3%, to
a deficit of $3,786 at January 1, 2000 from a deficit of $12,727,000 at January
2, 1999, for the reasons described above.
Mrs. Fields generated $17,903,000 of cash from operating activities during
fiscal 1999, primarily from store sales and franchising and licensing revenues
less costs and expenses incurred to generate the store sales and franchising and
licensing revenues, and less interest paid on the $140,000,000 senior notes.
Mrs. Fields utilized $4,696,000 of cash from investing activities during
fiscal 1999, primarily for capital expenditures relating to store remodels and
renovations.
Mrs. Fields utilized $13,039,000 of cash from financing activities during
fiscal 1999, primarily for the payment of long-term debt and to decrease its
bank overdraft.
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. We expect to expend approximately $9,000,000 for capital expenditures
in fiscal year 2000. Management anticipates that these expenditures will be
funded with cash generated from operating activities and short-term borrowings
under its credit facility as needed. As of March 31, 2000, the Company had
available borrowing capacity of $8,055,000.
Inflation
The impact of inflation on the operations 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
23
<PAGE>
by accounting principles generally accepted in the United States which minimizes
fluctuations in operating income. In addition, 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
Mrs. Fields' sales and income from store operations are highly seasonal
given the significant impact of its mall-based locations. Mrs. Fields' 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 income from store operations is even more
significant than the effect on sales. The impact on income from store operations
is more significant due to the fixed nature of certain store level costs, such
as occupancy costs and store manager salaries. Once these fixed costs are
covered by store sales, the flow through of sales to income from store
operations becomes greater. Accordingly, the fourth quarter is a key determinant
to overall profitability for the year.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's major market risk exposure is changing interest rates. The
Company does not hedge against changes in interest rates. The table below
provides information about the Company's financial instruments that are
sensitive to changes in interest rates including principal cash flows and
related weighted average interest rates by year of expected maturity dates. The
table does not include non-interest bearing notes totaling $141,000 and
unamortized discount of $489,000.
<TABLE>
<CAPTION>
Fair
Value
2000 2001 2002 2003 2004 Thereafter Total as of 1/1/00
----- ----- ----- ----- ---- ---------- ----- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt,
including current
portion (fixed rate) $ 740 $ 662 $ 718 $ 608 $140,091 $ 65 $142,884 $116,284
Weighted average
interest rate 9.52% 9.01% 9.50% 9.50% 10.12% 9.0% 10.12%
</TABLE>
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Mrs. Fields' Original Cookies, Inc. and subsidiaries
Report of Independent Public Accountants.................................................................................. 26
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000..................................................... 27
Consolidated Statements of Operations for the years ended January 3, 1998, January 2, 1999 and January 1, 2000............ 29
Consolidated Statements of Stockholder's Equity for the years ended January 3, 1998, January 2, 1999 and January 1, 2000.. 30
Consolidated Statements of Cash Flows for the years ended January 3, 1998, January 2, 1999 and January 1, 2000............ 31
Notes to Consolidated Financial Statements................................................................................ 34
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields' Original Cookies, Inc.:
We have audited the accompanying consolidated balance sheets of Mrs. Fields'
Original Cookies, Inc. (a Delaware corporation) and subsidiaries as of January
2, 1999 and January 1, 2000, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three fiscal
years in the period ended January 1, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mrs.
Fields' Original Cookies, Inc. and subsidiaries as of January 2, 1999 and
January 1, 2000, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended January 1, 2000 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Salt Lake City, Utah
March 27, 2000
26
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 4,751 $ 4,919
Accounts receivable, net of allowance for doubtful accounts of $74 and $111, respectively...... 3,208 4,295
Amounts due from franchisees and licensees, net of allowance for doubtful accounts of
$1,078 and $821, respectively........................................................... 6,003 3,708
Inventories.................................................................................... 5,503 4,977
Prepaid rent and other......................................................................... 4,017 1,336
Deferred income tax assets..................................................................... 861 1,360
-------- --------
Total current assets........................................................................ 24,343 20,595
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements......................................................................... 29,914 26,698
Equipment and fixtures......................................................................... 17,108 22,540
Land........................................................................................... 240 240
-------- --------
47,262 49,478
Less accumulated depreciation and amortization................................................. (15,465) (20,813)
-------- --------
Net property and equipment.................................................................. 31,797 28,665
-------- --------
DEFERRED INCOME TAX ASSETS....................................................................... 2,638 2,139
-------- --------
GOODWILL, net of accumulated amortization of $11,231 and $21,156, respectively................... 145,782 132,479
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $2,615 and $3,700,
respectively............................................................................ 14,296 13,062
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization
of $1,320 and $4,052, respectively...................................................... 11,718 10,818
-------- --------
OTHER ASSETS ................................................................................... 1,332 652
-------- --------
$231,906 $208,410
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
27
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... $ 8,046 $ 781
Current portion of capital lease obligations............................................ 299 842
Accounts payable........................................................................ 10,723 10,514
Bank overdraft.......................................................................... 4,133 -
Accrued liabilities..................................................................... 3,597 2,851
Current portion of store closure reserve................................................ 4,577 3,665
Accrued salaries, wages and benefits.................................................... 3,155 3,180
Accrued interest payable................................................................ 1,260 1,288
Sales taxes payable..................................................................... 962 1,128
Deferred credits........................................................................ 318 132
-------- --------
Total current liabilities............................................................ 37,070 24,381
LONG-TERM DEBT, net of current portion and discount....................................... 141,647 141,755
STORE CLOSURE RESERVE, net of current portion............................................. 10,134 3,529
CAPITAL LEASE OBLIGATIONS, net of current portion......................................... 997 3,107
-------- --------
Total liabilities.................................................................... 189,848 172,772
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of Pretzel
Time (a wholly owned subsidiary), aggregate liquidation preference of $1,495 and
$1,070, respectively..................................................................... 1,261 1,070
-------- --------
MINORITY INTEREST......................................................................... 119 111
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized, 400 shares outstanding........... - -
Additional paid-in capital.............................................................. 59,899 61,899
Accumulated deficit..................................................................... (19,221) (27,442)
-------- --------
Total stockholder's equity........................................................... 40,678 34,457
-------- --------
$231,906 $208,410
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
28
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
53 52 52
Weeks Weeks Weeks
Ended Ended Ended
January 3, January 2, January 1,
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net store and food sales............................................... $127,845 $140,235 $152,268
Franchising............................................................ 4,535 12,464 24,782
Licensing.............................................................. 2,028 1,537 3,887
-------- -------- --------
Total revenues...................................................... 134,408 154,236 180,937
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs...................................... 66,832 75,003 79,634
Cost of sales.......................................................... 32,028 38,482 46,323
General and administrative............................................. 16,192 19,017 21,972
Store closure provision (benefit)...................................... 538 7,303 (1,579)
Depreciation and amortization.......................................... 10,403 19,820 24,206
-------- -------- --------
Total operating costs and expenses.................................. 125,993 159,625 170,556
-------- -------- --------
Income (loss) from operations.................................... 8,415 (5,389) 10,381
-------- -------- --------
OTHER INCOME (EXPENSE), net:
Interest expense....................................................... (7,830) (13,197) (17,880)
Interest income........................................................ 246 623 53
Other expense, net..................................................... (368) (409) (230)
-------- -------- --------
Total other expense, net............................................ (7,952) (12,983) (18,057)
-------- -------- --------
Income (loss) before provision for income taxes, preferred stock
accretion and dividends of subsidiaries and minority interest........ 463 (18,372) (7,676)
PROVISION FOR INCOME TAXES............................................... (655) (316) (218)
-------- -------- --------
Loss before preferred stock accretion and dividends of
subsidiaries and minority interest................................... (192) (18,688) (7,894)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES.................. (644) (444) (305)
MINORITY INTEREST........................................................ (138) (11) (22)
-------- -------- --------
Net loss............................................................ $ (974) $(19,143) $ (8,221)
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
29
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
----------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 28, 1996................................... 400 $ - $15,000 $ 1,961 $ 16,961
Parent contribution of investment in Pretzel Time.......... - - 4,200 - 4,200
Parent contribution of note receivable due from Pretzel
Time's minority stockholder and founder.................. - - 500 - 500
Parent contribution of investment in Mrs. Fields' Brand.... - - 6,500 - 6,500
Conversion to equity of note payable to parent............. - - 4,643 - 4,643
Dividend paid to parent.................................... - - - (1,065) (1,065)
Net loss................................................... - - - (974) (974)
------ ------ ------- -------- --------
BALANCE, January 3, 1998..................................... 400 - 30,843 (78) 30,765
Parent equity infusion..................................... - - 29,056 - 29,056
Net loss................................................... - - - (19,143) (19,143)
------ ------ ------- -------- --------
BALANCE, January 2, 1999..................................... 400 - 59,899 (19,221) 40,678
Parent contribution........................................ - - 2,000 2,000
Net loss................................................... - - - (8,221) (8,221)
------ ------ ------- -------- --------
BALANCE, January 1, 2000..................................... 400 $ - $61,899 $(27,442) $ 34,457
====== ====== ======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
30
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 3, January 2, January 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................................. $ (974) $(19,143) $ (8,221)
Adjustments to reconcile net loss to net cash provided by
operating activities, net of effects from acquisitions:
Depreciation and amortization...................................................... 10,403 19,820 24,206
Amortization of discount on notes.................................................. - 32 77
Amortization of deferred loan costs................................................ - 1,250 2,732
Loss (gain) on disposition of assets............................................... 368 409 (142)
Deferred income taxes.............................................................. 210 - -
In-kind interest expense on note payable to stockholder............................ 338 - -
Preferred stock accretion and dividends of subsidiaries............................ 644 444 305
Minority interest.................................................................. 234 11 (8)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable............................................................... (353) (1,673) (1,087)
Amounts due from franchisees and licensees........................................ (514) (866) 2,295
Inventories....................................................................... 136 (822) 526
Prepaid rent and other............................................................ (895) 932 2,681
Other assets...................................................................... 427 1,437 680
Accounts payable and accrued liabilities.......................................... (6,651) (1,364) (955)
Store closure reserve............................................................. (1,666) 5,196 (5,219)
Accrued salaries, wages and benefits.............................................. 80 1,264 25
Accrued interest payable.......................................................... (586) (713) 28
Sales taxes payable............................................................... 261 (80) 166
Deferred credits.................................................................. (543) (838) (186)
-------- -------- --------
Net cash provided by operating activities........................................ 919 5,296 17,903
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions and related costs...................................... (10,949) (32,835) -
Purchase of property and equipment, net of effects from acquisitions.................. (4,678) (8,235) (5,157)
Proceeds from the sale of assets...................................................... 122 176 461
-------- -------- --------
Net cash used in investing activities............................................ (15,505) (40,894) (4,696)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.............................................. 108,250 39,400 -
Bank overdraft........................................................................ - 4,133 (4,133)
Principal payments on long-term debt.................................................. (77,009) (41,257) (5,978)
Payment of debt financing costs....................................................... (5,976) (7,062) (1,832)
Cash advance from Mrs. Fields' Holding................................................ 1,500 - -
Repayment of cash advance to Mrs. Fields' Holding..................................... (1,500) - -
Payment of cash dividend to Mrs. Fields' Holding...................................... (1,065) - -
Equity contribution from Mrs. Fields' Holding......................................... - 29,056 -
Principal payments on capital lease obligations....................................... (36) (123) (600)
Reduction in preferred stock of Pretzel Time.......................................... - (85) (496)
-------- -------- --------
Net cash provided by (used in) financing activities................................ 24,164 24,062 (13,039)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... 9,578 (11,536) 168
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR..................................... 6,709 16,287 4,751
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR........................................... $ 16,287 $ 4,751 $ 4,919
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
31
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest was approximately $8,416, $12,440 and $17,957 for the
years ended January 3, 1998, January 2, 1999 and January 1, 2000, respectively.
Cash paid for income taxes was approximately $217, $209 and $401 for the years
ended January 3, 1998, January 2, 1999 and January 1, 2000, respectively.
Supplemental Disclosure of Noncash Investing and Financing Activities:
On November 26, 1997, Mrs. Fields' Holding Company, Inc. ("Mrs. Fields'
Holding") converted to common equity of the Company $4,643 total principal
amount of convertible subordinated notes and contributed to the Company all of
the common equity of Mrs. Fields' Brands after converting its preferred stock
interests totaling $3,935 to common equity.
On July 25, 1997, certain assets were acquired and certain liabilities were
assumed of H & M Concepts Ltd. Co. by Mrs. Fields' Pretzel Concepts, Inc.
("Pretzel Concepts") as follows. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired................................ $15,780
Net cash paid................................................ (5,750)
Notes payable issued......................................... (8,000)
-------
Liabilities assumed....................................... $ 2,030
=======
</TABLE>
On September 2, 1997, 56 percent of the shares of common stock of Pretzel
Time, Inc. ("Pretzel Time") were acquired by Mrs. Fields' Holding as follows.
Additionally, in connection with the purchase accounting, certain other accruals
were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired................................ $ 8,311
Net cash paid................................................ (4,200)
-------
Liabilities assumed....................................... $ 4,111
=======
</TABLE>
On November 26, 1997, Mrs. Fields' Holding contributed all of the assets and
liabilities of Pretzel Concepts, Mrs. Fields' Holding's 56 percent of the shares
of common stock of Pretzel Time and a $500 note receivable from Pretzel Time's
founder and minority stockholder to the Company. Mrs. Fields' Holding also
contributed all of the common stock of Mrs. Fields' Brands to Mrs. Fields.
During the period from the acquisition of the majority ownership of Pretzel
Time (September 2, 1997) to January 1, 2000, Pretzel Time increased its
mandatorily redeemable cumulative preferred stock liquidation preference by
approximately $307, in lieu of paying cash dividends. In addition, for the same
period, Pretzel Time's mandatorily redeemable cumulative preferred stock was
increased by approximately $763 for the accretion required over time to amortize
the original issue discount.
In August 1998, the Company acquired all of the outstanding capital stock and
subordinated indebtedness of Cookies USA, Inc. ("Cookies USA") for a total
purchase price of approximately $18,400. During August and September 1998, the
Company also entered into agreements with three franchisees of Cookies USA (the
"Great American Franchisees") under which the Company purchased a total of 37
Great American Cookies franchises for
The accompanying notes to consolidated financial statements
are an integral part of these statements.
32
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
a total purchase price of $16,328. The total purchase price for all of these
acquisitions of $34,728 was allocated, as follows. Additionally, in connection
with the purchase accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired........................... $ 77,410
Net cash paid........................................... (27,771)
--------
Liabilities assumed.................................... $ 49,639
========
</TABLE>
In October 1998, the Company acquired the assets of the Cookie Conglomerate,
Inc. ("Cookie Conglomerate") for a total purchase price of $2,800. The total
purchase price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................. $ 2,800
Net cash paid............................................. -
--------
Liabilities assumed.................................... $ 2,800
========
</TABLE>
In November 1998, the Company acquired all of the outstanding stock of
Pretzelmaker Holdings, Inc. ("Pretzelmaker") for $5,419. The total purchase
price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired ........................... $ 8,519
Net cash paid ........................................... (1,100)
--------
Liabilities assumed .................................. $ 7,419
========
</TABLE>
During the years ended January 2, 1999 and January 1, 2000, the Company
acquired property and equipment under capitalized lease obligations and long-
term debt totaling $3,786 and $3,997 respectively. No property and equipment was
acquired under capitalized lease obligations during the year ended January 3,
1998.
During the year ended January 1, 2000, Mrs. Fields' Holding made an equity
contribution of $2,000 by assuming a $2,000 note payable that was due
December 31, 1999.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
33
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. ("Mrs.
Fields' Holding"). Mrs. Fields' Holding is a majority owned subsidiary of
Capricorn Investors II, L.P. ("Capricorn"). The Company has eight 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., H & M Canada and
Pretzelmaker of Canada; and three partially owned subsidiaries.
The Company primarily operates retail stores which sell freshly baked cookies,
brownies, pretzels and other food products through six specialty retail chains.
As of January 1, 2000, the Company owned and operated 134 Mrs. Fields Cookies
stores, 93 Original Cookie Company stores, 93 Great American Cookies stores, 52
Hot Sam Pretzels stores, 86 Pretzel Time stores, 4 Pretzelmaker stores in the
United States. Additionally, the Company has franchised or licensed 848 stores
in the United States and 133 stores in several other countries. As of January 1,
2000, the Company owned and operated 433 core stores and 29 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.
During the year ended January 1, 2000, the Company opened 13 new stores, and
franchised an additional 100 stores closed 37 stores, franchised 37 locations,
reacquired 5 stores from franchisees and had 123 franchisees discontinue
operations.
The Company holds legal title to certain trademarks for the "Mrs. Fields"
name and logo and licenses the use of these trademarks to third parties for the
establishment and operation of Mrs. Fields' cookie and bakery operations and
other merchandising activities. In connection with these licensing activities,
the Company authorizes third-party licensees to use certain business formats,
systems, methods, procedures, designs, layouts, specifications, trade names and
trademarks in the United States and other countries. Additionally, the Company
markets and distributes its products through catalogs, other print media, the
internet and mail order.
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.
Business Combinations
Mrs. Fields, Inc. and Affiliates and Original Cookie Company and Affiliates
The Company began operations on September 18, 1996, following the completion
of two simultaneous but separate asset purchase transactions wherein the Company
(i) acquired certain assets and assumed certain liabilities of Mrs. Fields Inc.,
Mrs. Fields Development Corporation and Mrs. Fields Cookies in accordance with
two Asset Purchase Agreements dated August 7, 1996, among these parties and
Capricorn, and (ii) acquired certain assets and assumed certain liabilities of
The Original Cookie Company, Incorporated and Hot Sam Company, Inc. in
accordance with an Asset Purchase Agreement dated August 7, 1996, as amended by
the First Amendment dated as of September 17, 1996, among these parties and
Capricorn.
The combined purchase price for the acquired net assets was approximately
$85,243,000. The Company paid net cash of $19,508,000 and issued approximately
$65,735,000 in senior and subordinated notes to the selling shareholders. The
acquisitions were accounted for as purchases. The total purchase price was
allocated to the net assets acquired, based on their estimated fair values. The
organization of the Company and the acquisitions resulted in the recording of
intangible assets of approximately $49,942,000 principally made up of goodwill,
trademarks and organization costs. An additional $17,680,000 of goodwill and
$4,520,000 of deferred income tax assets (net of
34
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
valuation allowances) were recorded in connection with the Company recording
certain other accruals totaling $11,300,000 and providing reserves totaling
$10,921,000 for impaired property and equipment (see Note 5) at Company-owned
stores the Company intends to exit through closing or franchising. Goodwill and
trademarks are amortized using the straight-line method over 15 years. The
$11,300,000 of accruals established at the date of the acquisitions consisted of
$5,060,000 for obligations incident to store closures (see Note 5), $2,450,000
for contingent legal and lease obligations that were firmed up before December
28, 1996, $3,135,000 for transaction and finders' fees and $655,000 for
severance and related costs.
As of January 1, 2000, approximately $2,215,000 of the $2,450,000 accrual for
legal and lease obligations has been utilized. The remaining amount as of
January 1, 2000 of approximately $235,000 is expected to be utilized by the end
of 2000. All of the $3,135,000 accrual established for transaction and finders'
fees and the $655,000 accrual for severance and related costs associated with
the acquisitions were fully utilized for the purposes intended during fiscal
1997.
H & M Concepts Ltd. Co.
On July 25, 1997, Mrs. Fields' Pretzel Concepts, Inc., a wholly owned
subsidiary of Mrs. Fields' Holding, acquired substantially all of the assets and
assumed certain liabilities of H & M Concepts Ltd. Co. and subsidiaries ("H &
M"). H & M owned and operated stores which engage in retail sales of pretzels,
toppings and beverages under a franchise agreement with Pretzel Time, Inc. The
total consideration of $13,750,000 consisted of (i) $5,750,000 of cash, financed
through an advance from Mrs. Fields' Holding of $1,500,000 and a $4,250,000 bank
loan to Pretzel Concepts, (ii) a $4,000,000 principal amount bridge note of
Pretzel Concepts and (iii) a $4,000,000 principal amount subordinated note of
Mrs. Fields' Holding retained by the sellers (all such debt collectively
referred to as the "H & M Debt"). The acquisition was accounted for using the
purchase method of accounting (based on the estimated fair values of the net
assets acquired) and resulted in recording approximately $9,618,000 of goodwill
that is being amortized using the straight-line method over 15 years.
Effective November 26, 1997, Mrs. Fields' Holding contributed all of the
assets and liabilities of Pretzel Concepts to the Company and, in consideration
thereof, the Company assumed the H & M Debt, including all accrued but unpaid
interest. Pretzel Concepts and the Company merged on the same date with the
Company being the surviving entity. The contribution was accounted for in a
manner similar to that of pooling-of-interests accounting. There was no step-up
in the historical basis of Pretzel Concepts' assets or liabilities. Beginning
with July 25, 1997, the Company has included Pretzel Concepts' results of
operations in the Company's consolidated results of operations.
Pretzel Time, Inc.
On September 2, 1997, Mrs. Fields' Holding acquired 56 percent of the shares
of common stock of Pretzel Time for a total cash purchase price of $4,200,000,
$750,000 of which was paid to Pretzel Time for working capital purposes, and the
balance of which was paid to the selling shareholders. In connection with the
acquisition, Mrs. Fields' Holding extended a $500,000 loan to the founder of
Pretzel Time who continued to own 44 percent of the shares of common stock of
Pretzel Time. The note bears interest at an annual rate of ten percent (see Note
8). Pretzel Time is a franchisor of hand rolled soft pretzel outlets located in
North America. The outlets are primarily located in shopping malls. The
acquisition was accounted for using the purchase method of accounting (based on
the estimated fair values of the net assets acquired) and resulted in recording
approximately $5,882,000 of goodwill that is being amortized using the straight-
line method over 15 years. The goodwill recorded was $1,682,000 more than the
purchase price as the Company assumed more liabilities than it acquired in
assets at their fair values. Additionally, severance and legal accruals were
established in accordance with EITF 95-3.
Effective November 26, 1997, Mrs. Fields' Holding contributed its 56 percent
of the shares of common stock of Pretzel Time to the Company. Mrs. Fields'
Holding also contributed to the Company the $500,000 note due from Pretzel
Time's founder and minority stockholder. The contribution was accounted for in a
manner similar to that of pooling-of-interests accounting. There was no step-up
in the book basis of Pretzel Time's assets or liabilities.
35
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 2, 1998, the Company purchased an additional four percent of the
shares of common stock of Pretzel Time from the founder for $300,000 in cash.
The purchase was accounted for using the purchase method of accounting (based on
the estimated fair values of the net assets acquired) and resulted in recording
approximately $311,000 of goodwill. In June 1998, the Company acquired an
additional ten percent of the shares of common stock of Pretzel Time from the
founder for $875,000 in cash. On December 9, 1998, Mrs. Fields purchased 3% of
Pretzel Time common stock for $500,000 in cash. On December 30, 1998, Mrs.
Fields completed the acquisition of the remaining outstanding common stock of
Pretzel Time under a stock purchase agreement dated December 30, 1998, for a
purchase price of approximately $4,700,000, $2,500,000 of which was paid in cash
on January 5, 1999 and $2,000,000 of which was paid in December 1999 (see Note
8). The Company has included the appropriate percentage of Pretzel Time's
results of operations for each respective period in its consolidated results of
operations.
The Mrs. Fields' Brand, Inc.
Prior to November 26, 1997, Mrs. Fields' Holding owned 50.1 percent of the
shares of the common stock of Mrs. Fields' Brand. Mrs. Fields' Brand holds legal
title to certain trademarks for the "Mrs. Fields" name and logo and licenses
the use of these trademarks to third parties for the establishment and operation
of Mrs. Fields' cookie and bakery operations and other merchandising activities.
In connection with these licensing activities, Mrs. Fields' Brand authorizes
third-party licensees to use certain business formats, systems, methods,
procedures, designs, layouts, specifications, trade names and trademarks in the
United States and other countries.
On November 26, 1997, Mrs. Fields' Holding acquired the remaining 49.9 percent
of the shares of the common stock of Mrs. Fields' Brand from Harvard Private
Capital Holdings, Inc. for approximately $2,565,000. The consideration consisted
of $1,065,000 in cash and $1,500,000 in rights to common equity of Mrs. Fields'
Holding. Mrs. Fields' Holding's Board of Directors determined the value of
Harvard's rights to the common equity based on a fair value analysis. This
analysis appropriately considered a discount for lack of controlling interest
and marketability as Mrs. Fields' Holding's common equity is not publicly
traded. The acquisition was accounted for using the purchase method of
accounting (based on the estimated fair values of the net assets acquired) and
resulted in recording approximately $2,565,000 of intangible assets (primarily
goodwill) that are being amortized using the straight-line method over 15 years.
Effective November 26, 1997, Mrs. Fields' Holding contributed all of the
common stock of Mrs. Fields' Brand to the Company. As a result of this capital
contribution, Mrs. Fields' Brand became a wholly owned subsidiary of the
Company. The contribution was accounted for in a manner similar to that of
pooling-of-interests accounting. There was no step-up in the book basis of Mrs.
Fields' Brand's assets or liabilities
Great American Cookie Company, Inc.
On August 24, 1998, the Company acquired all of the outstanding capital stock
and subordinated indebtedness of Cookies USA, Inc., the sole stockholder of
Great American Cookie Company, Inc., for a total purchase price of $18,400,000.
Great American is an operator and franchisor of mall-based specialty retail
cookie outlets and a manufacturer of cookie batter which is distributed to Great
American operated retail stores and sold to franchised retail stores.
Concurrently with the acquisition of Cookies USA, the Company entered into
agreements with two Great American franchisees under which the Company purchased
a total of 29 Great American franchises for a total purchase price of
$14,430,000. The Company acquired the franchises through the acquisition of 100
percent of the capital stock of the two corporations through which the
franchises operated. On September 9, 1998, the Company acquired eight additional
Great American franchised retail stores from a Great American franchisee, under
an asset purchase agreement, for a total purchase price of $1,898,000. These
acquisitions will be collectively referred to as the "Great American
Acquisitions."
The Great American Acquisitions have been accounted for using the purchase
method of accounting which resulted in recording approximately $69,390,000 of
goodwill that is being amortized using the straight-line method over 15 years.
Additionally, the Company caused Cookies USA to be merged with and into the
Company and caused
36
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the acquired franchisees corporations and/or net assets to be merged with and
into Great American. Great American became a wholly owned subsidiary of the
Company. The acquired entities' results of operations have been included with
those of the Company since the applicable dates of acquisition.
The Great American Acquisitions were financed by (i) the net proceeds from the
Company issuing $40,000,000 Series C Senior Notes; (ii) the contribution of the
net proceeds totaling $29,056,000 from a Mrs. Fields' Holding offering to the
Company; and (iii) existing cash of the Company.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and related
business and operations of eleven Great American stores for a total purchase
price of $2,800,000 under an asset purchase agreement among The Cookie
Conglomerate, Inc., The Cookie Conglomerate, LLP and two individuals who were
the partners of Cookie Conglomerate, LLP and the shareholders of Cookie
Conglomerate, Inc. The sellers were franchisees of Great American. The sellers'
rights under franchise agreements and subleases with Great American were
terminated upon closing of the transaction. The acquisition was funded through
borrowings.
Pretzelmaker Holdings, Inc.
On November 19, 1998, Mrs. Fields purchased all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. under an agreement among Mrs. Fields,
Pretzelmaker, and the holders of its capital stock. Pretzelmaker is the holding
company for a pretzel retail company. The purchase price was approximately
$5,400,000 and Mrs. Fields assumed indebtedness, including severance payments,
totaling approximately $1,600,000.
1-800-Cookies
On October 10, 1997, the Company acquired substantially all of the net assets
of R&R Bourbon Street, Inc. dba 1-800-Cookies for $653,000 in cash. The
acquisition was accounted for using the purchase method of accounting (based on
the estimated fair values of the net assets acquired) and resulted in recording
$600,000 of goodwill and $53,000 of other assets. The goodwill is being
amortized using the straight-line method over 15 years.
Pro Forma Acquisition Information (Unaudited)
The following unaudited pro forma information for the years ended January 3,
1998 and January 2, 1999 presents the results of operations of the Company
assuming that the H & M, Pretzel Time, The Mrs. Fields' Brand, Great American,
Cookie Conglomerate and Pretzelmaker acquisitions and related financings had
occurred at December 29, 1996. The results of operations give effect to certain
adjustments, including amortization of intangible assets and interest expense on
acquisition debt. 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 or the results which may occur in the future.
<TABLE>
<CAPTION>
53 Weeks Ended 52 Weeks Ended
January 3, January 2,
(Unaudited) 1998 1999
- ----------- -------------- --------------
<S> <C> <C>
Total revenues............................ $200,574,000 $191,246,000
Store closure provision................... (538,000) (7,303,000)
Depreciation and amortization............. (19,405,000) (25,582,000)
Income (loss) from operations............. 12,738,000 (4,909,000)
Net loss.................................. (3,638,000) (22,471,000)
</TABLE>
37
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Periods
The Company operates using a 52/53-week year ending near December 31.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Sources of Supply
The Company currently buys a significant amount of its food products from four
suppliers. Management believes that other suppliers could provide similar
products with comparable terms.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. As of January 1, 2000,
the Company had demand deposits at various banks in excess of the $100,000 limit
for insurance by the Federal Deposit Insurance Corporation. As of January 1,
2000, the Company had restricted cash of $192,000.
Inventories
Inventories consist of food, beverages and supplies and are stated at the
lower of cost (first-in, first-out method) or market value.
Pre-Opening Costs
Pre-opening costs associated with new company-owned stores are charged to
expense as incurred. These amounts were not significant for the periods
presented in the accompanying consolidated financial statements. Pre-opening
costs associated with new franchised stores are the responsibility of the
franchisee.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment, fixtures and leasehold improvements are depreciated or
amortized over three to seven years using the straight-line method.
Expenditures that materially increase values or capacities or extend useful
lives of property and equipment are capitalized. Routine maintenance, repairs
and renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are recorded in current operations.
38
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets consist primarily of goodwill and trademarks and are
amortized using the straight-line method over 15 years. Other intangible assets
such as covenants not to compete are not significant and are being amortized
using the straight-line method over one to five years.
Deferred Loan Costs
Deferred loan costs totaling $14,870,000 resulted from the sale of
$100,000,000 total principal amount of 10 1/8 percent Series A Senior Notes (the
"Series A Senior Notes") and the sale of $40,000,000 total principal amount of
10 1/8 percent Series C Senior Notes (the "Series C Senior Notes"). These costs
are being amortized to interest expense over the approximate seven-year life of
the Series A Notes and the approximate six-year life of the Series C Senior
Notes (see Note 3).
Discount on Series C Senior Notes
The Series C Senior Notes were issued at a discount which is being amortized
to interest expense over the approximate six-year life of the related notes.
Long-Lived Assets
The Company reviews for impairment of long-lived assets when events or changes
in circumstances indicate that the book value of an asset may not be fully
recovered. The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. The Company uses
an estimate of future undiscounted net cash flows of the related asset or group
of assets over the remaining life in measuring whether the assets are
recoverable. The Company assesses impairment of long-lived assets at the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets.
During the year ended January 2, 1999, the Company wrote-down approximately
$4,131,000 of impaired long-lived assets. The write-down included approximately
$2,243,000 of equipment and leasehold improvements at company-owned stores that
the Company intends to close or franchise (see Note 5). Substantially all of
these assets were disposed of during the year ended January 1, 2000. The write-
down also included approximately $855,000 of equipment and leasehold
improvements at ten company-owned stores that the Company intends to continue to
operate through the end of contractual lease terms. These assets are expected to
be disposed of when the leases expire ranging from June 1999 to December 2008.
Additionally, approximately $1,033,000 of goodwill that had been allocated to
the impaired assets was written-down.
During the year ended January 1, 2000, the Company wrote down approximately
$1,645,000 of impaired long-lived assets. The write down included approximately
$1,408,000 of equipment and leasehold improvements at 35 company-owned stores
that the Company intends to franchise or continue to operate through the end of
contractual lease terms. These assets are expected to be disposed of when the
leases expire or the store is franchised. Additionally, approximately $237,000
of goodwill that had been allocated to the impaired assets was written-down.
The net book value of the assets has either been fully or partially written-
down because the carrying amounts exceeded the estimated future cash flows as
determined in accordance with guidance in SFAS 121. During the years ended
January 2, 1999 and January 1, 2000, stores associated with impaired assets
generated losses of approximately $2,351,000 and $2,642,000, respectively. The
impairment provisions were included in depreciation and amortization in the
accompanying consolidated statements of operations for the years ended January
2, 1999 and January 1, 2000. No provisions were recorded for estimated future
operating losses.
39
<PAGE>
Store Closure Reserve
The Company accrues an estimate for the costs associated with closing a
non-performing store in the period the determination is made to close the store.
The accruals are for estimated store lease termination costs (see Note 5).
Revenue Recognition
Revenues generated from company-owned stores are recognized at the point of
sale. Initial franchising and licensing fee revenues are recognized when all
material services or conditions relating to the sale have been substantially
performed or satisfied. Franchise and license royalties, which are based on a
percentage of gross store sales, are recognized as earned. Revenues from the
sale of batter that the Company produces and sales to franchisees are recognized
at the time of shipment and are classified in franchising revenue. The Company
receives rebates or other payments from suppliers based (directly or indirectly)
on sales to franchisees and company-owned stores. Rebates related to franchisees
are recorded as franchising revenue when earned. Rebates related to company-
owned stores are recorded as a reduction to cost of sales when earned.
Leases
The Company has various operating lease commitments on both company-owned
and franchised store locations and equipment. Expenses of operating leases with
escalating payment terms, including leases underlying subleases with
franchisees, are recognized on a straight-line basis over the lives of the
related leases. The Company accrues contingent rental expense on a monthly basis
for those retail stores where contingent rental expense is probable.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax bases of assets and liabilities using enacted tax rates
expected to apply when differences are expected to be settled or realized.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign subsidiaries are
translated into U.S. dollars using the applicable balance sheet date exchange
rates, while revenues and expenses are translated using the average exchange
rates for the periods presented. Translation gains or losses are insignificant
for the periods presented.
Fair Value of Financial Instruments
The Company estimates that the total fair market value of its Series A/B
Senior Notes and Series C Senior Notes (see Note 3) was approximately
$135,100,000 and $113,400,000 as of January 2, 1999 and January 1, 2000,
respectively. These estimates are based on quoted market prices. The book values
of the Company's other financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
other long-term debt obligations, approximate fair values at the respective
balance sheet dates.
Recent Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999
and is not expected to have a material impact on the Company's consolidated
financial statements.
40
<PAGE>
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
---- ----
<S> <C> <C>
Series A/B senior unsecured notes, interest at 10 1/8 percent payable semi-
annually in arrears on June 1 and December 1, due December 1, 2004............. $100,000,000 $100,000,000
Series C senior unsecured notes, interest at 10 1/8 percent payable semi-
annually in arrears on June 1 and December 1, due December 1, 2004............. 40,000,000 40,000,000
Discount related to the issuance of $40,000,000 Series C senior unsecured
notes, net of accumulated amortization of $33,000 and $110,000,
respectively................................................................... (566,000) (489,000)
Notes payable to individuals or corporations with interest terms ranging
from non-interest bearing to 15 percent, due at various dates from 1999
through 2001, requiring monthly payments....................................... 10,259,000 3,025,000
------------ ------------
149,693,000 142,536,000
Less current portion............................................................ (8,046,000) (781,000)
------------ ------------
$141,647,000 $141,755,000
============ ============
</TABLE>
On November 26, 1997, the Company issued $100,000,000 total principal
amount of Series A Senior Notes due December 1, 2004 pursuant to an indenture
between the Company and the Bank of New York (the "Indenture"). The Series A
Senior Notes were issued pursuant to a private transaction that was not subject
to the registration requirements of the Securities Act of 1933 (the "Securities
Act"). On June 12, 1998, a majority of the Series A Senior Notes were exchanged
for 10 1/8% Series B Senior Notes due December 1, 2004 (collectively, the
"Series A/B Senior Notes"), which were registered under the Securities Act.
On August 24, 1998, the Company issued $40,000,000 total principal amount
of Series C Senior Notes due December 1, 2004 in connection with the Great
American Acquisitions. The Series C Senior Notes were issued under the Indenture
which also governs the terms of the Series A/B Senior Notes in a private
transaction that was not subject to the registration requirements of the
Securities Act. The Series A/B Senior Notes and the Series C Senior Notes will
be collectively referred to as the "Senior Notes." As of January 1, 2000, the
Series C Senior Notes had not been registered under the Securities Act.
In connection with the issuance of the Series C Senior Notes, the Company
recorded a discount of approximately $600,000. This discount is being amortized
to interest expense over the approximate six-year life of the Series C Senior
Notes.
The Senior Notes are general unsecured obligations of the Company, rank
senior in right of payment to all subordinated indebtedness of the Company and
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company.
The Senior Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after December 1, 2001 in cash at redemption prices
defined in the Indenture, plus accrued and unpaid interest. In addition, at any
time prior to December 1, 2001, the Company may redeem up to a total of 35
percent of the principal amount at a redemption price equal to 110.125 percent
of the principal, plus accrued and unpaid interest.
41
<PAGE>
The Senior Notes contain certain covenants that limit, among other things,
the ability of the Company and its subsidiaries to: (i) declare or pay dividends
or make any other payment or distribution on account of the Company's or any of
its subsidiaries' equity interest (including without limitation, any payment in
connection with any merger or consolidation involving the Company); (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any equity interest of the Company or any direct or indirect parent of
the Company or other affiliate of the Company; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any indebtedness that is subordinated to the Senior Notes, except as
payment of interest or principal at stated maturity; or (iv) make any restricted
investments except under conditions provided for in the Indenture.
The total amount of principal maturities of debt at January 1, 2000 are as
follows:
Fiscal Year
-----------
2000 $ 781,000
2001.................................. 673,000
2002.................................. 729,000
2003.................................. 619,000
2004.................................. 140,104,000
Thereafter............................ 119,000
------------
$143,025,000
============
Line of Credit
On February 28, 1998, the Company entered into an amended and restated line
of credit agreement with a commercial bank which provides for a maximum
commitment of up to $15,000,000 secured by essentially all of the assets of the
Company. The availability under the line of credit was limited by the Company's
Indenture to $8,055,000 as of January 1, 2000. Borrowings under the agreement
bear interest, at the Company's option, at either the bank's prime rate or the
applicable LIBOR rate plus two percent, with interest payable monthly in
arrears. The Company is also obligated to pay the bank a commitment fee in the
amount of one quarter of one percent of the unused portion of the revolving loan
commitment. As of January 1, 2000, the Company had no outstanding borrowings
under the agreement, which expires March 31, 2001. The agreement requires the
Company to maintain certain financial ratios including a minimum debt service
coverage ratio. At January 1, 2000, the Company was in compliance with the terms
of the agreement.
Capital Lease Obligations
Future minimum lease payments for equipment held under capital lease
arrangements as of January 1, 2000 are as follows:
Fiscal Year
-----------
2000................................................... $1,192,000
2001................................................... 1,181,000
2002................................................... 1,099,000
2003................................................... 889,000
2004................................................... 297,000
Thereafter............................................. 200,000
----------
Total future minimum lease payments................. 4,858,000
Less amount representing interest...................... (909,000)
----------
3,949,000
Less current portion................................ (842,000)
----------
$3,107,000
==========
42
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 2, 1999 and January 1, 2000, total assets held under capital
lease arrangements were approximately $1,024,000 and $8,170,000 with accumulated
amortization of approximately $108,000 and $1,907,000 respectively.
4. INCOME TAXES
The components of the provision for income taxes for the years ended
January 3, 1998, January 2, 1999 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
January 3, January 2, January 1,
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Current:
Federal....................................... $ 70,000 $ - $ -
State......................................... 228,000 245,000 186,000
Foreign....................................... 57,000 71,000 32,000
Deferred:
Federal....................................... 367,000 (3,021,000) 106,000
State......................................... 55,000 (469,000) 17,000
Change in valuation allowance................. (122,000) 3,490,000 (123,000)
--------- ----------- ---------
Total provision for income taxes........... $ 655,000 $ 316,000 $ 218,000
========= =========== =========
</TABLE>
The differences between income taxes at the statutory federal income tax
rate and income taxes reported in the consolidated statements of operations are
as follows for the years ended January 3, 1998, January 2, 1999 and January 1,
2000:
<TABLE>
<CAPTION>
January 3, January 2, January 1,
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate.................. 34.0% (34.0)% (34.0)%
Dividends paid by subsidiary.................... 34.5 -- --
Amortization of non-deductible goodwill......... 12.3 7.7 25.3
Net operating losses utilized................... (3.9) -- --
State income taxes, net of federal tax effect... 5.3 (5.3) (5.3)
State franchise minimum taxes................... 44.0 1.3 2.4
Foreign taxes................................... 12.3 0.4 0.4
Change in valuation allowance................... (26.3) 19.0 (1.6)
Other........................................... 29.3 12.6 15.6
----- ------ ------
Effective income tax rate.......................... 141.5% 1.7% 2.8%
===== ====== ======
</TABLE>
The significant components of the Company's deferred income tax assets and
liabilities at January 2, 1999 and January 1, 2000 are as follows:
43
<PAGE>
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
---- ----
<S> <C> <C>
Deferred income tax assets:
Property and equipment reserve.................................... $ 3,311,000 $ 1,760,000
Store closure reserve............................................. 5,845,000 2,826,000
Transaction cost accrual.......................................... 514,000 306,000
Net operating loss carryforward................................... 12,268,000 13,095,000
Legal reserve..................................................... 150,000 157,000
Other reserves.................................................... 388,000 539,000
Accrued expenses.................................................. 529,000 450,000
Alternative minimum tax credit carryforward....................... 215,000 215,000
------------ ------------
Total deferred income tax assets............................... 23,220,000 19,348,000
Valuation allowance............................................... (15,560,000) (15,683,000)
------------ ------------
Deferred income tax assets net of valuation allowance.......... 7,660,000 3,665,000
------------ ------------
Deferred income tax liabilities:
Accumulated depreciation and amortization......................... (3,464,000) (16,000)
Other............................................................. (697,000) (150,000)
------------ ------------
Total deferred income tax liabilities.......................... (4,161,000) (166,000)
------------ ------------
Net deferred income tax assets................................. $ 3,499,000 $ 3,499,000
============ ============
</TABLE>
Management has provided valuation allowances on portions of the deferred
income tax assets arising from the Company's business combinations. The
valuation allowances established in connection with purchase accounting are not
recorded through the provision for income taxes, but rather, as an increase to
goodwill. During the years ended January 3, 1998 and January 2, 1999, valuation
allowances of $800,000 and $6,910,000, respectively, were recorded in connection
with accounting for business combinations.
As of January 1, 2000, the Company had net operating losses of $33,337,000
that can be carried forward to offset federal income taxes. If not utilized, the
tax net operating loss carryforwards begin to expire in 2009. As defined in
Section 382 of the Internal Revenue Code, the Company has acquired companies
which have had a greater than 50 percent ownership change. Consequently, a
certain amount of these companies' tax net operating loss carryforwards
available to offset future taxable income in any one year may be limited. The
maximum amount of carryforwards available in a given year is limited to the
product of these companies' value on the date of ownership change and the
federal long-term tax-exempt rate, plus any limited carryforwards not utilized
in prior years. Although realization of the net deferred income tax assets of
$3,499,000 is not assured, management believes that it is more likely than not
that these assets will be realized. The amount of net deferred tax assets
considered realizable, however, could be reduced in the near term based on
changing conditions.
5. STORE CLOSURE AND PROPERTY AND EQUIPMENT IMPAIRMENT RESERVES
The Company's management reviews the historical and projected operating
performance of its stores on a periodic basis to identify underperforming stores
for impairment of net property investment or for targeted closing. The Company's
policy is to recognize a loss for that portion of the net property investment
determined to be impaired. Additionally, when a store is identified for targeted
closing, the Company's policy provides for the costs of closing the store, which
are predominantly estimated lease termination costs. Lease termination costs
include both one-time settlement payments and continued contractual payments
over time under the original lease agreements where no settlement can be
resolved with the landlord. As a result, although all stores under the current
exit plans will be exited by at least the end of fiscal year 2000, a portion of
the store closure reserve will remain until all cash payments have been made.
The Company did not accrue for future expected operating losses. If and when a
reserve that was established as part of purchase accounting is not fully
utilized, the Company reduces the reserve to zero and goodwill is adjusted for
the corresponding amount.
During fiscal year 1999, in accordance with accounting principles generally
accepted in the United States, the Company reassessed its lease termination
obligations on a store by store basis for stores closed or targeted for closing.
Management reassessed the remaining store closure reserves based on all
available relevant data. A portion of the reversal of the reserves was recorded
as a reduction to goodwill for those stores that had reserves established at the
time of an acquisition in accordance with Emerging Issues Task force Issue 95-3
("EITF 95-3"). The remaining portion of the reversal of the reserves was
recorded to the store closure provision (benefit) in the accompanying
consolidated statement of operations for those stores that initially had
reserves established through that income statement line item in accordance with
the SEC Staff Accounting Bulletin No. 100, "Restructuring and Impairment
Charges". As of January 1, 2000, the remaining store closure reserve was
$7,194,000.
44
<PAGE>
Mrs. Fields Inc. and Affiliates and Original Cookie Company and Affiliates
In connection with the Mrs. Fields Inc. and Original Cookie Company
acquisitions (see Note 1), the Company formulated a plan to exit certain stores
that did not meet certain financial and geographical criteria. In general, the
plan entailed closing stores that were not profitable and franchising stores
that were profitable but contributed less than $50,000 in store annual cash
contribution for cookie stores and less than $35,000 in annual store cash
contribution for pretzel stores. Management identified 138 stores to be closed
(13 of these stores were closed prior to the acquisition but had continuing
lease obligations) and 64 stores to be franchised. As of January 1, 2000, there
were no stores remaining to be closed and 14 stores remaining to be franchised.
Management estimates that the remaining stores will be franchised during the
first quarter of fiscal year 2000.
At the date of the acquisitions, in accordance with Emerging Issues Task
Force Issue 95-3 ("EITF 95-3"), the Company established a store closure
reserve of $5,060,000 for the 138 stores the Company intended to close. The
reserve was established to provide for estimated early lease termination costs
and penalties. There was no reserve established related to the 64 stores to be
franchised. Management continued to refine the plan for closing the stores after
the date of the acquisitions which entailed further analysis of lease agreements
and meeting with developers to assess timing and estimated lease termination
costs.
Management finalized the store closure plan in early September 1997, within
one year of the date of the acquisitions. At that time, the Company recorded an
additional $1,357,000 to the store closure reserve to reflect the finalized plan
estimates of lease termination costs and adjusted goodwill by a comparable
amount under the provisions of purchase accounting. The increase in the reserve
related solely to the 138 stores originally identified to be closed. During the
year ended January 2, 1999, the Company reassessed the adequacy of the store
closure reserve related to the remaining stores left to be closed and recorded
an additional $1,693,000 to the reserve. The additional $1,693,000 resulted from
management's expectation of higher lease termination costs than the costs
originally anticipated when the plan was finalized. This portion of the store
closure reserve was expensed in the Company's statement of operations for the
fiscal year ended January 2, 1999 as the decision to increase the reserve was
made subsequent to finalization of the original plan.
Pursuant to the exit plan, at the date of the acquisitions, the Company
established an impairment reserve of $10,921,000 against the property and
equipment of the stores the Company planned to exit, in order to record those
assets at net realizable value. The property and equipment of 117 of the total
stores to be closed were recorded at net values of zero. The property and
equipment of 54 of the total stores to be franchised were recorded at the
estimated net realizable amount recoverable through a franchise sale. The
property and equipment of the remainder of the stores to be closed or franchised
had already been reduced to net realizable value prior to the acquisitions.
During the fiscal year ended January 3, 1998, the Company increased its
store closure reserve by $538,000 for nine continuing company-owned stores that
were closed during fiscal year 1997 and for one continuing company-owned store
targeted for closure. These costs represent lease termination costs which
include both one-time settlement payments and continued contractual payments
over time under the original lease agreements where no settlement has been
reached with the landlord. The amount also includes certain costs to write-down
equipment and leasehold improvements to their net realizable value. This portion
of the store closure reserve was expensed in the Company's consolidated
statement of operations for the year ended January 3, 1998, as these stores were
not identified for closure as part of any of the Company's store closure plan
associated with the business combinations.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit 35 Mrs. Fields stores that
were not meeting certain financial and geographical criteria. The plan also
committed the Company to exit seven underperforming franchised stores that the
Company determined to disenfranchise as of January 2, 1999. The identified
stores to be exited under this plan are not part of the stores in the process of
being closed in connection with the business combination exit plan discussed
above. These stores were originally identified as continuing company-owned
stores at the date of acquisition, however, the stores have not performed as
expected. The Company intends to exit the stores primarily through closing and
franchising. In connection with this plan, the Company increased the store
closure reserve by $4,674,000 primarily for costs to be
45
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
incurred for settling lease termination costs for these stores. All of the
stores identified for closure are planned to be closed or franchised by the end
of fiscal 2000. The charge was included in the store closure provision in the
accompanying consolidated statement of operations for the year ended January 2,
1999.
H&M
In connection with the H&M acquisition (see Note 1), the Company formulated
a plan to exit pretzel stores that did not meet certain financial and
geographical criteria. Management identified 11 stores to be closed and 14
stores to be franchised. At the date of the acquisition, in accordance with EITF
95-3, the Company established a store closure reserve of $1,000,000 for the 11
stores the Company intended to close. The reserve was established to provide for
estimated early lease termination costs and penalties. Additionally, the Company
established an impairment reserve of $2,500,000 against the property and
equipment of the stores the Company planned to exit, in order to record those
assets at net realizable value. All of the stores identified to be exited were
closed or franchised by the end of fiscal year 1999.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit five H&M stores that were
not meeting certain financial and geographical criteria. The stores identified
to be exited under this plan were not part of the stores in the process of being
closed in connection with the business combination exit plan discussed above. In
connection with this plan, the Company increased the store closure reserve by
$367,000 primarily for costs to be incurred for settling lease termination costs
for these stores. The charge was included in the store closure provision in the
accompanying consolidated statement of operations for the year ended January 2,
1999. All of the stores identified for closure were closed or franchised by the
end of fiscal year 1999.
Pretzel Time
In connection with the Pretzel Time acquisition (see Note 1), the Company
formulated a plan to exit pretzel stores that did not meet certain financial and
geographical criteria. Management identified four stores to be closed. At the
date of the acquisition, in accordance with EITF 95-3, the Company established a
store closure reserve of $500,000 for the four stores the Company intended to
close. The reserve was established to provide for estimated early lease
termination costs and penalties. All of the stores identified for closure were
closed by the end of fiscal year 1999.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit five Pretzel Time stores
that were not meeting certain financial and geographical criteria. The
identified stores to be exited under this plan are not part of the stores in the
process of being closed in connection with the business combination exit plan
discussed above. In connection with this plan, the Company increased the store
closure reserve by $264,000 primarily for costs to be incurred for settling
lease termination costs for these stores. The charge was included in the store
closure provision in the accompanying consolidated statement of operations for
the year ended January 2, 1999. All of the stores identified for closure were
closed or franchised by the end of fiscal year 1999.
Great American
In connection with the Great American Acquisitions (see Note 1), the
Company formulated a plan to exit cookie stores that did not meet certain
financial and geographical criteria. Management identified 54 stores to be
closed and 11 stores to be franchised. At the date of the acquisitions, in
accordance with EITF 95-3, the Company established a store closure reserve of
$3,548,000 for the 54 stores the Company intended to close. The reserve was
established to provide for estimated early lease termination costs and
penalties. There was no reserve established related to the 11 stores to be
franchised. The Company established an impairment reserve of $2,150,000 against
the property and equipment of the stores the Company planned to exit, in order
to record those assets at net realizable value. All of the stores identified for
closure are planned to be closed by the end of fiscal year 2000. The timing to
implement the plan was developed based on discussions and relationships with
major shopping mall developers.
46
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit five underperforming Great
American franchised stores that the Company determined to disenfranchise as of
January 2, 1999. The identified stores to be exited under this plan were not
part of the stores in the process of being closed in connection with the
business combination exit plan discussed above. These stores were originally
franchised stores at the date of acquisition, however, the stores have not
performed as expected. In connection with this plan, the Company increased the
store closure reserve by $305,000 primarily for costs to be incurred for
settling lease termination costs for these stores. The charge was included in
the store closure provision in the accompanying consolidated statement of
operations for the year ended January 2, 1999. All of the stores identified for
closure were closed by the end of fiscal year 1999.
Pretzelmaker
In connection with the Pretzelmaker acquisition (see Note 1), the Company
formulated a plan to exit pretzel stores that did not meet certain financial and
geographical criteria. Management identified seven stores to be closed. At the
date of the acquisition, in accordance with EITF 95-3, the Company established a
store closure reserve of $500,000 for the seven stores the Company intended to
close. The reserve was established to provide for estimated early lease
termination costs and penalties. Additionally, the Company established an
impairment reserve of $327,000 against the property and equipment of the stores
the Company planned to exit in order to record those assets at net realizable
value. All of the stores identified for closure were closed by the end of fiscal
year 1999.
47
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Analysis
The following table presents a summary of the activity in the store closure
reserve for the periods indicated for stores to be closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields Inc. and
Original Cookie Co. H&M
-------------------------- --------------------------
Company- Company-
Business Owned Owned
Combination Stores Stores
and Unrelated Unrelated
Subsequent to Business to
Adjustments Acquisition Combination Acquisition
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Inception, September 16, 1996............................. $ 5,060,000 $ - $ - $ -
Utilization from inception (September
16, 1996) to December 28, 1996........................... (305,000) - -
----------- ----------- ----------- ------------
Balance, December 28, 1996................................ 4,755,000 - - -
To record obligations related to stores identified
for closure upon acquisition, July 25, 1997.............. - - 1,000,000 -
To record obligations related to stores identified
for closure upon acquisition, September 2, 1997.......... - - - -
Finalization of store closure plan for obligations
related to stores originally identified.................. 1,357,000 - - -
Provision for continuing company-owned stores
targeted for closure..................................... 538,000 - -
Utilization for the 52 weeks ended January 2, 1999........ (2,145,000) (538,000) - -
----------- ----------- ----------- ------------
Balance, January 3, 1998.................................. 3,967,000 - 1,000,000 -
To record obligations related to stores identified
for closure upon acquisition, August 24, 1998............ - - - -
To record obligations related to stores identified
for closure upon acquisition, November 29, 1998.......... - - - -
Additional reserves for stores originally identified
for closure upon acquisition, January 2, 1999............ 1,693,000 - - -
Additional reserves for continuing company-owned
and franchised stores targeted for closure,
January 2, 1999........................................... - 4,674,000 - 367,000
Utilization for the 52 weeks ended January 2, 1999........ (1,932,000) - (19,000) -
----------- ----------- ----------- ------------
Balance, January 2, 1999.................................. 3,728,000 4,674,000 981,000 367,000
Additional reserves for continuing company-owned
and franchised stores targeted for closure,
January 1, 2000........................................... 810,000 - 151,000 85,000
Reversal during the 52 weeks ended
January 1, 2000........................................... (1,524,000) (2,093,000) (418,000) -
Utilization for the 52 weeks ended January 1, 2000........ (1,400,000) (1,001,000) (178,000) (158,000)
----------- ----------- ----------- ------------
Balance, January 1, 2000.................................. $ 1,614,000 $ 1,580,000 $ 536,000 $ 294,000
=========== =========== =========== ============
<CAPTION>
Pretzel Time Great American
-------------------------- --------------------------
Company- Company-
Owned Owned
Stores Stores
Unrelated Unrelated
Business to Business to
Combination Acquisition Combination Acquisition
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Inception, September 16, 1996............................. $ - $ - $ - $ -
Utilization from inception (September
16, 1996) to December 28, 1996........................... - - - -
----------- ----------- ----------- ------------
Balance, December 28, 1996................................ - - - -
To record obligations related to stores identified
for closure upon acquisition, July 25, 1997.............. - - - -
To record obligations related to stores identified
for closure upon acquisition, September 2, 1997.......... 500,000 - - -
Finalization of store closure plan for obligations
related to stores originally identified.................. - - - -
Provision for continuing company-owned stores
targeted for closure..................................... - - - -
Utilization for the 52 weeks ended January 2, 1999........ (1,000) - - -
----------- ----------- ----------- ------------
Balance, January 3, 1998.................................. 499,000 - - -
To record obligations related to stores identified
for closure upon acquisition, August 24, 1998............ - - 3,548,000 -
To record obligations related to stores identified
for closure upon acquisition, November 29, 1998.......... - - - -
Additional reserves for stores originally identified
for closure upon acquisition, January 2, 1999............ - - - -
Additional reserves for continuing company-owned
and franchised stores targeted for closure,
January 2, 1999........................................... - 264,000 - 305,000
Utilization for the 52 weeks ended January 2, 1999........ (6,000) (149,000) -
----------- ----------- ----------- ------------
Balance, January 2, 1999.................................. 493,000 264,000 3,399,000 305,000
Additional reserves for continuing company-owned
and franchised stores targeted for closure,
January 1, 2000........................................... 66,000 - - 389,000
Reversal during the 52 weeks ended
January 1, 2000........................................... (362,000) (155,000) (1,159,000) (100,000)
Utilization for the 52 weeks ended January 1, 2000........ (88,000) (23,000) (566,000) (49,000)
----------- ----------- ----------- ------------
Balance, January 1, 2000.................................. $ 109,000 $ 86,000 $ 1,674,000 $ 545,000
=========== =========== =========== ============
<CAPTION>
Pretzelmaker Consolidated
-------------------------- ---------------------------------------
Total
Company- Company- Business
Owned Business Owned Combinations
Stores Combination Stores and
Unrelated and Unrelated Company-
Business to Subsequent to Owned
Combination Acquisition Adjustments Acquisition Stores
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Inception, September 16, 1996............................. $ - $ - $ 5,060,000 $ - $ 5,060,000
Utilization from inception (September
16, 1996) to December 28, 1996........................... - - (305,000) - (305,000)
----------- ------------- ----------- ----------- -----------
Balance, December 28, 1996................................ - - 4,755,000 - 4,755,000
To record obligations related to stores identified
for closure upon acquisition, July 25, 1997.............. - - 1,000,000 - 1,000,000
To record obligations related to stores identified
for closure upon acquisition, September 2, 1997.......... - - 500,000 - 500,000
Finalization of store closure plan for obligations
related to stores originally identified.................. - - 1,357,000 - 1,357,000
Provision for continuing company-owned stores
targeted for closure..................................... - - 538,000 538,000
Utilization for the 52 weeks ended January 2, 1999........ - - (2,146,000) (538,000) (2,684,000)
----------- ------------- ----------- ----------- -----------
Balance, January 3, 1998.................................. - - 5,466,000 - 5,466,000
To record obligations related to stores identified
for closure upon acquisition, August 24, 1998............ - - 3,548,000 - 3,548,000
To record obligations related to stores identified
for closure upon acquisition, November 29, 1998.......... 500,000 - 500,000 - 500,000
Additional reserves for stores originally identified
for closure upon acquisition, January 2, 1999............ - - 1,693,000 - 1,693,000
Additional reserves for continuing company-owned
and franchised stores targeted for closure,
January 2, 1999........................................... - - - 5,610,000 5,610,000
Utilization for the 52 weeks ended January 2, 1999........ - - (2,106,000) - (2,106,000)
----------- ------------- ----------- ----------- -----------
Balance, January 2, 1999.................................. 500,000 - 9,101,000 5,610,000 14,711,000
Additional reserves for continuing company-owned
and franchised stores targeted for closure,
January 1, 2000........................................... 88,000 650,000 1,115,000 1,124,000 2,239,000
Reversal during the 52 weeks ended
January 1, 2000........................................... (366,000) - (3,830,000) (2,347,000) (6,177,000)
Utilization for the 52 weeks ended January 1, 2000........ (117,000) - (2,348,000) (1,231,000) (3,579,000)
----------- ------------- ----------- ----------- -----------
Balance, January 1, 2000.................................. $ 105,000 $ 650,000 $ 4,038,000 $ 3,156,000 $ 7,194,000
=========== ============= =========== =========== ===========
</TABLE>
48
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of activity for stores originally
identified to be closed or franchised in connection with the applicable business
combination for the periods indicated. This table does not include a summary of
activity for stores the Company intends to close or franchise that were not
originally identified in connection with a business combination.
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and Original Great
Cookie Co. H&M Pretzel Time American
---------- ------------------- ------------------- -------------------
To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores identified for
closure or franchise at
inception, September 18,
1996....................... 138 64 - - - - - -
Stores closed prior to
Inception.................. (13) - - - - - - -
Stores closed or franchised
from Inception (September
18, 1996) to December 28,
1996....................... (17) (3) - - - - - -
------ ---------- ------ ---------- ------ ---------- ------ ----------
Balance, December 28, 1996... 108 61 - - - - - -
Stores identified for
closure or franchise upon
acquisition,
July 25, 1997............... - - 11 14 - - - -
Stores identified for
closure or franchise upon
acquisition, September 2,
1997........................ - - - - 4 - - -
Stores closed or
franchised from December
28, 1996 to January 3,
1998........................ (70) (9) (3) - - - - -
------ ---------- ------ ---------- ------ ---------- ------ ----------
Balance, January 3, 1998..... 38 52 8 14 4 - - -
Stores identified for
closure or franchise upon
acquisition, August 24,
1998........................ - - - - - - 54 11
Stores identified for
closure or franchise upon
acquisition, November 19,
1998........................ - - - - - - - -
Stores closed or
franchised for the 52
weeks ended January 2,
1999........................ (15) (16) (2) (7) (1) - (11) -
------ ---------- ------ ---------- ------ ---------- ------ ----------
Balance, January 2, 1999..... 23 36 6 7 3 - 43 11
Stores closed, franchised
or reversed for the 52
weeks ended January 1,
2000........................ (23) (22) (6) (7) (3) - (37) (10)
------ ---------- ------ ---------- ------ ---------- ------ ----------
Balance, January 1, 2000..... - 14 - - - - 6 1
====== ========== ====== ========== ====== ========== ====== ==========
<CAPTION>
Pretzelmaker Consolidated
------------------- -------------------
To Be To Be To Be To Be
Closed Franchised Closed Franchised
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Stores identified for
closure or franchise at
inception, September 18,
1996....................... - - 138 64
Stores closed prior to
Inception.................. - - (13) -
Stores closed or franchised
from Inception (September
18, 1996) to December 28,
1996....................... - - (17) (3)
------ ---------- ------ ----------
Balance, December 28, 1996... - - 108 61
Stores identified for
closure or franchise upon
acquisition,
July 25, 1997............... - - 11 14
Stores identified for
closure or franchise upon
acquisition, September 2,
1997........................ - - 4 -
Stores closed or
franchised from December
28, 1996 to January 3,
1998........................ - - (73) (9)
------ ---------- ------ ----------
Balance, January 3, 1998..... - - 50 66
Stores identified for
closure or franchise upon
acquisition, August 24,
1998........................ - - 54 11
Stores identified for
closure or franchise upon
acquisition, November 19,
1998........................ 7 - 7 -
Stores closed or
franchised for the 52
weeks ended January 2,
1999........................ - - (29) (23)
------ ---------- ------ ----------
Balance, January 2, 1999..... 7 - 82 54
Stores closed, franchised
or reversed for the 52
weeks ended January 1,
2000........................ (7) - (76) (39)
------ ---------- ------ ----------
Balance, January 1, 2000..... - - 6 15
====== ========== ====== ==========
</TABLE>
49
<PAGE>
MRS.FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of activity for stores the Company
intends to close or franchise that were not originally identified to be closed
or franchised in connection with a business combination:
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and
Original Cookie Co. H&M Pretzel Time Great American
-------------------- -------------------- -------------------- -------------------
To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores identified for closure (not
included in the original store
closure plan), during the 52
weeks ended January 3, 1998.............. 10 - - - - - - -
Stores closed or franchised during
the 52 weeks ended January 3,
1998..................................... (9) - - - - - - -
------ -------- ------- ------- ------ ------- ------ -------
Balance, January 3, 1998.................. 1 - - - - - - -
Stores identified for closure or
franchise (not included in the
original store closure plan),
January 2, 1999.......................... 20 10 4 1 2 3 5 -
Stores closed or franchised for the
52 weeks ended January 2,
1999..................................... (1) (2) - - - - -
------ -------- ------- ------- ------ ------- ------ -------
Balance, January 2, 1999.................. 20 10 2 1 2 3 5 -
Stores closed or franchised for the
52 weeks ended January 1,
2000..................................... (17) (6) (2) (1) (2) (2) (5) -
------ -------- ------- ------- ------ ------- ------ -------
Balance, January 1, 2000.................. 3 4 - - - 1 - -
====== ======== ======= ======= ====== ======= ====== =======
<CAPTION>
Consolidated
--------------------
To Be To Be
Closed Franchised
------ ----------
<S> <C> <C>
Stores identified for closure (not
included in the original store
closure plan), during the 52
weeks ended January 3, 1998............ 10 -
Stores closed or franchised during
the 52 weeks ended January 3,
1998................................... (9) -
------ -------
Balance, January 3, 1998................ 1 -
Stores identified for closure or
franchise (not included in the
original store closure plan),
January 2, 1999........................ 31 14
Stores closed or franchised for the
52 weeks ended January 2,
1999................................... (3) -
------ -------
Balance, January 2, 1999................ 29 14
Stores closed or franchised for the
52 weeks ended January 1,
2000................................... (26) (9)
------ -------
Balance, January 1, 2000................ 3 5
====== =======
</TABLE>
Store Closure Reserve Payment Obligations
As of January 1, 2000, the future estimated cash payments under the store
closure reserve are as follows:
Fiscal Year
-----------
2000......... $3,665,000
2001......... 1,401,000
2002......... 802,000
2003......... 591,000
2004......... 415,000
Thereafter... 320,000
----------
$7,194,000
==========
50
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of changes in the property and
equipment impairment reserves that were established in connection with the
applicable business combination for the periods indicated for stores to be
closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields
Inc. and
Original Great
Cookie Co. H&M American Pretzelmaker Consolidated
------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Inception, September 18, 1996........................ $10,921,000 $ - $ - $ - $10,921,000
Utilization from inception (September 18, 1996) to
December 28, 1996 related to stores to be closed... (854,000) - - - (854,000)
Utilization from inception (September 18, 1996) to
December 28, 1996 related to stores to be
franchised......................................... (215,000) - - - (215,000)
----------- ---------- ----------- ------------ -----------
Balance, December 28, 1996........................... $ 9,852,000 $ - $ - $ - $ 9,852,000
To record property and equipment impairment upon
acquisition, July 25, 1997.......................... - 2,500,000 - - 2,500,000
Utilization from December 28, 1996 to January 3,
1998 related to stores to be closed................. (3,299,000) (208,000) - - (3,507,000)
Utilization from December 28, 1996 to January 3,
1998 related to stores to be franchised............. (492,000) - - - (492,000)
----------- ---------- ----------- ------------ -----------
Balance, January 3, 1998............................. 6,061,000 2,292,000 - - 8,353,000
To record property and equipment impairment upon
acquisition, August 24, 1998........................ - - 2,150,000 - 2,150,000
To record property and equipment impairment upon
acquisition, September 9, 1998...................... - - 973,000 - 973,000
To record property and equipment impairment upon
acquisition, November 19, 1998...................... - - - 327,000 327,000
Utilization for the 52 weeks ended January 2,
1999 related to stores to be closed................. (1,782,000) (93,000) (246,000) - (2,121,000)
Utilization for the 52 weeks ended January 2,
1999 related to stores to be franchised............. (435,000) (819,000) - - (1,254,000)
----------- ---------- ----------- ------------ -----------
Balance, January 2, 1999............................. 3,844,000 1,380,000 2,877,000 327,000 8,428,000
Addition to impairment for the 52 weeks ended
January 1, 20900 related to stores to be closed..... 86,000 5,000 25,000 - 116,000
Addition to impairment for 52 weeks ended
January 1, 2000 related to stores to be
franchised.......................................... 443,000 11,000 - - 454,000
Utilization for the 52 weeks ended January 1,
2000 related to stores to be closed................. (1,192,000) (410,000) (1,434,000) (158,000) (3,194,000)
Utilization for the 52 weeks ended January 1,
2000 related to stores to be franchised............. (935,000) (346,000) (41,000) - (1,322,000)
----------- ---------- ----------- ------------ -----------
Balance, January 1, 2000............................ $ 2,246,000 $ 640,000 $ 1,427,000 $ 169,000 $ 4,482,000
=========== ========== =========== ============ ===========
</TABLE>
6. MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK OF PRETZEL TIME, INC.
The mandatorily redeemable cumulative preferred stock of Pretzel Time (the
"Pretzel Time Preferred Stock") is nonvoting and the preferred stockholders
are entitled to cumulative preferred dividends of ten percent for three years,
accrued and payable upon redemption. The Pretzel Time Preferred Stock must be
redeemed at $10,000 per share, plus unpaid and accumulated dividends. The excess
of the redemption price over the carrying value was accreted over the period
from issuance through September 1, 1999, using the effective interest method and
was charged to the accumulated deficit of Pretzel Time. During the period from
the acquisition of a majority ownership in Pretzel Time (September 2, 1997) to
January 1, 2000, Pretzel Time increased the liquidation preference of the
Pretzel Time Preferred Stock by $307,000, in lieu of paying cash dividends. In
addition, the Pretzel Time Preferred Stock was increased by $736,000, for the
accretion required over time to amortize the original issue discount incurred at
the time of issuance.
As of January 1, 2000, the liquidation preference and the recorded amount in
the accompanying consolidated balance sheet was $1,070,000. Subsequent to
January 1, 2000, the Company redeemed all of the remaining Pretzel Time
Preferred Stock for $1,070,000.
51
<PAGE>
MRS.FIELD'S ORIGINAL COOKIES, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES
Stock Pledged as Collateral
Mrs. Fields' Holding has pledged all of the Company's capital stock as
collateral for Mrs. Fields' Holding's 14 percent Senior Secured Discount Notes
due December 1, 2005 (the "Mrs. Fields' Holding Discount Notes"). Mrs.
Fields' Holding issued the Mrs. Fields' Holding Discount Notes on August 24,
1998, in connection with the Great American Acquisitions and the Mrs. Fields'
Holding equity contribution (see Note 1). In connection with the issuance of the
$55,000,000 principal amount at maturity of Mrs. Fields' Holding Discount Notes,
Mrs. Fields' Holding recorded an total original issue discount of approximately
$24,136,000. The principal amount of the Mrs. Fields' Holding Discount Notes
will accrete at a rate of 14 percent compounded semi-annually to a total
principal amount of $55,000,000 at December 1, 2002. Thereafter, the Mrs.
Fields' Holding Discount Notes will accrue interest at the annual rate of 14
percent, payable semi-annually on June 1 and December 1 of each year, commencing
June 1, 2003.
Mrs. Fields' Holding is a holding company and does not have separate
operations from which it can generate cash flows. Under the circumstances, Mrs.
Fields' Holding would likely be dependent on its owners' and the Company's cash
flows to make principal and interest payments when due. Interest payments
totaling $7,700,000 per year will commence in 2003. The Company has not
guaranteed, nor is it obligated to make principal or interest payments related
to the Mrs. Fields' Holding Discount Notes. However, in accordance with the
Company's Indenture, the Company may pay dividends to Mrs. Fields' Holding, in
order for Mrs. Fields' Holding to service the debt, if no default or event of
default occurs under the Indenture and certain fixed charge coverage ratios and
consolidated net income tests are met. The Mrs. Fields' Holding Discount Notes
are effectively subordinated to the Company's Senior Notes.
Legal Matters
The Company is the subject of certain legal actions, which it considers
routine to its business activities. Management, after consultation with legal
counsel, believes that the potential liability to the Company under any such
actions is adequately accrued for or will not materially affect the Company's
consolidated financial position or results of operations.
Operating Leases
The Company leases retail store facilities, office space and equipment
under long-term noncancelable operating lease agreements with remaining terms of
one to ten years. Certain of the retail store leases provide for contingent
rentals based on gross revenues. Additionally, as part of the Company's
franchising program, certain locations have been subleased to franchisees.
Rent expense was as follows for the periods presented:
<TABLE>
<CAPTION>
53 Weeks 52 Weeks 52 Weeks
Ended January Ended January Ended January
3, 1998 2, 1999 1, 2000
----------- ------------ ------------
<S> <C> <C> <C>
Minimum rentals ......................... $30,654,000 $ 36,834,000 $ 35,510,000
Contingent rentals ...................... 432,000 553,000 415,000
Sub-lease rentals ....................... (8,756,000) (12,550,000) (10,487,000)
----------- ------------ ------------
$22,330,000 $ 24,837,000 $ 25,438,000
=========== ============ ============
</TABLE>
As of January 1, 2000, the future minimum lease payments due under
operating leases (including future minimum lease payments for stores in the
process of being closed or franchised), which include required lease payments
for those stores that have been subleased, are as follows:
52
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000 ............................... $ 32,513,000
2001 ............................... 27,832,000
2002 ............................... 23,957,000
2003 ............................... 19,691,000
2004 ............................... 15,163,000
Thereafter ......................... 28,650,000
------------
$147,806,000
============
</TABLE>
As of January 2, 1999, the future minimum sublease payments due to the Company
under these leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000 .............................. $11,510,000
2001 .............................. 9,617,000
2002 .............................. 8,261,000
2003 .............................. 6,619,000
2004 .............................. 4,754,000
Thereafter ........................ 6,066,000
-----------
$46,827,000
===========
</TABLE>
Contractual Arrangements
The Company entered into a supply agreement to buy frozen dough products
through 2000. The agreement stipulates minimum annual purchase commitments of
not less than 23,000,000 pounds of the products each year through the end of the
contract. The terms of the supply agreement include certain volume incentives
and penalties. The Company and the supplier may terminate the supply agreement
if the other party defaults on any of the performance covenants.
The Company has assumed an agreement with a third-party lender to provide
financing to franchisees for the purchase of existing Company stores. Under the
terms of the agreement, a maximum of $5,000,000 may be borrowed from the lender
by franchisees of which the Company has agreed to guarantee a maximum of
$2,000,000. Outstanding franchisee borrowings guaranteed by the Company under
this agreement at January 2, 1999 and January 1, 2000 were approximately
$295,000 and $92,000, respectively. Under the terms of the agreement, the
Company is required to assume any franchisee obligations which are in default as
defined. As of January 1, 2000, the Company has assumed obligations totaling
approximately $33,000 which are included in the current portion of long-term
debt in the accompanying consolidated balance sheet.
The Company recorded deferred credits of approximately $1,204,000 as of
September 18, 1996. The deferred credits represent volume rebates associated
with the assumption of a long-term marketing and supply agreement with a
supplier in connection with the Mrs. Fields Inc. and affiliates and Original
Cookie Company and affiliates business combinations discussed in Note 1. Under
terms of the agreement, the Company is obligated to purchase a minimum amount of
product from the supplier. The supplier periodically prepays rebates to the
Company for anticipated purchases. The Company records the prepayments as
deferred credits and amortizes them ratably as purchases are made from the
supplier. This agreement was amended in January 1997 and an additional $600,000
in deferred credits were recorded. The amended agreement expires on the later of
December 31, 2003 or when the Company has met its revised purchase commitment.
In conjunction with this amendment, certain minimum commitments from the
previous agreement were carried forward and others were forgiven. Additionally,
in November 1997, Pretzel Time entered into a long-term marketing and supply
agreement with a supplier. Under terms of the agreement, the Company is
obligated to purchase a minimum amount of product from the supplier. An
additional $437,000 in deferred credits were recorded under this agreement. The
termination date of this agreement will be the later of December 31, 2003 or
when Pretzel Time has met its purchase commitment. Under these
53
<PAGE>
agreements, the Company recognized approximately $1,393,000, and $812,000
primarily as a reduction to food cost of sales during the years ended January 3,
1998 and January 2, 1999.
In connection with the Pretzelmaker acquisition the Company recorded
deferred credits of approximately $170,000 relating to a long-term marketing and
supply agreement that Pretzelmaker had entered into in November of 1997, which
was later amended in April of 1998. Under the terms of the agreement, the
Company is obligated to purchase a minimum amount of product from the supplier.
Under this agreement the Company recognized approximately $40,000 primarily as a
reduction to food cost of sales during fiscal 1999. The termination date of this
agreement is April 2003.
In November 1996, the Company entered into a consulting agreement with
Debbi Fields, a former director of the Company, under which Debbi Fields
traveled and performed public relations and advertising activities on behalf of
the Company for at least 50 days a year for a fee of $250,000 per year, with an
option to perform these services for 20 additional days a year for additional
pay of $5,000 per day. The compensation increased by 10 percent for 1999. The
consulting agreement expired on December 31, 1999 and is not expected to be
renewed.
The Company has entered into employment agreements with five key officers
with terms of two to three years. The agreements are for a total annual base
salary of $1,172,000. If the Company terminates employment without cause, or the
employee terminates employment with good reason, the employee can receive in
severance pay the amount equal to the product of his or her then current semi-
monthly base salary by the greater of the number of semi-monthly periods from
the notice of termination or 36 to 48 semi-monthly periods, plus a portion of
any discretionary bonus that would otherwise have been payable. The agreements
have customary provisions for other benefits and also include noncompetition
clauses.
8. RELATED-PARTY TRANSACTIONS
As of January 2, 1999 and January 1, 2000, the Company had receivables due
from franchisees and licensees, primarily related to prepaid rent which the
Company had paid on behalf of franchisees, totaling approximately $6,003,000 and
$3,708,000, respectively. These amounts are included in amounts due from
franchisees and affiliates and are net of allowance for doubtful accounts
totaling $1,078,000 and $821,000, respectively.
As of January 2, 1999 and January 1, 2000, the Company had a net payable
and a net receivable of approximately $150,000 and $642,000, respectively, with
Mrs. Fields' Holding. The amounts due to or from Mrs. Fields' Holding are
recorded in prepaid rent and other in the accompanying consolidated balance
sheets.
During the years ended January 3, 1998, the Company accrued approximately
$441,000 of interest expense due to Mrs. Fields' Holding related to the
convertible subordinated notes Mrs. Fields' Holding purchased. Mrs. Fields'
Holding converted all of the $4,643,000 convertible subordinated notes to equity
and the notes were cancelled (see Note 3) in 1997.
The Company paid fees to Korn/Ferry International ("Korn/Ferry") totaling
approximately $157,000 and $70,600 and $35,200, during the years ended January
3, 1998, January 2, 1999 and January 1, 2000, respectively. Korn/Ferry is an
executive search firm of which one of the Company's directors is the Chairman.
A director of the Company is a consultant and an advisor to Dillon Read &
Co., Inc. ("Dillon Read"). In 1997, the Company paid to Dillon Read a fee of
approximately $707,000 in connection with the restructuring of the Company in
September 1996. The director's company did not receive a fee from the Company
during the fiscal years ended January 2, 1999 or January 1, 2000. The Company
believes that the arrangements were on terms that could have been obtained from
an unaffiliated third party.
As of January 2, 1999, the Company has a loan due from the founder and
minority stockholder of Pretzel Time totaling $567,000. The note bears interest
at an annual rate of ten percent and is payable in monthly installments of
principal and interest beginning January 1998 by setoff of, and to the extent
of, the founder's bonus payments and dividends received by the founder in his
Pretzel Time stock; provided that in any calendar year no more than $100,000 may
be so offset. In addition, as of January 2, 1999, the Company is due
approximately $451,000 from the founder in connection with certain lease
payments related to the purchase of Pretzel Time for which the Company is
indemnified. These amounts are recorded in accounts receivable and other assets
in the accompanying consolidated balance sheets.
54
<PAGE>
In May 1999, Mrs. Fields, Mrs. Fields' Holding, Pretzel Time, a former
Pretzel Time shareholder and Capricorn entered into an assignment and assumption
agreement under which Capricorn agreed to assume a payment obligation of Mrs.
Fields of $2,000,000 for Pretzel Time stock held by the former shareholder that
was due on December 31, 1999. In a related transaction on the same date,
Capricorn and Mrs. Fields' Holding entered into a contribution agreement under
which Mrs. Fields' Holding and Capricorn agreed to treat the assumption by
Capricorn of the Mrs. Fields payment obligation as a capital contribution from
Capricorn to Mrs. Fields' Holding, and as a capital contribution from Mrs.
Fields' Holding to Mrs. Fields.
The Company and Mrs. Fields' Holding expect to enter into a tax-sharing
arrangement but as of the date of these financial statements no such agreement
has been finalized.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors the Mrs. Fields' Original Cookies, Inc. 401(k)
Retirement Savings Plan (the "Plan") for all eligible employees. Under the terms
of the Plan, employees may make contributions to the Plan, a portion of which is
matched by contributions from the Company. The total Company contributions to
the Plan for the years ended January 3, 1998, January 2, 1999 and January 1,
2000 were approximately $97,900, $171,000 and $168,000, respectively.
10. REPORTABLE SEGMENTS
Operating segments are components of the Company for which separate
financial information is available that is evaluated regularly by the Chief
Operating decision maker in deciding how to allocate resources and in assessing
performance. This information is reported on the basis that it is used
internally for evaluating segment performance. Mrs. Fields has two reportable
operating segments; namely, company-owned stores and related activity and
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 or license fee and monthly royalties based on a percentage of
gross sales and other licensing activity not related to cookie or pretzel
stores. The accounting policies for the segments are discussed in the summary of
significant accounting policies (see Note 2). 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>
Franchising,
Licensing
Company-Owned and
Stores Other Total
--------------- ------------- ----------------
Year ended January 3, 1998
<S> <C> <C> <C>
Revenue....................... $127,845,000 $ 6,563,000 $134,408,000
Contribution Margin........... 28,985,000 6,563,000 35,548,000
Year ended January 2, 1999
Revenue....................... 140,235,000 14,001,000 154,236,000
Contribution Margin........... 30,337,000 10,414,000 40,751,000
Year ended January 1, 2000
Revenue....................... 152,268,000 28,669,000 180,937,000
Contribution Margin........... 31,189,000 23,791,000 54,980,000
</TABLE>
55
<PAGE>
The reconciliation of contribution margin to net income (loss) is as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998 Fiscal 1999
------------------ ----------------- -----------------
<S> <C> <C> <C>
Contribution margin....................... $ 35,548,000 $ 40,751,000 $ 54,980,000
General and administrative expense........ (16,192,000) (19,017,000) (21,972,000)
Store closure provision................... (538,000) (7,303,000) 1,579,000
Depreciation and amortization............. (10,403,000) (19,820,000) (24,206,000)
Interest expense, net..................... (7,584,000) (12,574,000) (17,827,000)
Other expense, net........................ (1,805,000) (1,180,000) (775,000)
------------ ------------ ------------
Net income (loss)......................... $ (974,000) $(19,143,000) $ (8,221,000)
============ ============ ============
</TABLE>
Geographic segment information is as follows:
<TABLE>
<CAPTION>
Domestic International
Domestic International Franchising Franchising
Company-owned Company-owned and and
Stores Stores Licensing Licensing
-------------- --------------- ------------ --------------
Revenue
<S> <C> <C> <C> <C>
Fiscal 1997......................... $127,736,000 $109,000 $ 6,150,000 $413,000
Fiscal 1998......................... 140,018,000 217,000 13,738,000 263,000
Fiscal 1999......................... 152,249,000 19,000 28,450,000 219,000
</TABLE>
Revenues from international franchising and licensing are secured from
Canada and Australia with no other countries having material representation.
Revenues from international company-owned stores are immaterial.
There were no customers who accounted for more than 10 percent of Mrs.
Fields' total revenue or either segments' revenue. The Company has a $1,326,000
receivable due from one company which represents 14.8 percent of the Company's
total receivables.
11. SUBSEQUENT EVENT
On February 9, 2000, Capricorn, Investors III, L.P., an affiliate of
Capricorn, entered into an agreement to acquire TCBY Enterprises, Inc. ("TCBY"),
a retail snack food company. It is expected that, if this acquisition is
completed, Mrs. Fields will enter into a management agreement to provide
management services to TCBY. If completed, this acquisition would occur no
earlier than the second quarter of fiscal year 2000. We cannot be sure that this
acquisition will be completed, and there has been no agreement signed regarding
the terms of the management agreement. Management of Mrs. Fields believes that,
if completed, this acquisition would offer Mrs. Fields the opportunity to sell
its products in TCBY stores.
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's obligation related to its $140,000,000 total principal amount
of Senior Notes due 2004 (see Note 3) is fully and unconditionally guaranteed on
a joint and several basis and on a senior basis by four of the Company's wholly
owned subsidiaries (the "Guarantors"). These guarantees are general unsecured
obligations of the Guarantors, rank senior in right of payment to all
subordinated indebtedness of the Guarantors and rank pari passu in right of
payment with all existing and future senior indebtedness of the Guarantors.
There are no restrictions on the Company's ability to obtain cash dividends or
other distributions of funds from the Guarantors, except those imposed by
applicable law. The following supplemental financial information sets forth, on
a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for Mrs. Fields' Original Cookies, Inc. (the "Parent
Company"), Great American Cookie Company, Inc., The Mrs. Fields' Brand, Inc.,
Pretzelmaker Holdings, Inc., which are Guarantors, and Pretzel Time, Inc., which
will become a Guarantor (collectively, the "Guarantor Subsidiaries") and Mrs.
Fields' Cookies Australia, Mrs. Fields' Cookies (Canada) Ltd., H & M Canada and
Pretzelmaker of Canada, and three partially owned subsidiaries, (collectively,
the "Non-guarantor Subsidiaries"). The Company has not presented separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
because management has determined that such information is not material to
investors.
56
<PAGE>
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 53 WEEKS ENDED JANUARY 3, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ------------- --------------- -------------
NET REVENUES................................ $ 125,991 $ 2,004 $ 7,077 $ (664) $ 134,408
----------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs.......... 63,765 - 3,731 (664) 66,832
Cost of sales.............................. 31,173 - 855 - 32,028
General and administrative................. 14,215 1,066 911 - 16,192
Store closure provision.................... 538 - - - 538
Depreciation and amortization.............. 8,745 1,125 533 - 10,403
----------- ----------- ---------- ------------ ----------
Total operating costs and expenses...... 118,436 2,191 6,030 (664) 125,993
----------- ----------- ---------- ------------ ----------
Income (loss) from operations........... 7,555 (187) 1,047 - 8,415
INTEREST EXPENSE AND OTHER, net.............. (6,329) (1,230) (393) - (7,952)
----------- ----------- ---------- ------------ ----------
Income (loss) before provision for income
taxes, preferred stock accretion and
dividends of subsidiaries and equity in
net loss of consolidated subsidiaries.... 1,226 (1,417) 654 - 463
PROVISION FOR INCOME TAXES................... (535) (25) (95) - (655)
----------- ----------- ---------- ------------ ----------
Income (loss) before preferred stock
accretion and dividends of subsidiaries
and equity in net loss of consolidated
subsidiaries............................. 691 (1,442) 559 - (192)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES................... - (338) (306) - (644)
EQUITY IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES................................ (1,665) - - 1,527 (138)
----------- ----------- ---------- ------------ ----------
NET INCOME (LOSS)........................... $ (974) $ (1,780) $ 253 $ 1,527 $ (974)
=========== =========== ========== ============ ==========
</TABLE>
57
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 3, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------- ------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES.......................... $ (766) $ 387 $1,298 $ - $ 919
------------- ------------- -------------- ------------- ----------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash paid for acquisitions and related
expenses ................................. (10,949) - - - (10,949)
Purchase of property and equipment, net...... (4,556) - - - (4,556)
-------- ----- ------ ------------- --------
Net cash used in investing activities..... (15,505) - - - (15,505)
-------- ----- ------ ------------- --------
- - - -
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-term debt..... 108,250 - - - 108,250
Principal payments on long-term debt and
capital lease obligations.................. (76,759) (250) (36) - (77,045)
Payment of debt financing costs.............. (5,976) - - - (5,976)
Payment of cash dividend to Mrs. Fields'
Holding.................................... (1,065) - - - (1,065)
-------- ----- ------ ------------- --------
Net cash provided by (used in)
financing activities.................... 24,450 (250) (36) - 24,164
-------- ----- ------ ------------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS................................... 8,179 137 1,262 - 9,578
CASH AND CASH EQUIVALENTS,
beginning of year............................. 6,091 588 30 - 6,709
-------- ----- ------ ------------- --------
CASH AND CASH EQUIVALENTS, end of
Year.......................................... $ 14,270 $ 725 $1,292 $ - $ 16,287
======== ===== ====== ============= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid............................. $ 7,607 $ 789 $ 20 $ -- $ 8,416
Taxes paid................................ 181 25 11 -- 217
</TABLE>
58
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 1999
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................... $ 3,886 $ 792 $ 241 $ - $ 4,919
Accounts receivable, net...................... 2,151 2,131 13 - 4,295
Amounts due from franchisees and
licensees, net.............................. 1,314 2,394 - - 3,708
Inventories................................... 4,009 968 - - 4,977
Other current assets and amounts due from
(to) affiliates, net......................... 22,236 (18,898) (642) - 2,696
-------- ------------ ------------ ------------ ------------
Total current assets....................... 33,596 (12,613) (388) - 20,595
PROPERTY AND EQUIPMENT, net..................... 26,481 2,033 151 - 28,665
INTANGIBLES, net................................ 74,301 81,769 289 - 156,359
INVESTMENT IN SUBSIDIARIES...................... 65,468 - - (65,468) -
OTHER ASSETS.................................... 2,714 134 (57) - 2,791
-------- ------------ ------------ ------------ ------------
$202,560 $ 71,323 $ (5) $ (65,468) $ 208,410
======== ============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations................... $ 1,377 $ 246 $ - $ - $ 1,623
Accounts payable.............................. 8,823 1,676 15 - 10,514
Accrued liabilities........................... 11,134 1,000 110 - 12,244
-------- ------------ ------------ ------------ ------------
21,334 2,922 125 - 24,381
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion............ 144,582 280 - - 144,862
OTHER ACCRUED LIABILITIES....................... 3,529 - - - 3,529
MANDATORILY REDEEMABLE
CUMULATIVE PREFERRED STOCK..................... - 1,070 - - 1,070
MINORITY INTEREST............................... - - - 111 111
STOCKHOLDER'S EQUITY............................ 33,115 67,051 (130) (65,579) 34,457
-------- ------------ ------------ ------------ ------------
$202,560 $ 71,323 $ (5) $ (65,468) $ 208,410
======== ============ ============ ============ ============
</TABLE>
59
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED JANUARY 2, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES.................................... $144,057 $ 13,939 $ 377 $ (4,137) $ 154,236
-------- ------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs............. 76,437 - 334 (1,768) 75,003
Cost of sales................................. 37,165 3,587 99 (2,369) 38,482
General and administrative.................... 21,213 5,107 - - 26,320
Depreciation and amortization................. 16,624 3,196 - - 19,820
-------- ------------ ------------ ------------ ------------
Total operating costs and expenses......... 151,439 11,890 433 (4,137) 159,625
-------- ------------ ------------ ------------ ------------
(Loss) income from operations................. (7,382) 2,049 (56) - (5,389)
INTEREST EXPENSE AND OTHER, net................. (13,064) 81 - - (12,983)
-------- ------------ ------------ ------------ ------------
(Loss) income before provision for income
taxes, preferred stock accretion and
dividends of subsidiaries and equity in
net loss of consolidated subsidiaries....... (20,446) 2,130 (56) - (18,372)
PROVISION FOR INCOME TAXES...................... (197) (119) - - (316)
-------- ------------ ------------ ------------ ------------
(Loss) income before preferred stock
accretion and dividends of subsidiaries
and equity in net loss of consolidated
subsidiaries................................ (20,643) 2,011 (56) - (18,688)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES...................... - (444) - - (444)
EQUITY IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES...................... 1,500 - - (1,511) (11)
-------- ------------ ------------ ------------ ------------
NET (LOSS) INCOME............................... $(19,143) $ 1,567 $ (56) $ (1,511) $ (19,143)
======== ============ ============ ============ ============
</TABLE>
60
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 52 WEEKS ENDED JANUARY 2, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES........................... $(27,953) $ 33,382 $ (133) $ - $ 5,296
-------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash paid for acquisitions and related
Expenses.................................... (39,873) 7,038 - - (32,835)
Purchase of property and equipment, net....... (8,228) (7) - - (8,235)
Proceeds for asset sales...................... 176 - - - 176
-------- -------- --------- -------- --------
Net cash (used in) provided by
Investing activities..................... (47,925) 7,031 - - (40,894)
-------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt.................. 39,400 - - - 39,400
Bank overdraft................................ 4,133 - - - 4,133
Payment of debt financing costs............... (7,062) - - - (7,062)
Equity infusion from Mrs. Fields'
Holding..................................... 29,056 - - - 29,056
Principal payments on long-term debt.......
and capital lease obligations............... (257) (41,000) - - (41,257)
Capital lease repayments...................... (123) - - - (123)
Reduction in preferred stock of Pretzel
Time........................................ - (85) - - (85)
-------- -------- --------- -------- --------
Net cash provided by (used in)
Financing activities..................... 65,147 (41,085) - - 24,062
-------- -------- --------- -------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS.................................... (10,731) (672) (133) - (11,536)
CASH AND CASH EQUIVALENTS, beginning of
period......................................... 14,270 1,806 211 - 16,287
-------- -------- --------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period......................................... $ 3,539 $ 1,134 $ 78 $ - $ 4,751
======== ======== ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid................................. $ 12,405 $ 35 $ - $ - $ 12,440
Taxes paid.................................... 141 68 - - 209
</TABLE>
61
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 1, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
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
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
STOCKHOLDERS' EQUITY.......................... 42,821 64,476 (16) (66,603) 40,678
-------- ------- ----- -------- --------
$227,642 $70,616 $ 132 $(66,484) $231,906
======== ======= ===== ======== ========
</TABLE>
62
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED JANUARY 1, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
NET REVENUES................................. $ 156,727 $ 29,691 $ 658 $ (6,139) $ $180,937
------------ ------------- ------------- --------------- ---------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs.......... 80,702 - 288 (1,356) 79,634
Cost of sales.............................. 41,369 9,678 74 (4,798) 46,323
General and administrative................. 11,622 10,140 210 - 21,972
Depreciation and amortization.............. 15,933 6,702 - (8) 22,627
------------ ------------- ------------- --------------- ---------------
Total operating costs and expenses...... 149,626 26,520 572 (6,162) 170,556
------------ ------------- ------------- --------------- ---------------
(Loss) income from operations.............. 7,101 3,171 86 23 10,381
INTEREST EXPENSE AND OTHER, net.............. (17,634) (435) 12 - (18,057)
------------ ------------- ------------- --------------- ---------------
(Loss) income before provision for income
taxes, preferred stock accretion and
dividends of subsidiaries and equity in
net loss of consolidated subsidiaries.... (10,533) 2,736 98 23 (7,676)
PROVISION FOR INCOME TAXES................... (218) - - - (218)
------------ ------------- ------------- --------------- ---------------
(Loss) income before preferred stock
accretion and dividends of subsidiaries
and equity in net loss of consolidated
subsidiaries............................. (10,751) 2,736 98 23 (7,894)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES................... - (305) - - (305)
EQUITY IN NET LOSS OF
2,507 - - (2,529) (22)
------------ ------------- ------------- --------------- ---------------
CONSOLIDATED SUBSIDIARIES
NET (LOSS) INCOME............................ $ (8,244) $ 2,431 $ 98 $ (2,506) $ (8,221)
============ ============= ============= =============== ===============
</TABLE>
63
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 52 WEEKS ENDED JANUARY 1, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 16,392 $ 1,348 $ 163 $ - $ 17,903
----------- -------------- ------------- ------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment, net (5,157) - - - (5,157)
Proceeds for asset sales 461 - - - 461
----------- -------------- ------------- ------------- --------------
Net cash (used in) provided by
investing activities (4,696) - - - (4,696)
----------- -------------- ------------- ------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of debt financing costs (1,832) - - - (1,832)
Principal payments on long-term debt
and capital lease obligations (5,384) (1,194) - - (6,578)
Bank overdraft (4,133) - - - (4,133)
Reduction in preferred stock of Pretzel
Time -- (496) - - (496)
----------- -------------- ------------- ------------- --------------
Net cash provided by (used in)
financing activities (11,349) (1,690) - - (13,039)
----------- -------------- ------------- ------------- --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS 347 (342) 163 - 168
CASH AND CASH EQUIVALENTS,
beginning of period 3,539 1,134 78 - 4,751
----------- -------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of
period $ 3,886 $ 792 $ 241 $ - $ 4,919
=========== ============== ============= ============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 17,444 $ 513 $ - $ - $ 17,957
Taxes paid 204 197 - - 401
</TABLE>
64
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Officers of the Registrant
The following table sets forth certain information regarding the executive
officers and directors of Mrs. Fields as of January 1, 2000. The directors are
also directors of Mrs. Fields' Holding.
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Larry A. Hodges .............. 51 Director, President and Chief Executive Officer
Mark S. Tanner ............... 45 Senior Vice President and Chief Financial Officer
Pat W. Knotts ................ 45 Senior Vice President of Operations
Garry Remington .............. 47 Senior Vice President of Real Estate
Michael R. Ward .............. 42 Vice President, General Counsel and Secretary
Herbert S. Winokur, Jr ....... 56 Chairman of the Board of Directors
Richard Ferry ................ 62 Director
Nat Gregory .................. 51 Director
Walker Lewis ................. 55 Director
Peter Mullin ................. 59 Director
Gilbert Osnos ................ 70 Director
</TABLE>
Mr. Hodges has been President and Chief Executive Officer of Mrs. Fields
Inc. and Mrs. Fields since March 1994, and a Director of Mrs. Fields and Mrs.
Fields' Holding since April 1993. From 1992 to 1994, Mr. Hodges was the Chief
Executive Officer of Food Barn Stores, Inc. (Kansas City, Missouri). Earlier Mr.
Hodges was a consultant to various manufacturers and retailers. For 25 years,
Mr. Hodges was with American Stores Company where he served as President of two
of its subsidiaries ranging in annual sales from $600 million to $2.3 billion.
Mr. Hodges has over 32 years of experience in the retail field serving as
president of four supermarket chains and consultant and director to large food
companies. Mr. Hodges is a director of Ameristar Casinos, Inc. and Coinstar,
Inc.
Mr. Tanner has been Chief Financial Officer and Senior Vice President of
Finance and Administration since June 1999. Prior to Mrs. Fields, Mr. Tanner
held the position of CFO and Sr. Vice President with the Salt Lake Organizing
Committee ("SLOC") for the XIX Olympic Winter Games, where he was responsible
for finance and administration. Prior to SLOC, Mr. Tanner was Vice President
and CFO for Pepsi Cola International's operations in Asia, the Middle East, and
Africa. During his tenure with Pepsi Cola, he also held positions of Vice
President of Strategic Planning & Finance for Pepsi Cola North America and Chief
Financial Officer, Eastern Division of Pepsi Cola.
Mr. Knotts has been Senior Vice President of Mrs. Fields since October
1996. Mr. Knotts' responsibilities include all aspects of store operations and
related support functions. Between January 1992 and October 1996, Mr. Knotts
served as Executive Vice President of Operations for Original Cookie and Hot
Sam, where he was responsible for store operations, marketing, purchasing,
construction and store design. Mr. Knotts also held the position of Regional
Vice President of Stores for Silo Inc., a $1 billion consumer electronics and
major appliance chain.
Mr. Remington has been Senior Vice President of Real Estate of Mrs. Fields
since July 1997. Mr. Remington's responsibilities include all aspects of real
estate, store construction, remodels and lease negotiations. Between October
1996 and July 1997, Mr. Remington served as Vice President of Real Estate for
Sbarro, Inc. From 1994 to 1996, Mr. Remington held the position of Senior Vice
President of Leasing for the Woolworth Corporation, with responsibilities for
Footlocker, Champ Sports, Northern Reflections, Afterthoughts, and seven other
divisions. From 1992 to 1994, Mr. Remington was Vice President and Director of
Leasing for the Woolworth Corporation, which he joined in 1972.
II-1
<PAGE>
Mr. Ward serves Vice President, General Counsel and Secretary of Mrs.
Fields since September 1996. Mr. Ward's responsibilities include management of
the Legal Department. Between 1991 and 1996. Mr. Ward's responsibilities were
overseeing the Legal Department and the Human Resources Department for Mrs.
Fields Inc. He is admitted to practice law in the State of Utah. Mr. Ward was
appointed acting Chief Financial Officer on April 30, 1999 and acted in that
capacity prior to Mr. Tanner's assuming responsibilities of Chief Financial
Officer.
Mr. Winokur has been Chairman of the Board of Directors of Mrs. Fields and
Mrs. Fields' Holding since their inception in September 1996. Mr. Winokur is
managing member of Capricorn Holdings, L.L.C., the General Partner of Capricorn.
Mrs. Fields is owned by Mrs. Fields' Holding, a portfolio company of Capricorn.
Mr. Winokur is Chairman and Chief Executive Officer of Capricorn Holdings, Inc.
(a private investment company) and Managing General Partner of Capricorn
Investors, L.P. Capricorn Investors II, L.P., and Capricorn Investors III, L.P.,
private investment partnerships concentrating on investments in restructure
situations, organized by Mr. Winokur in 1987, 1994 and 1999, respectively. Prior
to his current appointment, Mr. Winokur was Senior Executive Vice President and
Director of Penn Central Corporation. Mr. Winokur is also a Director of Enron
Corp., Azurix Corp., The WMF Group, Ltd., C.C.C. Information Services Corp.,
Inc. and DynCorp.
Mr. Ferry has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Ferry is co-founder and Chairman of Korn/Ferry
International, the world's leading executive search firm. Mr. Ferry is on the
Board of Directors of Avery Dennison, Dole Food Company and Pacific Life
Insurance Company.
Mr. Gregory has been a Director of Mrs. Fields since its inception in
September 1996. Since 1993, Mr. Gregory has served as Chairman and Chief
Executive Officer of NATCO Group, Inc., an international supplier of oilfield
production equipment, which is a portfolio company of Capricorn. Prior to that
he served as Managing Director of Smith Barney from 1991 to 1993. Mr. Gregory is
a member and managing director of Capricorn Holdings, L.L.C., the General
Partner of Capricorn, and a director of Marine Drilling Companies, Inc.
Mr. Lewis has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Lewis is the Chairman of Devon Value Advisers. Mr. Lewis
served as Chairman of Strategic Planning Associates, specializing in shareholder
value strategies. Mr. Lewis was a Senior Advisor at Dillon Read & Co., Inc. and
his company, Devon Value Advisors, continues to act as a consultant to Dillon
Read. He was a Managing Director of Kidder, Peabody & Co., Inc., President of
Avon North America and Executive Vice President of Avon Products, Inc. Mr. Lewis
has served on the Board of Directors of Owens Corning, American Management
Systems, Incorporated, Jostens, Inc., Marakon Associates and London Fog.
Mr. Mullin has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Mullin founded Mullin Consulting, Inc. in Los Angeles in
1969, and serves as its Chairman and Chief Executive Officer. He also co-founded
Strategic Compensation Associates and serves as Chairman of the firm's Executive
Committee. Mr. Mullin is a member of the Board of Directors of Avery Dennison
Corporation, 1st Business Bank, Process Technology Holdings, Inc., Golden State
Vintners, M Life Insurance Company and the Board of Advisors of CMS Companies.
Mr. Osnos has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Osnos has served since 1992 as Chairman of Osnos & Company,
which provides interim management to companies. He has served as Interim
President/CEO/COO to a large array of companies in manufacturing, distribution,
retailing and service industries. In 1979 he joined the predecessor firm and
became a partner in 1981. He has been Chairman of the Turnaround Management
Association and a member of its Board since prior to 1993. He is also on the
Board of Directors of Furr's/Bishop's, Inc. and Dunham's Athleisure Corp.
II-2
<PAGE>
Item 11. Executive Compensation
The following table sets forth information with regard to compensation for
services rendered in all capacities to Mrs. Fields by its Chief Executive
Officer and the four other most highly compensated executive officers of Mrs.
Fields other than the CEO who were serving as executive officers at the end of
the last completed fiscal year. Information described in the table reflects
compensation earned by such individuals for services with Mrs. Fields or its
subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Award
------------------------------------------ ----------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ All Other
Salary Bonus Compensation Award(s) SARS(4) Compensation
Name and Principal Position Year ($) ($) ($) ($) (#) ($)
- --------------------------------- ---- ---------- --------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry Hodges 1999 $354,667 $ 87,500 $4,410 $ - - -
President and CEO 1998 339,583 150,000 4,833 - - $471,000(5)
1997 300,000 185,412 2,177 50,000(3) - -
Mark S. Tanner 1999 137,873 20,000 - - 65,712 -
Senior Vice President 1998 - - - - - -
and CFO 1997 - - - - - -
L. Tim Pierce 1999 114,842 40,000 1,915 - - 20,000(6)
Senior Vice President 1998 193,430 70,000 2,634 - - -
and CFO 1997 175,000 103,607 1,287 - - 71,867(6)
Pat Knotts 1999 222,001 43,000 - - - -
Senior Vice President 1998 191,699 70,000 - - - -
Operations 1997 162,500 27,321 - - - 23,920(1)
Michael Ward 1999 176,113 28,000 2,033 - - -
Vice President 1998 135,385 50,000 1,370 - - -
Legal and Administration 1997 109,904 56,393 619 - - 39,488(5)
Garry Remington 1999 192,533 38,000 - - - -
Senior Vice President 1998 180,000 33,945 - - - -
Real Estate 1997 82,859 - - - 24,642 46,707(2)
</TABLE>
(1) Represents payment of relocation expenses of $20,920 and a grant of $3,000
under the Original Cookie 401(k) plan.
(2) Represents payment of relocation expenses.
(3) 50% of the restricted shares vested on January 1, 1999 and the other 50%
vested on January 1, 2000.
(4) The stock options for common stock of Mrs. Fields' Holding have 10-year
terms and were granted as of September 1996, with the exception of Garry
Remington's, which were granted as of July 1997. All options have an
exercise price of $10.00 per share, with the exception of Garry
Remington's, which have an exercise price of $13.00 per share.
(5) Represents payment under Mrs. Field's Inc. Management Value Creation Plan.
(6) Mr. Pierce resigned from Mrs. Fields on April 30, 1999. Mrs. Fields bought
back his vested shares of stock for $291,560 and entered into a severance
agreement with him for $20,000.
Option Grants and Exercises
In 1996, the Board of Directors of Mrs. Fields' Holding approved the
provisions of a director stock option plan (the "Director Stock Option Plan"),
providing for the issuance of common stock, par value $.001 per share, of Mrs.
Fields' Holding to directors of Mrs. Fields' Holding, and an employee stock
option plan (the "Employee Stock Option Plan" and, together with the Director
Stock Option Plan, the "Plans"), providing for the issuance of options to
purchase common stock of Mrs. Fields' Holding to officers and other employees of
Mrs. Fields' Holding and its subsidiaries, including Mrs. Fields. The Plans
provide for the issuance of options to purchase a total of 542,840
II-3
<PAGE>
shares of common stock of Mrs. Fields' Holding to directors of Mrs. Fields'
Holding and officers and employees of Mrs. Fields' Holding's subsidiaries,
including Mrs. Fields. Of the total 542,840 option shares available, 445,356
shares, representing approximately 10% of the total common stock of Mrs. Fields'
Holding on a fully diluted basis, after giving effect to the issuance of stock
under the warrants to purchase common stock of Mrs. Fields' Holding and to
issuances of stock under options currently issued to directors and employees
under the Plans, have been issued. See "Beneficial Ownership of Capital
Stock."
Board Compensation
The Board of Directors of Mrs. Fields meets regularly on a quarterly basis
and more often as required. Board members, other than officers of Mrs. Fields
and Mr. Winokur and Mr. Gregory, are compensated for services rendered annually
as follows:
(1) $12,000 cash; and
(2) grants of options to purchase common stock of Mrs. Fields' Holding,
under the Director Stock Option Plan.
The Board of Directors of Mrs. Fields' Holding approved the award of
options under the Director Stock Option Plan to purchase 1,792 shares of common
stock of Mrs. Fields' Holding to each of Messrs. Ferry, Gregory, Lewis, Osnos
and Winokur as of January 1, 1998, at an exercise price of $16.74 per share, and
the award of options to purchase 634 shares of common stock of Mrs. Fields'
Holding as of January 2, 1999, at an exercise price of $19.72 to each of the
same directors, with the options of Messrs. Gregory and Winokur being issued to
Capricorn.
The Board members were also offered an opportunity to acquire shares of
common stock of Mrs. Fields' Holding under a director stock purchase plan (the
"Director Stock Purchase Plan"). Such compensation in shares that would be
payable or issuable to Messrs. Winokur and Gregory will be paid to Capricorn. A
total of 51,667 vested shares of common stock of Mrs. Fields' Holding and 28,333
restricted shares of common stock of Mrs. Fields' Holding have been issued to
directors and officers of Mrs. Fields under the Director Stock Purchase Plan.
Board Committees
Three functioning committees of the Board have been organized: an Executive
Committee, a Compensation Committee and an Audit Committee. Following is a brief
description of each of these committees.
Executive Committee. The Executive Committee is composed of Messrs.
Winokur (Chairman), Gregory and Hodges. The purpose of this committee is to act
on behalf of the entire Board of Directors between Board meetings.
Compensation Committee. The Compensation Committee is composed of Messrs.
Gregory (Chairman), Mullin and Lewis. The purpose of this committee is to ensure
that Mrs. Fields has a broad plan of executive compensation that is competitive
and motivating to the degree that it will attract, hold and inspire performance
of managerial and other key personnel of a quality and nature that will enhance
the growth and profitability of Mrs. Fields.
Audit Committee. The Audit Committee is comprised of Messrs. Ferry
(Chairman) and Osnos. The purpose of the Audit Committee is to provide oversight
and review of Mrs. Fields' accounting and financial reporting process in
consultation with Mrs. Fields' independent and internal auditors.
Indemnification and Compensation
Mrs. Fields' By-Laws authorize Mrs. Fields to indemnify its present and
former directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding upon receipt of
an undertaking by or on behalf of such individuals to repay such amounts if so
required.
II-4
<PAGE>
Employment Agreements
All of the executive officers are parties to employment agreements with
Mrs. Fields. Each employment agreement provides for a period of employment of
two years (or three years, in the case of Larry Hodges) from the date of the
agreement, subject to termination provisions and to automatic extension of the
agreement. Each employment agreement permits the employee to participate in any
incentive compensation plan adopted by Mrs. Fields to replace the Fiscal 1994
Incentive Compensation Plan of Mrs. Fields Inc., benefit plans and an equity-
based plan or arrangement. If Mrs. Fields terminates employment for cause or if
the employee terminates employment without good reason, Mrs. Fields has no
further obligation to pay the employee. If Mrs. Fields terminates employment
without cause, or the employee terminates employment with good reason, the
employee can receive in severance pay the amount equal to the product of his or
her then current semi-monthly base salary by the greater of the number of semi-
monthly periods from the notice of termination or 36 semi-monthly periods, plus
a portion of any discretionary bonus that would otherwise have been payable. The
employment agreement prohibits the employee, for a year from the date of
termination of employment under the agreement, from becoming an employee, owner,
officer, agent or director of a firm or person that directly competes with Mrs.
Fields in a line or lines of business of Mrs. Fields that accounts for 10% or
more of Mrs. Fields' gross sales, revenues or earnings before taxes. An
exception is made for investments of not more than 3% of the equity of a company
listed or traded on a national securities exchange or an over-the-counter
securities exchange. The employment agreements have customary provisions for
vacation, fringe benefits, payment of expenses and automobile allowances. The
employees who have employment agreements, and their base salaries, are: Larry
Hodges, President and Chief Executive Officer, $364,000, Mark Tanner, $235,000,
Pat Knotts, Senior Vice President of Operations, $210,800, Michael Ward, Vice
President, General Counsel and Secretary, $165,000 and Garry Remington, Senior
Vice President of Real Estate, $197,600.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of the date of this report, all of the capital stock of Mrs. Fields is
owned by Mrs. Fields' Holding, whose address is 2855 East Cottonwood Parkway,
Suite 400, Salt Lake City, Utah 84121. The following table sets forth certain
information, as of January 1, 2000, believed by us to be accurate based on
information provided to us concerning the beneficial ownership of common stock
by each stockholder who is known by Mrs. Fields to own beneficially in excess of
5% of the outstanding common stock, and by each director, Mrs. Fields' Chief
Executive Officer, each of Mrs. Fields' other four most highly compensated
executive officers and all officers and directors as a group, as of January 1,
2000. The stockholders listed below are deemed beneficial owners of common stock
of Mrs. Fields as a result of their ownership of common stock of Mrs. Fields'
Holding, the owner of 100% of the capital stock of Mrs. Fields. Except as
otherwise indicated, all persons listed below have (1) sole voting power and
investment power with respect to their shares, except to the extent that
authority is shared by spouses under applicable law, and (2) record and
beneficial ownership with respect to their shares. The shares and percentages
described below include shares of common stock which were outstanding or
issuable within 60 days upon the exercise of options outstanding as of January
1, 2000 and give effect to the exercise of warrants issued by Mrs. Fields'
Holding. See "Executive Compensation" and "--Board Compensation."
II-5
<PAGE>
As of January 1, 2000, there were eight record holders of common stock of Mrs.
Fields' Holding.
<TABLE>
<CAPTION>
Common Stock
----------------------
Number of Percentage
Title of Class Name of Beneficial Owner Shares Of Class
- -------------- ------------------------ --------- -----------
<S> <C> <C> <C>
Common stock, par Capricorn Investors II, L.P.(1)(2)(3) ............................ 3,184,084 86.0%
value $0.001 per share, Larry Hodges(2)(3) ............................................... 105,569 2.8%
of Mrs. Fields' Holding Peter Mullin(2)(3) ............................................... 18,409 0.5%
Richard Ferry(2)(3) .............................................. 13,409 0.4%
Walker Lewis(2)(3) ............................................... 10,909 0.3%
Gilbert Osnos(2)(3) .............................................. 10,909 0.3%
Pat Knotts(3) .................................................... 18,892 0.5%
Michael Ward(3) .................................................. 15,607 0.4%
Garry Remington(3) ............................................... 10,541 0.32%
All executive officers and directors as a group (9 persons)
(2)(3)(4)......................................................... 3,388,329 91.5%
</TABLE>
(1) The address of Capricorn is 30 East Elm Street, Greenwich, CT 06830.
(2) Larry Hodges, Peter Mullin, Richard Ferry, Walker Lewis and Gilbert Osnos
are directors of the Company. Herbert Winokur and Nat Gregory are managing
member and member, respectively, of Capricorn Holdings, L.L.C., the General
Partner of Capricorn, and are directors of Mrs. Fields. See "Management."
(2) The shares and percentages include shares subject to options granted to
directors and officers of Mrs. Fields that are currently vested as of
January 1, 2000, as follows: Capricorn, 6,817 shares; Mr. Hodges, 75,569
shares; Mr. Mullin, 3,409 shares; Mr. Ferry, 3,409 shares; Mr. Lewis, 3,409
shares; Mr. Osnos, 3,409 shares; Mr. Knotts, 18,892 shares; Mr. Ward,
15,607 shares; and Mr. Remington, 10,541 shares; all executive officers and
directors as a group, 141,062.
(4) Includes shares beneficially owned by Capricorn.
Item 13. Certain Relationships and Related Transactions
Agreements with Debbi Fields and Affiliates. In November 1996, Mrs. Fields
entered into a consulting agreement with Debbi Fields, a former director of Mrs.
Fields, under which she traveled and performed public relations and advertising
activities on behalf of Mrs. Fields for at least 50 days a year for a fee of
$250,000 per year, with an option to perform 20 additional days a year for
additional pay of $5,000 per day. The compensation increased by 10% a year
beginning on January 1, 1999. The consulting agreement expired on December 31,
1999. Under the consulting agreement, Debbi Fields may not disclose any
confidential information of Mrs. Fields, such as recipes and trade secrets, and
may not, without the prior written consent of Mrs. Fields, compete with Mrs.
Fields.
In addition, Mrs. Fields has a license agreement with FSG Holdings, Inc., a
Delaware Corporation, under which Debbi Fields has a nonexclusive license to use
certain trademarks, names, service marks and logos of Mrs. Fields in connection
with book and television series projects. Debbi Fields is required to pay 50% of
any gross revenues in excess of $200,000 that she receives from the book and
television series projects to Mrs. Fields as a license fee.
Mrs. Fields leased certain office space to an entity which is owned in part
by Debbi Fields. Billings to the entity for the fiscal years ended January 3,
1998 and January 2, 1999 totaled approximately $60,000 and $274,000,
respectively. The lease was terminated in the first quarter of fiscal year 1998.
Mrs. Fields believes that the arrangements were on terms that could have been
obtained from an unaffiliated third party.
Arrangements with Walker Lewis. Mr. Lewis, a director of Mrs. Fields, acts
as a consultant and an advisor to Dillon Read. Mr. Lewis' company, Devon Value
Advisers, received a fee of $250,000, plus expenses, from Mrs. Fields in the
first quarter of 1998 under an agreement to provide advisory acquisition and
consulting services to Mrs. Fields. Mrs. Fields believes that the arrangement
was on terms that could have been obtained from an unaffiliated third party.
Korn/Ferry Agreement. Mrs. Fields has paid fees of approximately $71,000
and $35,000 during the years ended January 2, 1999 and January 1, 2000,
respectively, to Korn/Ferry International, an executive search firm of which
Richard Ferry, a director of Mrs. Fields, is the Chairman, in connection with
the hiring of employees for Mrs. Fields. Mrs. Fields believes that the
arrangements are on terms that could have been obtained from an unaffiliated
third party.
II-6
<PAGE>
Arrangements With Mrs. Fields' Holding. As of January 2, 1999 and January
1, 2000, Mrs. Fields had a net payable of $150,000 and a net receivable of
$642,000 with Mrs. Fields' Holding, respectively. The receivables stem primarily
from goods sold and an allocation of payroll and other operating expenses. Mrs.
Fields believes that the terms of the sale and allocations are essentially
equivalent to the terms that would have been obtained from an unaffiliated third
party in a similar transaction.
Incentive Arrangements. Under a senior management value creation plan that
was adopted by Mrs. Fields Inc. and assumed by Mrs. Fields at the time of its
formation in September 1996, the following payments were made in 1998: $471,484
to Mr. Hodges; $71,867 to Mr. Pierce; $39,488 to Mr. Ward; and $71,078 to a vice
president of Mrs. Fields Inc. Mr. Hodges used $250,000, representing
substantially all of this payment after his payment of related taxes, to
purchase 25,000 shares of common stock of Mrs. Fields' Holding at $10.00 per
share.
Director Stock Purchase Plan. Each of the directors of Mrs. Fields was
offered an opportunity to purchase common stock of Mrs. Fields' Holding under
the Director Stock Purchase Plan. Under the Director Stock Purchase Plan, shares
of common stock of Mrs. Fields' Holding, either restricted or vested, can be
issued to outside directors of Mrs. Fields' Holding and its subsidiaries,
including Mrs. Fields. Restricted shares vested 50% on January 1, 1999 and 50%
on January 1, 2000. A total of 51,667 vested shares of common stock of Mrs.
Fields' Holding and 28,333 restricted shares of common stock of Mrs. Fields'
Holding have been issued to directors and officers of Mrs. Fields under the
Director Stock Purchase Plan.
The Plans. Under the Employee Stock Option Plan, a committee of the Board
is authorized to administer the Employee Stock Option Plan and has the power,
among other things, to grant awards to officers and other employees of Mrs.
Fields' Holding and its subsidiaries, including Mrs. Fields, of options for
common stock of Mrs. Fields' Holding. The Employee Stock Option Plan provides
for the issuance of three types of options. Performance vested options were
deemed to be vested 20% for fiscal year 1997 and vest an additional 20% per year
for each subsequent fiscal year in which there is a 10% increase in the implied
valuation of Mrs. Fields, which is equal to the excess of 5.5 times Adjusted
EBITDA for such fiscal year over net debt at the end of such fiscal year. Time
vested options vest 25% per year on the anniversaries of the dates on which they
are granted, and vest in full upon a change of control of Mrs. Fields' Holding
or Mrs. Fields. Upside options vest upon the earlier to occur of the expiration
of such option and a change of control, in accordance with certain internal rate
of return targets:
(1) if the IRR through the vesting date is less than 20%, the option will
not vest;
(2) if the IRR is from 20% to 24.99%, the option will vest one-third;
(3) if the IRR is from 25% to 29.99%, the option will vest two-thirds; and
(4) if the IRR is at least 30%, the option will vest in full.
IRR means, as of any date, the internal rate of return, determined in
accordance with generally accepted practice, on one share of common stock of
Mrs. Fields' Holding calculated from September 18, 1996, through the date as of
which the determination is being made, using
(1) a value of $10.00 per share at September 18, 1996 (subject to certain
adjustments),
(2) if the relevant date is the date of a change of control, the value paid
under or implicit in the change of control transaction (as determined
in good faith by a committee of the Board of Directors), and
(3) if the relevant date of determination is the expiration of such option,
the value determined in good faith based on the implied valuation for
the four most recent fiscal quarters for which financial statements are
available.
An total of 492,840 shares of common stock of Mrs. Fields' Holding have
been reserved for issuance under the Employee Stock Option Plan. Stock issued
under the Employee Stock Option Plan is subject to customary restrictions on
transfer.
II-7
<PAGE>
Under the Director Stock Option Plan, a committee of the Board is
authorized to administer the Director Stock Option Plan and has the power, among
other things, to grant awards of options for common stock of Mrs. Fields'
Holding to outside directors of Mrs. Fields' Holding and its subsidiaries,
including Mrs. Fields. The Director Stock Option Plan provides for the issuance
of time vested options, which vest 25% per year on the anniversaries of the
dates on which they are granted, and vest in full upon a change of control of
Mrs. Fields' Holding or Mrs. Fields. A total of 50,000 shares of common stock of
Mrs. Fields' Holding are reserved for issuance under the Director Stock Option
Plan. Common stock of Mrs. Fields' Holding issued under the Director Stock
Option Plan is subject to customary restrictions on transfer. Options have been
awarded under the Director Stock Option Plan to each of Messrs. Ferry, Gregory,
Lewis, Osnos and Winokur to purchase 3,350, 1,792 and 394 shares of common stock
of Mrs. Fields' Holding as of January 1, 1997, January 1, 1998 and January 2,
1999 at exercise prices of $10.00, 16.74 and 19.72 per share, respectively.
Options of Messrs. Gregory and Winokur have been issued to Capricorn.
The Stockholders' Agreement. Mrs. Fields' Holding has entered into a
stockholders' agreement with its stockholders. The stockholders' agreement gives
rights of first refusal to Mrs. Fields' Holding if any Mrs. Fields' Holding
stockholder receives an offer to purchase common stock of Mrs. Fields' Holding
and, if Mrs. Fields' Holding does not exercise its rights, gives the rights of
first refusal to other Mrs. Fields' Holding stockholders. In the event of a sale
to a third party approved by Capricorn, Capricorn has the right to require the
other Mrs. Fields' Holding stockholders to sell their common stock of Mrs.
Fields' Holding (the "Drag Along"). If Capricorn sells any common stock of
Mrs. Fields' Holding, the other Mrs. Fields' Holding stockholders will have the
opportunity to sell their common stock of Mrs. Fields' Holding in proportion to
their holdings (the "Tag Along"). The stockholders' agreement also provides
for piggyback registration rights for all Mrs. Fields' Holding stockholders, and
gives one Mrs. Fields' Holding stockholder demand registration rights. The
stockholders' agreement gives Mrs. Fields' Holding the option to purchase all of
the common stock of Mrs. Fields' Holding held by an officer or director that
holds common stock of Mrs. Fields' Holding if such officer or director is
terminated. If an officer or director is terminated other than for cause, the
officer or director has the right to sell shares to Mrs. Fields' Holding. The
stockholders' agreement provides for customary restrictions on transfer of
common stock of Mrs. Fields' Holding. The holders of warrants to purchase common
stock of Mrs. Fields' Holding will be subject to the Drag Along and benefit from
the Tag Along.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Financial Statements
(1) See Item 8 "Financial Statements and Supplementary Data" for
a list of the financial statements filed as part of this
report.
(2) The following financial statement schedule for Mrs. Fields'
Original Cookies, Inc. is filed as a part of this report
Page
----
Schedule II - Valuation and Qualifying Accounts................ ____
(3) Exhibits Index
The exhibits filed with or incorporated by reference in this
report are listed in the Exhibit Index beginning on
page____.
(b) Reports filed on Form 8-K during the fourth quarter
None
II-8
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
2.1 Securities Purchase Agreement by and among Cookies USA, Inc., the
Individuals and Entities Identified Therein as The Sellers and Mrs. Fields'
Original Cookies, Inc., dated as of August 13, 1998, filed as exhibit 2.3 to the
Company's Registration Statement on Form S-4 (No. 333-67389), and incorporated
by reference herein.
2.2 Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Jake Tortorice of Chocolate Chip Cookies of Texas, Inc. as Seller,
filed as exhibit 2.3 to the Company's 8-K dated September 3, 1998, and
incorporated by reference herein.
2.3 Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome E. Mouton, Steven J.
Bryan and Jason A. Piltzmaker, holders of all outstanding capital stock of
Deblan Corporation, as Sellers, filed as exhibit 2.2 to the Company's
8-K dated September 3, 1998, and incorporated by reference herein.
2.4 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
ASK & MSK Family Limited Partnership-II(B), Ltd. filed as exhibit 2.4 to the
Company's 8-K dated September 3, 1998, and incorporated by reference herein.
2.5 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Crossroads Cookies, Inc. filed as exhibit 2.5 to the Company's 8-K dated
September 3, 1998, and incorporated by reference herein.
2.6 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Hot Barton and Northpark Cookies, Inc. filed as exhibit 2.6 to the Company's 8-K
dated September 3, 1998, and incorporated by reference herein.
2.7 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Northpark Cookies, Inc. filed as exhibit 2.7 to the Company's 8-K dated
September 3, 1998, and incorporated by reference herein.
2.8 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Quail Springs Cookies, Inc. filed as exhibit 2.8 to the Company's 8-K dated
September 3, 1998, and incorporated by reference herein.
II-9
<PAGE>
2.9 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Westgate Cookies, Inc. filed as exhibit 2.9 to the Company's 8-K dated September
3, 1998, and incorporated by reference herein.
3.1 Restated Certificate of Incorporation of Mrs. Fields' Original Cookies,
Inc., filed as exhibit 3.1 to the Company's Registration Statement on Form S-4
(No. 333-45179), and incorporated by reference herein.
3.2 By-Laws of Mrs. Fields' Original Cookies, Inc., filed as exhibit 3.4 to the
Company's Registration Statement on S-4 (No. 333-45179), and incorporated by
reference herein
4.1 Indenture, dated as of November 26, 1997, among Mrs. Fields' Original
Cookies, Inc., The Mrs. Fields' Brand, Inc., and The Bank of New York, as
Trustee, filed as exhibit 4.1 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein.
4.2 Form of Notation of Guarantee (included as Exhibit E to Exhibit 4.1)
4.3 Form of Certificate of Senior Note (included as Exhibit A to Exhibit 4.1)
4.4 First Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., and The Bank of
New York, as Trustee, filed as exhibit 4.4 to the Company's Registration
Statement on Form S-4 (No. 333-67389) and incorporated by reference herein.
4.5 Second Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., Great American
Cookie Company, Inc., and The Bank of New York, as trustee, filed as exhibit 4.4
to the Company's Registration Statement on Form S-4 (No. 333-67389) and
incorporated by reference herein.
4.6 Third Supplemental Indenture, dated as of November 20, 1998, among Mrs.
Fields' Original Cookies, Inc., Great American Cookie Company, Inc., The Mrs.
Fields' Brand, Inc., Pretzelmaker Holdings, Inc., and The Bank of New York, as a
Trustee, filed as exhibit 4.5 to the Company's Registration Statement on Form S-
4 (No. 333-67389) and incorporated by reference herein.
4.7 Fourth Supplemental Indenture, dated as of December 30, 1998, among Mrs.
Fields' Original Cookies, Inc., Great American Cookie Company, Inc., The
II-10
<PAGE>
Mrs. Fields' Brand, Inc., Pretzelmaker Holdings, Inc., and The Bank of New York,
as a Trustee, filed as exhibit 4.7 to the Company's Registration Statement on
Form S-4 (No. 333-67389), and incorporated by reference herein.
4.8 Registration Rights Agreement, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., Great American
Cookie Company, Inc., Jefferies & Company, Inc. and BT Alex. Brown Incorporated,
filed as exhibit 4.9 to the Company's Registration Statement on Form S-4 (No.
333-67389), and incorporated by reference herein.
10.1 Amended and Restated Marketing Agreement, dated as of January 9, 1997,
between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA Fountain, filed as
exhibit 10.27 to the Company's Registration Statement on S-4 (No. 333-45179),
and incorporated by reference herein
10.2 Amendment, dated December 1, 1997, to Amended and Restated Marketing
Agreement between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain, filed as exhibit 10.4 to the Company's Registration Statement on Form
S-4 (No. 333-67389), and incorporated by reference herein.
10.3 Corollary agreement, dated September 21, 1998, to existing marketing
agreement, dated as of January 9, 1997 and amended on November 13, 1997 and
December 1, 1997 between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain, filed as exhibit 10.5 to the Company's Registration Statement on Form
S-4 (No. 333-67389), and incorporated by reference herein.
10.4 Employment Agreement, dated as of October 1, 1997, between Michael R. Ward
and Mrs. Fields' Original Cookies, Inc., filed as exhibit 10.28 to the Company's
Registration Statement on S-4 (No. 333-45179), and incorporated by reference
herein
10.5 Employment Agreement, dated as of October 1, 1997, between Pat Knotts and
Mrs. Fields' Original Cookies, Inc., filed as exhibit 10.29 to the Company's
Registration Statement on S-4 (No. 333-45179), and incorporated by reference
herein
10.6 Employment Agreement, dated as of July 1, 1996, between Lawrence Hodges
and Mrs. Fields' Original Cookies, Inc., filed as exhibit 10.31 the Company's
Registration Statement on S-4 (No. 333-45179), and incorporated by reference
herein
II-11
<PAGE>
10.7 Employment Agreement, dated as of July 10, 1997, between Garry Remington
and Mrs. Fields' Original Cookies, Inc., filed as exhibit 10.10 to the
Company's Registration Statement on Form S-4 (No. 333-67389), and incorporated
by reference herein.
10.8 Lease Agreement, dated as of February 23, 1993, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies, filed as
exhibit 10.32 the Company's Registration Statement on S-4 (No. 333-45179), and
incorporated by reference herein.
10.9 Lease Agreement, dated as of October 10, 1995, between The Equitable Life
Assurance Society of the United States and Mrs. Fields Cookies, filed as exhibit
10.33 the Company's Registration Statement on S-4 (No. 333-45179), and
incorporated by reference herein.
10.10 Letter of Agreement, dated as of October 1, 1992, between United
Airlines, Inc. and Mrs. Fields Development Corporation, filed as exhibit 10.34
to the Company's Registration Statement on S-4 (No. 333- 45179), and
incorporated by reference herein.
10.11 Lease Agreement, dated as of January 18, 1998, between 2855 E. Cottonwood
Parkway, L.C. and Mrs. Fields' Original Cookies, Inc., filed as exhibit 10.35 to
the Company's Registration Statement on S-4 (No. 333-45179), and incorporated by
reference herein.
10.12 Amendment to Supply Agreement, dated as of June 19, 1995 between Van Den
Bergh Foods Company and Mrs. Fields Inc., filed as exhibit 10.37 to the
Company's Registration Statement on S-4 (No. 333-45179), and incorporated by
reference herein.
10.13 License Agreement, dated as of March 1, 1992, between Mrs. Fields
Development Corporation and Marriott Corporation, filed as exhibit 10.40 to the
Company's Registration Statement on S-4 (No. 333-45179), and incorporated by
reference herein
10.14 License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp., filed as
Exhibit 10.41 to the Company's Registration Statement on S-4 (No. 333-45170),
and incorporated by reference herein.
II-12
<PAGE>
10.15 Uniform Franchise Offering Circular of Pretzel Time, Inc., filed as
Exhibit 10.56 to the Company's Registration Statement on S-4 (No. 333-45179),
and incorporated by reference herein.
10.16 Uniform Franchise Offering Circular of Great American Cookie Company,
Inc., as amended on November 24, 1998, filed as exhibit 2.1 to the Company's
Registration Statement on Form S-4 (No. 333-67389), and incorporated by
reference herein.
10.17 Assignment of Assets and Assumption of Liabilities Agreement, dated July
25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields' Pretzel Concepts,
Inc., filed as Exhibit 10.62 to the Company's Registration Statement on S-4 (No.
333-45179), and incorporated by reference herein.
10.18 First Amendment to Operating Agreement for UVEST, LLC, dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST Limited, filed as
Exhibit 10.64 to the Company's Registration Statement on S-4 (No. 333-45179),
and incorporated by reference herein.
10.19 First Amendment to Operating Agreement for LV-H&M, L.L.C., Dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean Jensen, filed as
Exhibit 10.65 to the Company's Registration Statement on S-4 (No. 333-45179),
and incorporated by reference herein.
10.20 Lease Agreement, dated March 2, 1995, between Price Development Company,
Limited Partnership and Mrs. Fields Cookies, filed as exhibit 10.69 to the
Company's Registration Statement on S-4 (No. 333-45179), and incorporated by
reference herein
10.21 Mrs. Fields' Holding Company, Inc. Director Stock Option Plan, filed as
exhibit 2.1 to the Company's Registration Statement on Form S-4 (No. 333-67389),
and incorporated by reference herein.
10.22 Mrs. Fields' Holding Company, Inc. Employee Stock Option Plan, filed as
exhibit 2.1 to the Company's Registration Statement on Form S-4 (No. 333-67389),
and incorporated by reference herein.
10.23 Mrs. Fields' Holding Company, Inc. Director Stock Purchase Plan, filed as
exhibit 2.1 to the Company's Registration Statement on Form S-4 (No. 333-67389),
and incorporated by reference herein.
II-13
<PAGE>
10.24 Amended and Restated Loan Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank, filed as
Exhibit 10.73 to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.25 Intellectual Property Security Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank, filed as
exhibit 10.44 to the Company's Registration Statement on Form S-4 (No. 333-
67389), and incorporated by reference herein.
10.26 Pledge and Security Agreement, dated as of February 28, 1998, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank, filed as exhibit
10.45 to the Company's Registration Statement on Form S-4 (No. 333-67389), and
incorporated by reference herein.
10.27 Stockholders' Agreement, dated as of July 17, 1998, between Mrs. Fields'
Holding Company, Inc. and its Stockholders, filed as exhibit 10.46 to the
Company's Registration Statement on Form S-4 (No. 333-67389), and incorporated
by reference herein.
10.28 Form of Settlement Agreement and Release, by and among Mrs. Fields'
Original Cookies, Inc., Capricorn Investors II, L.P., a Delaware limited
partnership, Great American Cookie Company, Inc., Cookies USA, Inc., The Jordan
Company, and the Franchisees parties thereto, filed as exhibit 10.47 to the
Company's Registration Statement on Form S-4 (No. 333-67389), and incorporated
by reference herein.
10.29 Supply Agreement, dated as of March 30, 1998 between Mrs. Fields'
Original Cookies, Inc. and LBI Acquisition Corp. d/b/a Pennant Foods, filed as
exhibit 10.48 to the Company's Registration Statement on Form S-4 (No. 333-
67389), and incorporated by reference herein.
10.30 Trademark license agreement dated January 3, 2000 between The Mrs.
Fields' Brand, Inc. and Nonni's Food Company, Inc.
10.31 Purchase agreement dated December 1, 1999 between The Mrs. Fields' Brand,
Inc. and Nonni's Food Company, Inc.
12.1 Computation of ratio of earnings to fixed charges of Mrs. Fields'
Original Cookies, Inc.
21.1 Subsidiaries of Mrs. Fields' Original Cookies, Inc, filed as Exhibit 21.1
to the Company's Registration Statement on Form S-4 (No. 333-67389), and
incorporated by reference herein.
27.1 Financial Data Schedule (for SEC use only), filed as Exhibit 27 to the
Company's Form 10-K for the year ended January 1, 2000
99.3 Schedule II - Valuation and Qualifying Accounts
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 31, 1999
- -------------------------------------- --------------
Larry A. Hodges, President & CEO Date
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Larry A. Hodges President, Chief Executive Officer March 31, 2000
- --------------------------- and Director (Chief Executive Officer)
(Larry A. Hodges)
/s/ Mark S. Tanner Senior Vice President and Chief Financial March 31, 2000
- --------------------------- Officer (Chief Financial and Principal
(Mark S. Tanner) Accounting Officer)
/s/ Herbert S. Winokur Chairman of the Board of Directors March 31, 2000
- ---------------------------
(Herbert S. Winokur)
/s/ Richard M. Ferry Director March 31, 2000
- ---------------------------
(Richard M. Ferry)
/s/ Director March 31, 2000
- ---------------------------
(Nathaniel A. Gregory)
/s/
- --------------------------- Director March 31, 2000
(Walker Lewis)
/s/ Peter W. Mullin Director March 31, 2000
- ---------------------------
(Peter W. Mullin)
/s/
- --------------------------- Director March 31, 2000
(Gilbert C. Osnos)
</TABLE>
II-16
<PAGE>
TRADEMARK LICENSE AGREEMENT
between
THE MRS. FIELDS' BRAND, INC.
a Delaware corporation
and
NONNI'S FOOD COMPANY, INC.
a Florida corporation
DATED: January 3, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS................................................................. 1
AGREEMENT................................................................ 1
1. DEFINITIONS................................................... 1
2. GRANT OF LICENSE.............................................. 2
3. RESERVATION OF RIGHTS AND PRODUCT RIGHTS...................... 3
4. LICENSE TRANSFER.............................................. 4
5. LICENSE FEE AND ROYALTIES..................................... 4
6. GUARANTEED ROYALTY............................................ 5
7. LICENSE RETENTION............................................. 6
8. NONNI'S BRANDS REPORTS........................................ 6
9. DEVELOPMENT OF ROYALTY BEARING PRODUCTS....................... 6
10. ADVERTISING AND PROMOTION REQUIREMENTS........................ 8
11. ROYALTY BEARING PRODUCTS APPROVAL STANDARDS................... 8
12. USE OF LICENSED NAMES AND MARKS............................... 9
13. INFRINGEMENT.................................................. 10
14. INSURANCE..................................................... 11
15. CONFIDENTIALITY............................................... 11
16. TERM AND TERMINATION.......................................... 12
17. DISPOSAL OF INVENTORY UPON EXPIRATION......................... 14
18. FINAL STATEMENT UPON TERMINATION OR EXPIRATION................ 15
19. REPRESENTATIONS AND WARRANTIES................................ 15
20. INDEMNIFICATION............................................... 16
21. NOTICES....................................................... 16
22. GENERAL PROVISIONS............................................ 17
</TABLE>
EXHIBIT "A" - LICENSED NAMES AND MARKS
EXHIBIT "B" - ROYALTY BEARING PRODUCTS
<PAGE>
TRADEMARK LICENSE AGREEMENT
THIS AGREEMENT is made and entered into this 3rd day of January 2000, by
and between THE MRS. FIELDS' BRAND, INC., a Delaware corporation ("MFB"), and
NONNI'S FOOD COMPANY, INC., a Florida corporation ("Nonni's").
RECITALS
WHEREAS, MFB is the sole owner of certain trademarks, service marks, and
trade names, which have become associated with high quality food products;
WHEREAS, Nonni's desires to acquire a license from MFB to develop,
manufacture, package, distribute and sell through designated retail distribution
channels high quality, prepackaged ready-to-eat shelf stable cookie products
utilizing the Mrs. Fields trademarks, service marks and trade names; and
WHEREAS, MFB desires to license to Nonni's the right to develop,
manufacture, package, distribute and sell ready-to-eat shelf stable cookie
products through designated retail distribution channels subject to the
provisions of this Agreement;
AGREEMENT
NOW THEREFORE, in consideration of the covenants and agreements contained
herein and other valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS
(a) "Designated Distribution Channels" shall mean grocery stores,
supermarkets, drug stores, convenience stores, club stores, mass
merchandisers and other similar retail prepackaged food and snack retail
distribution channels.
(b) "Guaranteed Amounts" shall have the meaning set forth in Section 5
hereof.
(c) "Initial Term" shall have the meaning set forth in Section 16
hereof.
(d) "Licensed Names and Marks" shall mean those trademarks, trade
names and service marks identified on Exhibit A hereto.
(e) "Net Sales" shall mean gross sales minus cash discounts for early
payments.
(f) "Option" shall have the meaning set forth in Section 16 hereof.
(g) "Packaging Specifications" shall mean those specifications for
<PAGE>
packaging approved by MFB pursuant to Section 11 hereof.
(h) "Product Specifications" shall mean those specifications for
Royalty Bearing Products approved by MFB pursuant to Section 11 hereof.
(i) "Protected Information" shall mean MFB recipes, formulations,
systems, programs, procedures, manuals, confidential reports and
communications, marketing techniques and arrangements, purchasing
information, pricing policies, quoting procedures, financial information,
employee, customer, supplier and distributor data, all of the materials or
information relating to the business or activities of MFB which were not
otherwise known to Nonni's prior to the commencement of the negotiations
leading to this Agreement, or generally known to others engaged in similar
businesses or activities, and all modifications, improvements and
enhancements which are derived from or relate to Nonni's access to or
knowledge of any of the above enumerated materials or information (whether
or not any of the above are reduced to writing or whether or not patentable
or protectable by copyright) which Nonni's receives, receives access to,
conceives or develops or has received, received access to, conceived or
developed, in whole or in part, directly or indirectly, in connection with
Nonni's license hereunder. Information which is independently developed by
Nonni's, or which was already in the possession of Nonni's prior to the
date of this Agreement and which was not obtained in connection with the
transactions contemplated by this Agreement, or information which is or
becomes publicly available without breach of (i) this Agreement, (ii) any
other agreement or instrument to which Nonni's is a party or a beneficiary,
or (iii) any duty owed to MFB by Nonni's, shall not be considered Protected
Information hereunder.
(j) "Royalty Bearing Product(s)" shall mean the food products
described on Exhibit B hereto, that are sold as prepackaged shelf stable
cookies using the Licensed Names and Marks.
(k) "Royalty Default Rate" shall mean the interest rate which is the
lesser of (i) the annual rate from time to time publicly announced by
Citibank, N.A. at its "base rate" or "prime rate" (or any successor rate)
plus two percent (2%) or (ii) the highest applicable legal rate.
(l) "Running Royalty" or "Running Royalties" shall mean the royalty or
royalties from time to time payable pursuant to Section 5.
(m) "Territory" shall mean The United States of America and Canada.
(n) "Guaranteed Royalty" shall have the meaning set forth in Section 6
hereof.
2. GRANT OF LICENSE
2
<PAGE>
(a) Grant. Subject to the terms and conditions of this Agreement,
MFB hereby grants to Nonni's, and Nonni's hereby accepts the grant by MFB of,
the exclusive right and license to use the Licensed Names and Marks to
manufacture and market Royalty Bearing Products through Designated Distribution
Channels throughout the Territory. Except as stated in Section 3, MFB shall not
compete with Nonni's in the (i) use of any trademark, service mark or tradename
in marketing Royalty Bearing Products in Designated Distribution Channels in the
Territory or (ii) license any third party to use the same in marketing any
Royalty Bearing Products in Designated Distribution Channels in the Territory.
(b) First Right of Offer - Products. If at any time during the
Initial Term (or a current Option Period) MFB determines to offer a ready-to-eat
shelf stable cookie commodity marketed through the Designated Distribution
Channels, for countries outside the Territory to a third party manufacturer,
licensee or marketing company, prior to offering the ready-to-eat shelf stable
cookie commodity marketed through the Designated Distribution Channels to a non-
related party by any means, MFB shall notify Nonni's and provide Nonni's a sixty
(60) day period of time thereafter during which MFB shall negotiate exclusively
in good faith with Nonni's for the license to sell in the Territory the
ready-to-eat shelf stable cookie commodity marketed through the Designated
Distribution Channels. The terms and conditions upon which MFB grants a license,
if any, for a ready-to-eat shelf stable cookie commodity marketed through the
Designated Distribution Channels pursuant to this Section shall be as negotiated
by MFB and Nonni's during such 60 day period; provided, that MFB is only free to
reject Nonni's offer if an agreement cannot be reached as to the Licensing Fee
and the Running Royalty and after such rejection, MFB can negotiate with any
third party for the license to sell the ready-to-eat shelf stable cookie
commodity marketed through the Designated Distribution Channels and accept such
third party offer only if it exceeds Nonni's best offer. Any agreement reached
with Nonni's during such 60 day period shall be documented in a separate
agreement or addendum to this Agreement and shall become effective only when
signed by all parties.
(c) Nonni's agrees to appoint a person designated by MFB, as a full
board member of Nonni's. Such person, or a replacement designated by MFB, shall
serve as a board member through the term of this Agreement and any Option
Period.
3. RESERVATION OF RIGHTS AND PRODUCT RIGHTS
(a) Reservation. MFB reserves all rights with respect to the
Licensed Names and Marks not expressly licensed to Nonni's hereunder, and
MFB may use or grant licenses to others to use the Licensed Names and Marks
in any other manner or in connection with any goods or services, other than
for sale of Royalty Bearing Products in Designated Distribution Channels in
the Territory. Without limiting the foregoing, the license granted pursuant
to this Agreement shall be exclusive to Nonni's except that MFB shall not
be precluded from, and hereby expressly retains the right to: (i) own,
operate, and grant or license others the right to own and
3
<PAGE>
operate Mrs. Fields Cookies stores which sell cookie, bakery and/or ice
cream products (whether or not such products are Royalty Bearing Products)
under the Licensed Names and Marks at locations within the Territory on
such terms and conditions, as MFB, in its sole discretion, deems
appropriate, and (ii) offer for sale and sell, and license others to offer
for sale and sell, any products or services under the Licensed Names and
Marks which are not Royalty Bearing Products. During the term of this
Agreement, Nonni's shall have the exclusive right to use the recipes which
it solely develops. Within 6 months of the expiration or termination of
this Agreement, MFB shall have the option to purchase for its exclusive use
any of the recipes which Nonni's had solely developed during the term of
the Agreement. The purchase price for each recipe shall be $75,000.00.
(b) Products. MFB shall have the right to purchase Royalty Bearing
Products from Nonni's at a "most favored nations" price in order to sell
the Royalty Bearing Products at Mrs. Fields Cookies store locations owned
and operated by MFB, its licensees and its franchisees which are licensed
by MFB to operate Mrs. Fields Cookies stores pursuant to Mrs. Fields'
Uniform Franchise Offering Circular or under an exemption to the Federal
Trade Commission Regulations governing the sale of franchises. "Most
favored nations price for the purpose of this agreement will be the lowest
net price received by Nonni's from any customer for the specific store
keeping unit ("sku") of the Royalty Bearing Product during the 30 day
period immediately preceding the order from MFB, less an offset for the
amount of the running royalty otherwise due from Nonni's to MFB which will
instead be credited against the purchase price charged by Nonni's to MFB.
4. LICENSE TRANSFER
This Agreement shall be binding upon and inure to the benefit of the
parties to this Agreement and their successors or assigns; provided, that the
rights of the parties under this Agreement may only be assigned (i) upon written
consent by MFB or (ii) without consent to a parent corporation which owns at
least fifty-one percent (51%) of such assigning party, a fifty-one percent (51%)
owned subsidiary corporation of such party, a fifty-one percent (51%) owned
subsidiary of a parent of such party if such parent owns at least fifty-one
percent (51%) of such party, or to such other business organization which shall
acquire substantially all of the assets and business of the parties, a parent,
or a subsidiary. Nonni's shall not have the right to grant sublicenses under
this Agreement; provided, however that Nonni's shall have the right to contract
with a third party for the actual manufacturing of the Royalty Bearing Products
("co-pack agreements"), if such co-packer (with respect to Royalty Bearing
Products) are approved in writing by MFB, (such approval shall be deemed granted
unless within 30 days after sending said notice to MFB, Nonni's receives from
MFB written notice indicating disapproval) which approval will not be
unreasonably withheld, and provided further that such co-packer signs a
confidentiality agreement with MFB, containing substantially the obligations of
Nonni's as set forth in paragraph 15 hereof.
4
<PAGE>
Nonni's shall be required to provide a copy of the co-pack agreement to MFB
before the execution of any such agreement. Nonni's obligations as set forth in
this Agreement shall not be altered in any manner as a result of the existence
of any co-pack agreements with third party manufacturers. Any assignment,
franchise, sublicense, or transfer, not expressly permitted by this Section 4,
is prohibited and will be deemed to be null and void.
5. LICENSE FEE AND ROYALTIES
(a) Guaranteed Licensing Fees and Running Royalties. Upon execution
of this Agreement and upon the concurrent approval under Section 9(b) by
MFB of Royalty Bearing Products, Nonni's shall deliver warrants totaling
10% of the stock of Nonni's pursuant to the Warrant Purchase Agreement
attached as Exhibit C. Throughout the term (including Option Periods) of
this Agreement the Running Royalty shall be 5% of Net Sales of Royalty
Bearing Products, except for years one and three which shall be 7% of Net
Sales of Royalty Bearing Products. Nonni's shall remit such Running
Royalties to MFB on the last day of the month following the end of each
calendar quarter covered by the Agreement. All Guaranteed Amounts and
Running Royalties shall be non-refundable for any reason whatsoever.
(b) Payments. All fees, royalties, and amounts payable hereunder
shall be paid to MFB in U.S. currency in immediately available funds at
such address or to such account as shall be designated in writing by MFB.
(c) Interest on Late Payments. Nonni's shall pay interest on all
overdue amounts hereunder from the due date of such amounts until paid at
the Royalty Default Rate.
6. GUARANTEED ROYALTY
(a) Nonni's agrees to pay a Guaranteed Royalty (defined below) per
year (which shall not begin until 3 months after the execution of this
Agreement) on Net Sales of Royalty Bearing Products during the first three
years as set forth on the following schedule:
INITIAL TERM
------------
Year 1 $1,100,000
Year 2 $1,750,000
Year 3 $2,100,000
(b) The foregoing guaranteed payments shall be referred to herein as
the "Guaranteed Royalty" and shall be due within 45 days of said twelve
month period.
5
<PAGE>
7. LICENSE RETENTION
If Nonni's fails to generate royalties sufficient to meet its Guaranteed
Royalty as set forth in Section 6(a) hereof with respect to Royalty Bearing
Products, MFB shall have the option to receive additional Running Royalties from
Nonni's in the manner and in an amount equal to the Running Royalties that would
have been paid had Nonni's met its Guaranteed Royalty, and if paid, Nonni's
shall retain the exclusive license described herein.
8. NONNI'S REPORTS
(a) Periodic Reports. On or before the last day of the month
following the last month of each calendar quarter covered by this
Agreement, Nonni's shall deliver to MFB a written statement prepared,
signed, and certified to be true and correct by Nonni's senior financial
officer, or their designee, setting forth the amount of Royalty Bearing
Products sold, including sufficient information and detail to confirm the
calculations, which report shall be accompanied by payment in full of the
amount of Running Royalties then due.
(b) Annual Reports. Within ninety (90) days following the end of each
calendar year of this Agreement, beginning with the first such year in
which Nonni's has sales of Royalty Bearing Products, Nonni's shall deliver
to MFB a written statement setting forth the amount of Royalty Bearing
Products sold and the calculations, including sufficient information and
detail to confirm the calculations, used to determine such amounts, which
calculations shall be signed and certified as true and correct by an
independent certified public accounting firm chosen by Nonni's and
acceptable to MFB, which acceptance shall not be withheld unreasonably. If
this statement discloses that the amount of Running Royalties paid during
any period to which the report relates was less than the amount required to
be paid or that any other amount is due MFB, Nonni's immediately shall pay
such amounts, together with accrued interest at the Royalty Default Rate in
cash or other immediately available funds. MFB shall have the right to
examine and audit the books and records of Nonni's to verify the amount of
Royalty Bearing Products sold.
9. DEVELOPMENT OF ROYALTY BEARING PRODUCTS
Nonni's hereby covenants, agrees, warrants and represents that:
(a) Product Development. All Royalty Bearing Products shall be
developed, manufactured, marketed, and sold as "premium" products
consistent with MFB's then existing image. Nonni's accepts full
responsibility for and agrees to pay all costs it incurs associated with
the development of all Royalty Bearing Products and all advertising and
promotion, packaging design, graphics, and packaging
6
<PAGE>
materials for Royalty Bearing Products. MFB shall cooperate with Nonni's in
development of Royalty Bearing Products, primarily through the suggestion
of ideas, concepts, and recipes for products and packaging (MFB shall make
its artwork, designs and logos available for Nonni's use); provided,
however, that MFB shall have no obligation to develop Royalty Bearing
Products or any other products.
(b) MFB Approval. Nonni's shall not sell any initial Royalty Bearing
Product or any newly flavored Royalty Bearing Products until MFB, in its
reasonable judgment, finds that such product in mass production quantities
is satisfactory to MFB, pursuant to Section 11 hereof. The license to
Nonni's granted by this Agreement to distribute the Royalty Bearing
Products under the Licensed Names and Marks is expressly contingent upon
such final approval by MFB, which approval shall not be unreasonably
withheld.
(c) Compliance with Specifications. Nonni's will manufacture, sell
and distribute the Royalty Bearing Products in accordance with the Product
Specifications and will package and label the Royalty Bearing Products in
accordance with the Packaging Specifications.
(d) Capital Costs. Nonni's will secure all plant, equipment and
technical skills necessary for the manufacture of the Royalty Bearing
Products according to the Product and Packaging Specifications, and MFB
shall have no liability or responsibility with respect thereto.
(e) Compliance with Laws. The Royalty Bearing Products will be
manufactured in compliance with, and will not be adulterated or misbranded
within the meaning of, the Federal Food, Drug and Cosmetic Act of 1938, or
any other federal, state, foreign or local laws or regulations applicable
thereto, will not constitute an article which may not be introduced into
interstate commerce and will be manufactured in substantial compliance with
all applicable federal, state, foreign or local laws and regulations
applicable thereto. Unless MFB otherwise agrees in writing, Nonni's will
destroy all inventories which are not in conformity with Food and Drug
Administration rules and regulations and all applicable federal, state,
foreign and local laws. Nonni's agrees to notify MFB promptly of any
regulatory action of which Nonni's has knowledge that is taken in relation
to it by any federal, state, foreign, county or municipal authority which
relates to or affects the manufacture, storage, distribution or sale of the
Royalty Bearing Products.
(f) Customer Complaints. Nonni's shall provide MFB a summary of all
written consumer complaints received regarding the quality of the Royalty
Bearing Products and shall maintain all written consumer complaints and a
telephone log for all consumer complaints received by telephone for a
period of one year. Nonni's will send a written report to MFB each month
containing the comments received, names
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of complaining persons, with addresses and telephone numbers (if
available). Comments will be organized and summarized by type of comment or
complaint and by the geographical location of the complaint. Such
information will also be available for inspection by MFB during normal
working hours upon reasonable notice. Nonni's further agrees that it will
respond to any written customer complaint within fourteen (14) days of
receipt of such complaint by written response with either a refund of the
customer's money or a coupon for the same type of Royalty Bearing Product
purchased, depending upon the complaining customer's request. Nonni's
further agrees that any complaints about MFB products which are not Royalty
Bearing Products will be forwarded to MFB within five (5) days of receipt.
MFB agrees that all customer complaints and comments received by it with
respect to Royalty Bearing Products will be forwarded to Nonni's within
five (5) days of receipt. Nonni's shall further provide MFB with copies of
all responses to complaints, upon request.
(g) Ingredient Approval. Nonni's will purchase for its own account
all flavoring ingredients, raw materials and packaging which is proprietary
to MFB from sources which are approved by MFB, which approval shall not be
unreasonably withheld.
(f) Nonni's must develop and submit for MFB's approval product recall
procedures.
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10. ADVERTISING AND PROMOTION REQUIREMENTS
(a) Nonni's Promotion. Nonni's shall market Royalty Bearing Products
as premium products or as is otherwise consistent with MFB's then existing
image so that such marketing shall not reflect adversely upon Royalty
Bearing Products, the good name of MFB, or the Licensed Names and Marks.
MFB shall have a prior-to-use reasonable right of approval for all
promotional, marketing and advertising materials and concepts for each
promotional campaign Nonni's uses to market Royalty Bearing Products. In
that regard, MFB shall have a right of reasonable approval, prior to the
development of final television, radio or printed advertisements, the final
"story boards" with respect to television advertising, the final "script"
with respect to radio spots and the final "layouts" with respect to printed
advertisements. MFB shall also have a right of reasonable approval with
respect to the actors or actresses used in connection with any such
advertising campaigns; provided, that Nonni's shall have the right to make
minor variations in promotional, marketing and advertising materials used
in connection with the approved promotional campaigns. All advertisements
and advertising campaigns shall conform in all material respects to the
approvals given by MFB. MFB shall have five (5) business days following
the receipt of the proposed promotional, marketing or advertising materials
to send Nonni's written notice of its disapproval which shall include an
explanation of the basis for disapproval. If such written disapproval is
not received by Nonni's within this five (5) business day period, the
marketing, promotional or advertising material submitted to MFB shall be
deemed approved. Any material modifications to any such materials
previously approved by MFB shall be subject to approval pursuant to this
Section 10. Once a promotional campaign has been approved by MFB, if no
material changes are made to it by Nonni's, MFB shall not rescind its
approval and Nonni's may proceed accordingly on the basis that it is
approved.
(b) MFB's Promotion. MFB agrees to participate in the cross promotion
in its company owned stores of the Royalty Bearing Products. Such
participation shall be at the sole discretion of MFB.
11. ROYALTY BEARING PRODUCTS APPROVAL STANDARDS
(a) Approval Standards. Prior to initial marketing of each Royalty
Bearing Product, Nonni's shall provide MFB with (i) notice of the proposed
predetermined product content specifications for approval (as so approved
by MFB, the "Product Specifications"), and (ii) without charge,
representative samples of the proposed product and related packaging
materials, labels, and package inserts, for approval (as so approved by
MFB, the "Packaging Specifications"). Approval of product content
specifications, product quality, packaging, labels and inserts shall be in
MFB's reasonable discretion. Unless within ten (10) business days after
sending the above notice and samples Nonni's receives from MFB notice
indicating disapproval of proposed predetermined product content
specifications, product quality or other items described above, together
with an explanation of the basis of its disapproval, such predetermined
product content specifications, product quality,
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or other items shall be deemed approved. Nonni's shall market all Royalty
Bearing Products in accordance with the approval received from MFB with
respect to product content specifications, quality, packaging and labeling,
and in accordance with all governmental laws, rules, and regulations
applicable in the Territory.
(b) Examination By MFB. Periodically MFB shall have the right to
request and upon such request Nonni's shall provide to MFB, free of charge,
representative samples of any Royalty Bearing Products then being sold,
together with any packaging, packaging inserts, labels, wrapping,
advertising, marketing and promotional material then in use. MFB shall
examine any such samples, packaging, promotional or marketing materials,
and advertisements within ten (10) days after receipt. If as a result of
such examination MFB believes that any Royalty Bearing Product is not in
substantial conformity with the Product Specifications or product quality
approved by MFB, or that any packaging, advertising, marketing or
promotional materials are not in substantial conformity with any previous
approvals given by MFB, or any Licensed Names or Marks are not being used
in conformity with the requirements of this Agreement, MFB shall promptly
notify Nonni's. After receipt of any such notice from MFB, Nonni's shall
have ten (10) business days or a mutually agreed upon time period to
correct the lack of conformity identified by MFB. Nonni's recognizes that
representatives of MFB may also inspect Royalty Bearing Products after
delivery into Designated Distribution Channels and Nonni's shall cooperate
with MFB in obtaining Nonni's customers' cooperation in such inspections.
Notwithstanding the foregoing, MFB's right to request and receive samples
and related packaging shall be limited to once per calendar quarter, unless
in any quarter such samples are non-conforming as described above in which
case MFB may request additional samples from time to time during such
quarter and the next succeeding calendar quarter to ensure conformity.
(c) Labeling; Trademark Notices. Whenever Nonni's uses the Licensed
Names and Marks, Nonni's shall affix the appropriate trademark notice and
agrees to use the registration symbol of "(R)" in connection with its use
of the Licensed Names and Marks, or "TM" where the mark has not been
registered federally, and in each instance where appropriate accompanied by
the words "Reg. TM of MFB" or a reasonable facsimile thereof or such other
reference as may be designated by MFB from time to time. Where a Licensed
Name and Mark is used more than once on packaging, in copy or advertising
or on the Royalty Bearing Products, the "(R)" or "TM" designation need only
be used once either on the most prominent use of the Licensed Name and
Mark, or if all uses are of equal prominence, then on the first use of the
Licensed Name and Mark in or on each package, copy, advertisement, or
product. Nonni's shall use the Licensed Names and Marks only as
trademarks, service marks, or trade names and shall affix the notice as
specified. Nonni's shall not have the right, unless previously agreed in
writing by MFB, to use other trademarks, service marks, or trade names in
marketing and promoting Royalty Bearing Products. MFB shall have the right
to own and register any such other trademark, service mark, or trade name
which is registerable, including a Licensed Name or Mark or "Fields" in any
format, and such trademarks, service marks, and trade names owned or
registered by MFB shall be included in the Licensed Names and Marks, and
Nonni's shall cooperate with MFB by providing packaging, labelling,
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and documentation as may be required to obtain and maintain such
registration.
12. USE OF LICENSED NAMES AND MARKS
(a) Restrictions On Use. Unless MFB consents in writing which consent
shall not be unreasonably withheld, Nonni's shall use the Licensed Names
and Marks:
(i) only for the purposes of and pursuant to this Agreement,
(ii) only in a manner consistent with the scope of the relevant
registration of the Licensed Names and Marks or
applications therefor in the Territory,
(iii) only in the manner permitted and prescribed by MFB as set
forth herein,
(iv) only with respect to Royalty Bearing Products, and
(v) only to sell Royalty Bearing Products through Designated
Distribution Channels.
(b) Recognition of Goodwill. Nonni's recognizes the value of the
goodwill associated with the Licensed Names and Marks and acknowledges that
the Licensed Names and Marks and all rights therein and goodwill pertaining
thereto belong exclusively to MFB.
(c) Validity of Other Agreements. Nonni's agrees that it will not,
during the term of this Agreement or thereafter, attack the title or any
rights of MFB in and to the Licensed Names and Marks, or any other license
agreement or franchise agreement involving the Licensed Names and Marks to
which MFB is a party.
(d) Validity of Licensed Names and Marks. Nonni's agrees that it will
not intentionally destroy, impair or in any way impede the effect and
validity of the Licensed Names and Marks.
13. INFRINGEMENT
Nonni's agrees to assist MFB, at MFB's cost and expense, to the extent
necessary in the procurement of any protection or to protect any of MFB's rights
to the Licensed Names and Marks, and MFB, if it so desires, may commence or
prosecute any claims or suits in its own name or, with Nonni's consent, in the
name of Nonni's or join Nonni's as a party thereto. Nonni's shall notify MFB in
writing of any infringements or imitations by others of the Licensed Names and
Marks which may come to Nonni's attention, and MFB shall have the sole right to
determine whether or not any action shall be taken on account of any such
infringements or imitations at MFB's cost and expense. Nonni's shall not
institute any suit
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or take any action on account of any such infringements or imitations without
first obtaining the written consent of MFB.
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14. INSURANCE
Nonni's shall obtain and keep in force, at its sole expense, product
liability insurance providing adequate insurance for MFB against any claims and
suits involving product liability arising out of, or with respect to, the
transactions contemplated by this Agreement, in no less than Ten million dollars
($10,000,000.00) combined single limit on bodily injuries and/or property
damage. Within thirty (30) days after the date of this Agreement, Nonni's shall
submit to MFB a certificate of insurance naming MFB as an additional insured and
providing that any cancellation or material change or alteration which reduces
coverage or any benefits accruing to MFB shall become effective only upon thirty
(30) days prior notice to MFB. The requirements of this Section 14 are
acknowledged by Nonni's to be a material term of this Agreement as defined in
paragraph 16(b)(ii).
15. CONFIDENTIALITY
(a) Acknowledgment of Confidentiality. Nonni's understands that any
Protected Information disclosed to it by MFB under this Agreement is
secret, proprietary and of great value to Nonni's, which value may be
impaired if the secrecy of the Protected Information is not maintained.
(b) Reasonable Security Measures. MFB has taken and will continue to
take reasonable security measures to preserve and protect the secrecy of
the Protected Information and Nonni's agrees to take all measures
reasonably necessary to protect the secrecy of such information in order to
prevent it from falling into the public domain or into the possession of
persons not bound to maintain the secrecy of such information.
(c) Non-Disclosure Obligation. Nonni's agrees not to disclose the
Protected Information obtained pursuant to this Agreement, to any person or
entity (other than Nonni's key officers and employees to whom disclosure is
necessary and to co-packers whom have executed a Confidentiality Agreement
pursuant to paragraph 4), during the term of this Agreement or at any time
following the expiration or termination of this Agreement.
(d) Burden of Proof. Nonni's hereby acknowledges and agrees that if
Nonni's shall disclose, divulge, reveal, report, publish, transfer or use,
for any purpose whatsoever, except as authorized herein, any Protected
Information, and Nonni's shall assert as a defense that such information
(i) was already known to Nonni's or developed prior to the execution of
this Agreement, (ii) was independently developed by Nonni's, (iii) was
disclosed to third parties without violation of this Agreement, (iv) was
already in the public domain prior to the execution of this Agreement, or
(v) entered the public domain without violation of this Agreement, then
Nonni's shall bear the burden of proof with respect to the same.
(e) Mutuality of Obligations. MFB hereby agrees that any information
which it receives from Nonni's which is within the scope of the definition
of Protected Information, shall be treated as confidential by MFB, and MFB
hereby agrees to be
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bound by the terms of this Agreement with respect to any such information
it receives from Nonni's, to the same extent that Nonni's is bound by the
terms of this Agreement with respect to Protected Information, as set forth
above in paragraphs 15(a), (b), (c) and (d).
16. TERM AND TERMINATION
(a) Term. The initial term of this Agreement shall begin upon the
execution hereof and shall continue for a period of sixty-three (63) months
("Initial Term"). So long as Nonni's is not in material default and
subject to Section 7, has met and/or paid Running Royalties based on its
Guaranteed Royalty as described in paragraph 6(a) hereof, this Agreement
would then automatically renew for successive five year terms ("Option
Periods")until such time as either party terminates the Agreement upon no
more than twenty (20) days prior written notice to the other party.
Notwithstanding the above, during any Option Period and only during an
Option Period, if Nonni's has achieved or paid a minimum of a 2% growth of
Running Royalties year-over-year during the proceeding twelve month period,
then MFB shall not exercise its termination rights under this paragraph
16(a). MFB's termination rights under paragraph 16(b) shall not be deemed
altered or waived by this paragraph 16(a).
(b) Termination. This Agreement may be terminated as follows:
(i) If Nonni's defaults in the payment of any Running Royalties
then this Agreement and the license granted hereunder may be terminated
upon notice by MFB effective thirty (30) days after receipt of such notice,
without prejudice to any and all other rights and remedies MFB may have
hereunder or by law provided, and all rights of Nonni's hereunder shall
cease.
(ii) If Nonni's fails to pay its Guaranteed Royalty as set forth
in paragraph 6(a) hereof, then, this Agreement and the license granted
hereunder may be terminated upon receipt of such notice by Nonni's,
without prejudice to any and all other rights and remedies MFB may
have hereunder or by law provided, and all rights of Nonni's hereunder
shall cease.
(iii) If Nonni's fails to perform in accordance with any material
term or condition of this Agreement (other than as described in
paragraph 16(b)(i) and (ii) above) and such default continues
unremedied for thirty (30) days after the date on which Nonni's
receives written notice of default, unless such remedy cannot be
accomplished in such time period and Nonni's has commenced diligent
efforts within such time period and continues such effort until the
remedy is complete, then this Agreement may be terminated upon notice
by MFB, effective upon receipt of such notice, without prejudice to
any and all other rights and remedies MFB may have hereunder or by law
provided.
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(iii) If Nonni's is determined to be insolvent, or files a
petition in bankruptcy or for reorganization, or takes advantage of
any insolvency statute, or makes an assignment for the benefit of
creditors, or undertakes any similar action, under any federal, state
or foreign bankruptcy, insolvency or similar law, unless such is
dismissed, removed or otherwise cured within thirty (30) days or
unless Nonni's has filed for Chapter 11 Reorganization protection
under Federal Bankruptcy Laws, then this Agreement and the License
granted hereunder may be terminated upon notice by MFB, effective upon
receipt of such notice, without prejudice to any and all other rights
and remedies MFB may have hereunder or by law provided, and the
license herein granted shall not constitute an asset in
reorganization, bankruptcy, or insolvency which may be assigned or
which may accrue to any court or creditor appointed referee, receiver,
or committee.
(v) If MFB is determined to be insolvent, or files a petition
in bankruptcy or for reorganization, or takes advantage of any
insolvency statute, or makes an assignment for the benefit of
creditors, or undertakes any similar action, under any federal, state
or foreign bankruptcy, insolvency or similar law, or fails to perform
in accordance with any material term or condition of this Agreement
and such default continues for thirty (30) days after MFB receives
written notice of default, then this Agreement and the License granted
hereunder may be terminated upon notice by Nonni's, effective upon
receipt of such notice, without prejudice to any and all other rights
and remedies Nonni's may have hereunder or by law provided, and the
license herein granted shall not constitute an asset in
reorganization, bankruptcy, or insolvency which may be assigned or
which may accrue to any court or creditor appointed referee, receiver,
or committee.
(vi) If MFB fails to perform in accordance with any material
term or condition of this Agreement and such default continues
unremedied for thirty (30) days after the date on which MFB receives
written notice of default, then this Agreement may be terminated upon
notice by Nonni's, effective upon receipt of such notice, without
prejudice to any and all other rights and remedies Nonni's may have
hereunder or by law provided.
(c) Rights Upon Termination or Cancellation. On any cancellation,
termination or expiration of this Agreement;
(i) Nonni's agrees to immediately pay to MFB all currently owed
Running Royalties and any additional royalties pursuant to Section 17
and to return all Protected Information, confidential documents and
other material supplied by MFB to Nonni's and agrees never to use,
disclose to others, nor assist others in using the Protected
Information.
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(ii) Nonni's will be deemed to have automatically and
irrevocably assigned, transferred, and conveyed to MFB any rights,
equities, good will, titles or other rights in and to the Licensed
Names and Marks and Royalty Bearing Products which may have been
obtained by Nonni's or which may have vested in Nonni's in pursuance
of any endeavors covered hereby, and Nonni's will execute any
instruments requested by MFB to accomplish or confirm the foregoing.
Any such assignment, transfer or conveyance shall be without
consideration other than the mutual covenants and considerations of
this Agreement.
(iii) Except as provided in Section 17 below, Nonni's further
agrees that it shall forthwith discontinue the use of all Licensed
Names and Marks, including packaging and other paper goods and other
objects bearing any Licensed Names and Marks.
(d) Licensing of Licensed Names and Marks After Termination. Upon any
expiration or earlier termination of this Agreement, MFB may license others
to use the Licensed Names and Marks to produce, sell, market and advertise
products similar or identical to the Royalty Bearing Products through
Designated Distribution Channels in the Territory.
(e) Packaging Designs. In the event this Agreement is properly
terminated, MFB shall have the right to purchase the packaging designs for
the Royalty Bearing Products from Nonni's at a price equal to the amount
expended by Nonni's on such packaging designs. To exercise this right, MFB
shall notify Nonni's in writing of MFB's intent to purchase the packaging
design, not later than 30 days after termination. Upon receipt of such
notice, Nonni's shall provide MFB with the amount of Nonni's cost for
packaging design, whereupon, MFB may rescind its offer within twenty (20)
business days of receipt of the price of such costs for packaging design,
otherwise MFB shall be deemed to have accepted such cost as the purchase
price for such packaging.
17. DISPOSAL OF INVENTORY UPON EXPIRATION
For a period of six (6) months following the termination or expiration of
this Agreement, Nonni's shall have the right to sell any Royalty Bearing
Products in Nonni's inventory which have been packaged in packages bearing the
Licensed Names and Marks, and MFB shall have the right to purchase at Nonni's
fully allocated cost, any packaging materials using the Licensed Names and Marks
then in Nonni's inventory. Any sales of Royalty Bearing Products under this
Section shall be, at all times, in accordance with the policies, prices, and
standards established for marketing and distribution of Royalty Bearing Products
pursuant to this Agreement, and shall include payment of all Running Royalties
accrued in accordance with Section 5 hereof.
18. FINAL STATEMENT UPON TERMINATION OR EXPIRATION
As soon as practicable after termination or expiration of the license
granted
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hereunder, but in no event more than thirty (30) days thereafter, Nonni's shall
deliver to MFB a statement indicating the number and description of Royalty
Bearing Products packaged in packaging using the Licensed Names and Marks then
in Nonni's inventory and the number and description of unused packaging
materials bearing the Licensed Names and Marks then in Nonni's inventory. MFB
shall have the option to conduct a physical inventory to ascertain or verify
such statement.
19. REPRESENTATIONS AND WARRANTIES
(a) Title. MFB represents and warrants and Nonni's acknowledges that
MFB has represented that MFB is the owner of all right, title, and interest
in and to the Licensed Names and Marks and that such licensing and Licensed
Names and Marks under this Agreement to Nonni's does not infringe upon the
rights of any third parties. Nonni's further acknowledges the good will
associated with the Licensed Names and Marks and that such Licensed Names
and Marks have acquired secondary meaning in the mind of the public.
Nonni's shall not during the term of this Agreement dispute or contest,
directly or indirectly, or due or cause to be done, any action which in any
way contests, impairs, or tends to impair MFB's exclusive rights and title
to the Licensed Names and Marks or the validity of any registrations
thereof and Nonni's shall not assist others in so doing. Nonni's shall not
in any manner represent that it owns any rights in the Licensed Names and
Marks (and/or registrations therefore), but may, only during the term of
this Agreement, and only if Nonni's has complied with all laws, regulations
and registration requirements within the jurisdiction for so doing,
represent that it is a "licensee" or "official licensee" hereunder.
Nonni's shall not register or attempt to register in its own name, or that
of any third party, any Licensed Name or Mark. Subject to the terms and
conditions of this Agreement, Nonni's agrees that any and all uses by
Nonni's of the Licensed Names and Marks under this Agreement shall be on
behalf of and accrue and inure to the benefit of MFB. MFB will maintain at
its sole expense, the proper registration of all Licensed Names and Marks
used under this Agreement.
(b) Right To Enter Into This Agreement. MFB and Nonni's each warrant
and represent for itself that it has the right to enter into this
Agreement, that it will not knowingly subsequently take any action contrary
to this Agreement, and that the entering into of this Agreement will not
knowingly violate any other agreement to which it is a party or conflict
with or violate any law, rule or regulation by which it is bound.
(c) MFB's Image. MFB represents and warrants that it will not
intentionally do anything to destroy or impair its existing image.
20. INDEMNIFICATION
(a) MFB Indemnification. MFB hereby indemnifies Nonni's and forever
holds Nonni's harmless from and against all claims, suits, actions,
proceedings, damages, losses or liabilities, costs or expenses (including
reasonable attorneys' fees
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and expenses) arising out of, based upon, or in connection with (i) any
breach of any of MFB's warranties or representations as set forth in this
Agreement or (ii) any claim that the use by Nonni's of the Licensed Names
and Marks as provided in this Agreement infringes upon any third party
trademark, service mark, or trade name.
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(b) Nonni's Indemnification. Nonni's hereby indemnifies MFB and
forever holds MFB harmless from and against all claims, suits, actions,
proceedings, damages, losses or liabilities, costs or expenses (including
reasonable attorneys' fees and expenses) arising out of, based upon, or in
connection with, unless it is at the direction of MFB (i) any breach of any
of Nonni's warranties or representations as set forth in this Agreement,
(ii) any use of any patent, process, method, or device by Nonni's in
connection with the Royalty Bearing Products; (iii) any alleged defects or
dangers inherent in the Royalty Bearing Products or the manufacture,
distribution, sale, or use thereof; (iv) any injuries or damages to
purchasers, users, or consumers of Royalty Bearing Products arising from or
related to the use or consumption of Royalty Bearing Products; (v) any
injuries or damages arising from Nonni's or any of Nonni's customers,
advertising, marketing or promotion of the Licensed Names and Marks or
Royalty Bearing Products; or (vi) any alleged infringement of any third
party's copyright, patent, or trademark unless and to the extent such
alleged infringement is based upon Nonni's use of the Licensed Names and
Marks as authorized in this Agreement.
(c) Conditions of Indemnification. As a condition of indemnification
under this Section 20, the party seeking indemnification shall give the
other party (for purposes of this Section 20 called the "Indemnifying
Party") immediate notice of and copies of all pleadings and correspondence
related to the assertion of any such claim, proceeding, action, or suit and
agrees not to settle, compromise, or otherwise dispose of any such claim,
proceeding, action or suit without the prior written consent of the
Indemnifying Party. The Indemnifying Party shall have the right (but not
the obligation) to assume the defense or settlement of any such claim,
proceeding, action, or suit at its expense, by counsel of its choice. If
the Indemnifying Party assumes such defense, the Party seeking indemnity
shall cooperate fully with the Indemnifying Party in defense of the action
and the Indemnifying Party shall not be liable to pay or reimburse the
other party for attorneys' fees or expenses, except such out-of-pocket
costs or expenses incurred by the Indemnified Party in cooperating with the
Indemnifying Party.
21. NOTICES
All notices provided by this Agreement shall be in writing and shall
be given by facsimile or registered mail, postage prepaid, or by personal
delivery, by one party to the other, addressed to such other Party at the
applicable address set forth below, or to such other addresses as may be
given for such purpose by such other party by notice duly given hereunder.
Notice shall be deemed properly given on the date of a confirmed facsimile
transmission, three (3) days after the date mailed if given by first class
mail. or on the date of delivery, which ever applies:
To MFB: The Mrs. Fields' Brand, Inc.
2855 E. Cottonwood Parkway
Suite 400
Salt Lake City, UT 84121
Attention: Legal Department
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Fax No: (801) 736-5945
To NONNI'S: Nonni's Food Company, Inc.
601 South Boulder, Suite 900
Tulsa, OK 74119
Fax: (918) 560-4108
22. GENERAL PROVISIONS
(a) No Fiduciary or Other Relationship. It is understood and agreed
by the parties hereto that this Agreement does not create a fiduciary
relationship between them, that MFB and Nonni's are and shall be
independent contractors and that nothing in this Agreement is intended to
make either party a general or special agent, joint venturer, partner or
employee of the other for any purpose whatsoever.
(b) Use of Licensed Names and Marks in Contracts. Nonni's shall not
employ any of the Licensed Names and Marks in signing any contract or
applying for any license or permit or in a manner that may result in MFB's
liability for any of Nonni's indebtedness or obligations, nor may Nonni's
use the Licensed Names and Marks in any way not expressly authorized by
MFB. Except as expressly authorized in writing, neither MFB nor Nonni's
shall make any express or implied agreements, warranties, guarantees or
representations or incur any debt in the name or on behalf of the other,
represent that their relationship is other than licensor and licensee or be
obligated by or have any liability under any agreements or representations
made by the other that are not expressly authorized in writing.
(c) Severability. Except as expressly provided to the contrary
herein, each Section, paragraph, term and provision of this Agreement, and
any portion thereof, shall be considered severable and if, for any reason,
any such provision of this Agreement is held to be invalid, contrary to or
in conflict with any applicable present or future law or regulation in a
final, unappealable ruling issued by any court, agency or tribunal with
competent jurisdiction in a proceeding to which MFB is a party, that ruling
shall not impair the operation of, or have any other effect upon, such
other portions of this Agreement as may remain otherwise intelligible,
which shall continue to be given full force and effect and bind the parties
hereto, although any portion held to be invalid shall be deemed not to be a
part of this Agreement from the date the time for appeal expires, if
Nonni's is a party thereto, otherwise upon Nonni's receipt of a notice of
non-enforcement thereof from MFB. If any covenant herein which restricts
competitive activity is deemed unenforceable by virtue of its scope in
terms of area, business activity prohibited and/or length of time, but
would be enforceable by reducing any part or all thereof, Nonni's and MFB
agree that the same shall be enforced to the fullest extent permissible
under the laws and public policies applied in the jurisdiction in which
enforcement is sought.
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(d) Substitution of Provisions. If any applicable and binding law or
rule of any jurisdiction requires a greater prior notice of the termination
of this Agreement than is required hereunder, or the taking of some other
action not required hereunder, or if, under any applicable and binding law
or rule of any jurisdiction, any provision of this Agreement is invalid or
unenforceable, the prior notice and/or other action required by such law or
rule shall be substituted for the comparable provisions hereof. Nonni's
agrees to be bound by any promise or covenant imposing the maximum duty
permitted by law which is subsumed within the terms of any provision
hereof, as though it were separately articulated in and made a part of this
Agreement, that may result from striking from any of the provisions hereof,
any portion or portions which a court may hold to be unenforceable in a
final decision to which MFB is a party, or from reducing the scope of any
promise or covenant to the extent required to comply with such a court
order. Such modifications to this Agreement shall be effective only in
such jurisdiction, unless MFB elects to give them greater applicability,
and shall be enforced as originally made and entered into in all other
jurisdictions.
(e) Waiver. MFB and Nonni's may by written instrument unilaterally
waive or reduce any obligation of or restriction upon the other under this
Agreement, effective upon delivery of written notice thereof to the other
or such other effective date stated in the notice of waiver. Any waiver so
granted by the waiving party shall be without prejudice to any other rights
the waiving party may have, will be subject to continuing review by the
waiving party and may be revoked, in the waiving party's sole discretion,
at any time and for any reason, effective upon delivery to the other party
of ten (10) days' prior written notice.
(f) Waiver by Custom or Practice. MFB and Nonni's shall not be deemed
to have waived or impaired any right, power or option reserved by this
Agreement (including, without limitation, the right to demand exact
compliance with every term, condition and covenant herein or to declare any
breach thereof to be a default and to terminate this Agreement prior to the
expiration of its term) by virtue of any custom or practice of the parties
at variance with the terms hereof; any failure, refusal or neglect of MFB
or Nonni's to exercise any right under this Agreement or to insist upon
exact compliance by the other with its obligations hereunder; any waiver,
forbearance, delay, failure or omission by MFB or Nonni's to exercise any
right, power or option, whether of the same, similar or different nature,
or MFB's acceptance of any payments due from Nonni's after any breach of
this Agreement.
(g) Force Majeure. Neither MFB nor Nonni's shall be liable for loss
or damage or deemed to be in breach of this Agreement if their failure to
perform obligations results from:
(i) compliance with any law, regulation, requirement or
instruction of any federal, state, municipal or foreign
government or any department or agency thereof; or
21
<PAGE>
(ii) acts of God; or
(iii) fires, strikes, embargoes, war or riot; or
(iv) any other similar event or cause.
Any delay resulting from any of said causes shall extend performance
accordingly or excuse performance, in whole or in part, as may be
reasonable, except that said causes shall not excuse payments of amounts
owed at the time of such occurrence or payment of any Running Royalties or
Guaranteed Amounts for Royalty Bearing Products due on any sales
thereafter.
(h) Press Release. Unless consented to by Nonni's in advance or
required by law, regulation, statute, etc., MFB agrees not to issue any
formal press release prior to the introduction of Royalty Bearing Products
through the Designated Distribution Channels.
(i) Temporary Restraining Orders. Notwithstanding anything to the
contrary contained in this Agreement, MFB and Nonni's shall each have the
right in a proper case to obtain temporary restraining orders and temporary
or preliminary injunctive relief from a court of competent jurisdiction.
(j) Rights Cumulative. The rights of MFB and Nonni's hereunder are
cumulative and no exercise or enforcement by MFB or Nonni's of any right or
remedy hereunder shall preclude the exercise or enforcement by MFB or
Nonni's of any other right or remedy hereunder which MFB or Nonni's is
entitled by law to enforce.
(k) Costs and Attorney Fees. If a claim for amounts owed by Nonni's
to MFB or its affiliates is asserted in any judicial proceeding or appeal
thereof, or if MFB or Nonni's is required to enforce this Agreement in any
judicial proceeding or appeal thereof, the party prevailing in such
proceeding shall be entitled to reimbursement of its reasonable costs and
expenses, including reasonable accounting and legal fees, whether incurred
prior to, in preparation for, or in contemplation of the filing of any
written demand, claim, action, hearing or proceeding to enforce the
obligations of this Agreement. If MFB incurs expenses in connection with
Nonni's failure to pay when due amounts owing to MFB, to submit when due
any reports, information or supporting records or otherwise to comply with
this Agreement, or if Nonni's incurs expenses in connection with MFB's
failure to comply with this Agreement, including, but not limited to legal
and accounting fees, the party incurring the expense shall be reimbursed by
the other party for any such reasonable costs and expenses which it incurs.
(l) Governing Law. Except to the extent governed by the United States
Trademark Act of 1946 (Lanham Act, 15 U.S.C. (S)(S) 1051 et seq.) or other
federal law, this Agreement, and the relationship between Nonni's and MFB,
shall be governed by the laws of the State of Utah.
22
<PAGE>
(m) Jurisdiction. Nonni's and MFB hereby irrevocably consent and
agree that any legal action, suit or proceeding arising out of or in any
way in connection with this Agreement may be instituted or brought in the
United States District Court for the District of Utah. Nonni's and MFB
hereby irrevocably consent and submit to, for themselves and in respect of
their property, generally and unconditionally, the jurisdiction of such
Court, and to all proceedings in such Court. Further, Nonni's and MFB
irrevocably consent to actual receipt of any summons and/or legal process
at their respective addresses as set forth in this Agreement as
constituting in every respect sufficient and effective service of process
in any such legal action or proceeding. Nonni's and MFB further agree that
final judgment in any such legal action, suit or proceeding shall be
conclusive and may be enforced in any other jurisdiction, whether within or
outside the United States of America, by suit under judgment, a certified
or exemplified copy of which will be conclusive evidence of the fact and
the amount of the liability.
(n) Waiver of Punitive Damages. Except with respect to the
indemnification obligations of the parties hereunder, the parties waive to
the fullest extent permitted by law any right to or claim for any punitive
or exemplary damages against the other and agree that, in the event of a
dispute between them, the party making a claim shall be limited to recovery
of any actual damages it sustains.
(o) Headings. The headings of the several sections and paragraphs
hereof are for convenience only and do not define, limit or construe the
contents of such sections or paragraphs.
(p) Entire Agreement. This Agreement and the Exhibits hereto
represent the entire agreement between MFB and Nonni's with respect to the
subject matter hereof and supersede any prior agreements and negotiations
between the parties.
(q) Exhibits. All Exhibits hereto form part of this Agreement.
(r) Counterparts. This Agreement may be executed simultaneously in
two counterparts, each of which shall be deemed an original, but both of
which together shall constitute one and the same agreement, binding upon
both parties hereto, notwithstanding that both parties are not signatories
to the original or the same counterpart.
(s) Expenses. Each party shall bear its own expenses (including
attorneys' fees and expenses) in connection with the preparation,
negotiation, execution, and delivery of this Agreement.
IN WITNESS THEREOF, this Agreement has been executed by the Parties hereto
as of the date and year first written above.
NONNI'S FOOD COMPANY, INC.
23
<PAGE>
By:_________________________________
Its:_________________________________
THE MRS. FIELDS' BRAND, INC.
By:_________________________________
Larry A. Hodges
Its: President
24
<PAGE>
EXHIBIT "A"
LICENSED NAMES AND MARKS
25
<PAGE>
EXHIBIT "B"
ROYALTY BEARING PRODUCTS
Shelf stable ready-to-eat cookies packaged for retail sale for the following
products:
Cookies
26
<PAGE>
EXHIBIT "C"
WARRANT PURCHASE AGREEMENT
27
<PAGE>
PURCHASE AGREEMENT
This Agreement is made and entered into this 1/st/ day of December, 1999 by
and between THE MRS. FIELDS' BRAND, INC., a Delaware corporation ("MFB"), and
NONNI'S FOOD COMPANY, INC., a Florida corporation ("NONNI'S").
RECITALS
WHEREAS, MFB is the owner of certain cookie recipes which it has developed;
and
WHEREAS, Nonni's desires to purchase from MFB, and MFB desires to sell to
Nonni's certain of its cookie recipes (collectively, the "Acquired Recipes")
listed on Exhibit A attached hereto and made part hereto.
AGREEMENT
NOW THEREFORE, in consideration of the covenants and agreements contained
herein and other valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Sale and Purchase. On the terms and subject to the conditions of this
-----------------
Agreement, MFB agrees to sell, and Nonni's agrees to purchase, on or before
December 29, 1999, the Acquired Recipes set forth on Exhibit A attached hereto
and made a part hereof. Nonni's agrees that the Acquired Recipes are only to be
used for cookies produced and sold by Nonni's and Nonni's further agrees not to
sale, license or transfer in any manner the Acquired Recipes to a non-related
party.
2. Purchase Price. The purchase price for the Acquired Recipes shall be
--------------
Two Million Dollars ($2,000,000.00). MFB shall provide wire transfer
instructions to Nonni's. Nonni's agrees to effect the payment by wire transfer
in immediate available funds.
3. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other party.
4. Severability. If any provision of this Agreement or the application of
------------
any such provision to any person or circumstance shall be held invalid, illegal
or unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof.
5. Attorney's Fees. Should any litigation be commenced with respect to any
---------------
matters governed by this Agreement, the party prevailing shall be entitled, in
addition to such other relief as may be granted, to a reasonable sum for such
party's attorneys' fees and expenses determined by the court in such litigation.
<PAGE>
6. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Utah applicable to agreements
made and to be performed entirely within such State, without regard to the
conflicts of law principles of such State.
7. Remedies. Each of the parties acknowledges and agrees that each other
--------
party would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties agrees that each other party
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of the United
States or any state thereof, having jurisdiction over the parties and the
matter, in addition to any other remedy to which it may be entitled, at law or
in equity.
8. Submission to Jurisdiction. Each of the parties submits to the
--------------------------
jurisdiction of any state or federal court sitting in Salt Lake City, Utah, in
any action or proceeding arising out of or relating to this Agreement and agrees
that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Each
party agrees that a final judgment in any action or proceeding so brought shall
be conclusive and may be enforced by suit on the judgment or in any other manner
provided by law or at equity.
NONNI'S FOOD COMPANY, INC.
By:_________________________
Its:________________________
THE MRS. FIELDS' BRAND, INC.
By:_________________________
Its:________________________
<PAGE>
Mrs. Fields
<TABLE>
<CAPTION>
September 18, 53 Weeks 52 Weeks 52 Weeks
1996 through Ended Ended Ended
December 28, January 3, January 2, January 1,
1996 1998 1999 2000
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
EARNINGS
Income (loss) before provision for income taxes $ 3,856 $ 463 $(18,372) $ (7,676)
Fixed charges 2,027 8,891 13,915 18,380
Exclude preferred dividends (97) (644) (444) (305)
Full minority interest gain or loss (138) (11) (11) (22)
-------- -------- -------- --------
Total earnings (loss) $ 5,786 $ 8,572 $ (4,902) $ 10,377
======== ======== ======== ========
FIXED CHARGES:
Interest expense $ 1,867 $ 7,830 $ 13,197 $ 17,880
Preferred stock dividends as adjusted 160 1,061 728 500
-------- -------- -------- --------
Total fixed charges $ 2,027 $ 8,891 $ 13,925 $ 18,380
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES (a) 2.85x 0.96x NA NA
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-02-1999
<PERIOD-END> JAN-01-2000
<CASH> 4,919
<SECURITIES> 0
<RECEIVABLES> 8,935
<ALLOWANCES> 932
<INVENTORY> 4,977
<CURRENT-ASSETS> 20,595
<PP&E> 49,478
<DEPRECIATION> 20,813
<TOTAL-ASSETS> 208,410
<CURRENT-LIABILITIES> 24,381
<BONDS> 141,755
1,070
0
<COMMON> 0
<OTHER-SE> 34,457
<TOTAL-LIABILITY-AND-EQUITY> 208,410
<SALES> 152,268
<TOTAL-REVENUES> 180,937
<CGS> 46,323
<TOTAL-COSTS> 170,556
<OTHER-EXPENSES> 504
<LOSS-PROVISION> 457,000
<INTEREST-EXPENSE> 17,880
<INCOME-PRETAX> (8,003)
<INCOME-TAX> 218
<INCOME-CONTINUING> (8,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,221)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.3
------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Mrs. Fields'
Original Cookies, Inc. and subsidiaries as of January 2, 1999 and January 1,
2000, and for each of the three fiscal years ended in the period ended January
2, 2000 and have issued our report thereon dated March 27, 2000. Our audits were
made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. Schedule II, "Valuation and Qualifying Accounts",
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Arthur Andersen LLP
Salt Lake City, Utah
March 27, 2000
<PAGE>
EXHIBIT 99.3
------------
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
----------
beginning Balance at
--------- ----------
of period Additions Deductions end of period
--------- --------- ---------- -------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended January 3, 1998 $ 375,000 $ 494,000 $ 255,000 $ 614,000
=========== =========== ========== ===========
Year Ended January 2, 1999 $ 614,000 $ 816,000 $ 278,000 $ 1,152,000
=========== =========== ========== ===========
Year Ended January 1, 2000 $ 1,152,000 $ 457,000 $ 677,000 $ 932,000
=========== =========== ========== ===========
Store Closure and Other Reserve:
Store Closure Reserve $ 4,755,000 $ 3,395,000 $2,684,000 $ 5,466,000
Transaction Fee Accrual 227,000 - 227,000 -
Legal Accrual 1,197,000 - 548,000 649,000
Lease Obligation Accrual 1,026,000 - 867,000 159,000
Finders' Fee Accrual 735,000 - 735,000 -
Severance and Related Costs Accrual 116,000 - 116,000 -
----------- ----------- ---------- -----------
Year Ended January 3, 1998 $ 8,056,000 $ 3,395,000 $5,177,000 $ 6,274,000
=========== =========== ========== ===========
Store Closure Reserve $ 5,466,000 $11,103,000 $1,858,000 $14,711,000
Legal Accrual 649,000 - 267,000 382,000
Lease Obligation Accrual 159,000 - 159,000 -
----------- ----------- ---------- -----------
Year Ended January 2, 1999 $ 6,274,000 $11,103,000 $2,284,000 $15,093,000
=========== =========== ========== ===========
Store Closure Reserve $14,711,000 $ 2,238,000 $9,756,000 $ 7,193,000
Legal Accrual 382,000 - 148,000 234,000
----------- ----------- ---------- -----------
Year Ended January 1, 2000 $15,093,000 $ 2,238,000 $9,904,000 $ 7,427,000
=========== =========== ========== ===========
Impairment Reserve (1):
Stores to be Closed $ 6,733,000 $ 1,423,000 $3,507,000 $ 4,649,000
Stores to be Franchised 3,119,000 1,077,000 492,000 3,704,000
----------- ----------- ---------- -----------
Year Ended January 3, 1998 $ 9,852,000 $ 2,500,000 $3,999,000 $ 8,353,000
=========== =========== ========== ===========
Stores to be Closed $ 4,643,000 $ 2,477,000 $2,115,000 $ 5,005,000
Stores to be Franchised 3,710,000 973,000 1,260,000 3,423,000
----------- ----------- ---------- -----------
Year Ended January 2, 1999 $ 8,353,000 $ 3,450,000 $3,375,000 $ 8,428,000
=========== =========== ========== ===========
Stores to be Closed $ 5,005,000 $ 116,000 $3,194,000 $ 1,927,000
Stores to be Franchised 3,423,000 454,000 1,322,000 2,555,000
----------- ----------- ---------- -----------
Year Ended January 1, 2000 $ 8,428,000 $ 570,000 $4,516,000 $ 4,482,000
=========== =========== ========== ===========
</TABLE>
(1) THE IMPAIRMENT RESERVE REDUCES THE CARRYING AMOUNTS OF PROPERTY AND
EQUIPMENT AT STORES TO BE CLOSED TO ZERO AND THE CARRYING AMOUNTS OF
PROPERTY AND EQUIPMENT AT STORES TO BE FRANCHISED TO NET REALIZABLE VALUE.
