As filed with the Securities and Exchange Commission on April 24, 1998
Registration No.333-45179-01
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 4 to Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MRS. FIELDS' ORIGINAL COOKIES, INC.
(Exact name of Registrant as THE MRS. FIELDS' BRAND, INC.
specified in its charter) Exact Name of Registrant as
charter) specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of (State of jurisdiction of
incorporation or organization) incorporation or organization)
--------- ---------
6749 6749
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
87-0552899 87-0563472
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
462 West Bearcat Drive
462 West Bearcat Drive Salt Lake City, Utah 84115
Salt Lake City, Utah 84115 (801) 463-2000
(801) 463-2000 (Address, including zip code and
(Address, including zip code and telephone telephone number, including area
number, including area code, or code or Registrant's principal
Registrant's principal executive offices) executive offices)
Michael Ward, Esq. Michael Ward, Esq.
Vice President of Administration The Mrs. Fields' Brand, Inc.
Mrs. Fields' Original Cookies, Inc. 462 West Bearcat Drive
462 West Bearcat Drive Salt Lake City, Utah 84115
Salt Lake City, Utah 84115 (801) 463-2000
(801) 463-2000 (Name, address, including zip code
(Name, address, including zip code, and and telephone number, including
telephone number, including area code area code of agents for service)
of agents for service)
COPIES TO:
Randall H. Doud, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
(212) 735-3000
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering .
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
The Registrants hereby amend this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Offer for All Outstanding 101/8 % Series A Senior Notes due 2004
in Exchange for 101/8 % Series B Senior Notes due 2004,
Which Have Been Registered Under the Securities Act of 1933, As Amended, of
MRS. FIELDS' ORIGINAL COOKIES, INC.
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
THE MRS. FIELDS' BRAND, INC.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON ,
May 22, 1998, UNLESS EXTENDED.
Mrs. Fields' Original Cookies, Inc., a Delaware corporation ("Mrs. Fields"
or the "Company"), hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus (as the same may be amended or supplemented from
time to time, the "Prospectus") and in the accompanying Letter of Transmittal
(which together constitute the "Exchange Offer"), to exchange an aggregate
principal amount at maturity of up to $100,000,000 of 101/8 % Series B Senior
Notes due 2004 (the "New Senior Notes") of the Company, which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for a like principal amount of its outstanding 10
1/8% Series A Senior Notes due 2004 (the "Old Senior Notes" and, together with
the New Senior Notes, the "Senior Notes") of the Company from the holders (the
"Holders") thereof. The terms of the New Senior Notes are identical in all
material respects to the Old Senior Notes except (i) that the New Senior Notes
have been registered under the Securities Act, (ii) for certain transfer
restrictions and registration rights relating to the Old Senior Notes and (iii)
that the New Senior Notes will not contain certain provisions relating to an
additional payment to be made to Holders of Old Senior Notes under certain
circumstances relating to the timing of the Exchange Offer. The Mrs. Fields'
Brand, Inc., a Delaware corporation ("MFB"), is also offering to exchange its
guarantee of the Old Senior Notes (the "Old Guarantee") for a like guarantee of
the New Senior Notes (the "New Guarantee").
On November 26, 1997, the Company issued $100,000,000 principal amount of
Old Senior Notes. The Old Senior Notes were issued pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after December 1, 2001 in cash at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time prior to December 1, 2001, the Company
may on any one or more occasions redeem up to an aggregate of 35% of the
aggregate principal amount of Senior Notes ever issued under the Indenture (as
defined herein) at a redemption price equal to 110.125% of the principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the redemption
date, with the net cash proceeds of one or more Public Equity Offerings (as
defined herein); provided that at least 65% of the aggregate principal amount of
Senior Notes ever issued under the Indenture remains outstanding immediately
after the occurrence of such redemption. See "Description of the Senior
Notes-Optional Redemption." In addition, upon the occurrence of a Change of
Control (as defined herein), each Holder of Senior Notes will have the right to
require the Company to repurchase all or any part of such Holder's Senior Notes
at an offer price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the date of
repurchase. See "Description of the Senior Notes-Repurchase at the Option of
Holders-Change of Control." There can be no assurance that, in the event of a
Change of Control, the Company would have sufficient funds to repurchase all
Senior Notes tendered. See "Risk Factors-Inability to Repurchase Senior Notes
Upon a Change of Control."
(Continued on the following page)
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Old Senior Notes on April 24, 1998.
SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD SENIOR NOTES
IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 24, 1998.
<PAGE>
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 indebtedness
(including capital lease obligations) of the Company. As of January 3, 1998, the
Company (excluding its subsidiaries) had $0.2 million in indebtedness other than
the Senior Notes. The Senior Notes are fully and unconditionally guaranteed (the
"Guarantees") on a senior basis by the Guarantors (as defined herein). The
Guarantees are general unsecured obligations of the Guarantors, will 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. Currently MFB is, under the Old Guarantee, and will continue
to be upon issuance of the New Guarantee, the sole Guarantor of the Senior
Notes. As of January 3, 1998, the aggregate amount of debt of the Company's
subsidiaries (including capital lease obligations) was approximately $0.9
million and the aggregate liquidation preference of mandatorily redeemable
preferred stock of the Company's subsidiaries was approximately $1.5 million,
all of which was issued by subsidiaries other than the Guarantors and will
effectively rank senior in right of payment to the Senior Notes. Although the
Indenture limits the ability of the Company and its subsidiaries to incur
additional indebtedness and issue preferred stock, the Company is permitted to
incur additional indebtedness and issue preferred stock, including secured
indebtedness, under certain circumstances, which will effectively rank senior to
the Senior Notes with respect to the assets securing such indebtedness. See
"Risk Factors-Effective Subordination" and "Description of Senior
Notes-General."
The New Senior Notes are being offered hereunder in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement (as defined herein). Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties, the Company believes that New Senior Notes
issued pursuant to the Exchange Offer in exchange for Old Senior Notes may be
offered for resale, resold and otherwise transferred by Holders thereof (other
than any Holder which is an "affiliate" of the Company within the meaning of
Rule 405 of the Securities Act), without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Senior Notes are acquired in the ordinary course of such Holder's business and
such Holder, other than broker-dealers, has no arrangement with any person to
engage in a distribution of such New Senior Notes. However, the Commission has
not considered the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Each Holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of such New Senior Notes
and has no arrangement or understanding to participate in a distribution of New
Senior Notes. If any Holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement with any person to participate in
the distribution of the New Senior Notes to be acquired pursuant to the Exchange
Offer, such Holder (i) could not rely on the applicable interpretations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Senior Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Senior Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Senior Notes received in exchange for Old Senior Notes where
such Old Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 120 days after the Expiration Date (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of its own and the Guarantor's expenses incidental to the
Exchange Offer, and will reimburse the Initial Purchasers and Holders of
Transfer Restricted Securities for fees and expenses of counsel, not to exceed
$50,000. Tenders of Old Senior Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Senior
Notes, the Company will promptly return the Old Senior Notes to the Holders
thereof. See "The Exchange Offer."
There is no existing trading market for the New Senior Notes, and there
can be no assurance regarding the future development of a market for the New
Senior Notes. The Initial Purchasers (as defined herein) have advised the
Company that they currently intend to make a market in the New Senior Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
with respect to the New Senior Notes may be discontinued at any time without
notice. The Company does not intend to apply for listing or quotation of the New
Senior Notes on any securities exchange or stock market.
<PAGE>
--------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------
<PAGE>
AVAILABLE INFORMATION
The Company has not been, prior to the effectiveness of this
Registration Statement, subject to the periodic reporting and other information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company has agreed that, whether or not it is required to do so by
the rules and regulations of the Commission, it shall deliver to The Bank of New
York, as trustee under the Indenture (the "Trustee"), to each Holder of Senior
Notes and to each prospective purchaser of Senior Notes identified to the
Company by an Initial Purchaser, annual and quarterly financial statements
substantially equivalent to financial statements that would be included in
reports filed with the Commission, if the Company were subject to the reporting
and other informational requirements of the Exchange Act.
The Company and the Guarantor have filed with the Commission a registration
statement on Form S-4 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act with
respect to the New Senior Notes offered hereby. This Prospectus, which forms a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, the guarantor
and the New Notes offered hereby, reference is made to the Registration
Statement, with respect to any statements made in this Prospectus concerning the
provisions of certain documents, reference is made to the copy of such document
filed as an exhibit to the Registration Statement otherwise filed with the
Commission.
Upon the effectiveness of the Registration Statement, the Company will
become subject to the informational requirements of the Exchange Act, and in
accordance therewith will file reports and other information with the
Commission. MFB has submitted to the staff of the Commission a no-action request
that MFB not be subject to the informational requirements of the Exchange Act.
If this request is granted, MFB would not be required to make such filings but
the Company, as the issuer of the New Senior Notes, would be required to include
summarized financial information regarding MFB in the periodic reports and
certain other documents that the Company files with the Commission. If this
request is not granted, MFB would be required to file with the Commission such
periodic reports, but would not be required to file proxy or information
statements. The Registration Statement, the exhibits forming a part thereof and
the reports and other information filed by the Company and MFB with the
Commission in accordance with the Exchange Act may be inspected, without charge,
at the Public Reference Section of the Commission located at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the following regional offices of
the Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10004; and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of all or any portion of the material may also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such information
may also be accessed electronically by means of the Commission's home page on
the Internet (http://www.sec.gov.).
In the event that the Company is not required to be subject to the
reporting requirements of the Exchange Act in the future, the Company will be
required under the Indenture pursuant to which the Old Senior Notes were, and
the New Senior Notes will be, issued, to file with the Commission, and to
furnish the Holders of the New Senior Notes with (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's independent public accountants and (ii) all
current reports that would be required to be filed with the SEC on Form 8-K if
the Company were required to file such reports, in each case, within the time
periods specified in the Commission's rules and regulations.
This prospectus incorporates documents by reference which are not
presented herein or delivered herewith. These documents are available upon
request from Michael Ward, Mrs. Fields' Original Cookies, Inc., 462 West Bearcat
Drive, Salt Lake City, Utah 84115, (801) 463-2000. In order to ensure timely
delivery, any request should be made by 1998.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Capitalized terms used and not otherwise defined
in this summary have the meanings given to them elsewhere in this Prospectus.
Unless the context otherwise requires, references herein to: (i) ?Mrs. Fields?
or the ?Company? are to Mrs. Fields' Original Cookies, Inc., a Delaware
corporation, and its subsidiaries, or to Mrs. Fields' Original Cookies, Inc., as
the offeror or the obligor on the Senior Notes; (ii) ?Pretzel Time? are to
Pretzel Time, Inc., a Pennsylvania corporation; (iii) ?MFB? or the "Guarantor"
are to The Mrs. Fields' Brand, Inc., a Delaware corporation; and (iv) ?H&M? are
to H & M Concepts Ltd. Co., an Idaho limited liability company, and its
subsidiaries. Pro forma financial information included in this Prospectus gives
effect to the offering of the Old Senior Notes and the application of net
proceeds therefrom (the "Refinancing"), and the Transactions referred to herein,
as if each of the Transactions and the Offering of Old Senior Notes and the
Refinancing had occurred on December 29, 1996, (the first day of the most
recently completed fiscal year) with respect to the pro forma condensed
consolidated statement of operations for the year ended January 3, 1998.
The Company
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. Mrs. Fields is one
of the most widely recognized and respected brand names in the premium cookie
industry, with a 94% brand awareness among customers, 20% on an unaided basis
and 74% on an aided basis (based on a 1994 study commissioned by the Company).
The Company has recently developed a significant presence in the rapidly
growing, health-oriented pretzel segment as a result of the acquisitions of the
pretzel businesses of Hot Sam Company, Inc. (?Hot Sam?), H&M (the largest
Pretzel Time franchisee) and a 60% majority interest in Pretzel Time. As of
January 3, 1998, the Company's retail network consisted of 1,034 locations, of
which 711 were cookie stores and 323 were pretzel stores. Of the total 1,034
stores, 481 were Company-owned and 553 were franchised or licensed. The
Company's stores average approximately 600 square feet in size and are located
predominantly in high-end shopping malls. The Company, through licensed
locations also operates kiosks and carts at airports, universities, stadiums,
hospitals and office building lobbies. The Company's objective is to increase
sales and profitability by focusing on its higher-profitability stores in prime
locations ("core stores"). As a result, by the end of fiscal 1999, the Company
plans to close or franchise approximately 64 Company-owned cookie stores and 38
Company-owned pretzel stores that do not meet certain financial and geographical
criteria. For the fiscal year ended January 3, 1998, the Company generated pro
forma net revenue and adjusted EBITDA (as defined herein) of $142.5 million and
$23.1 million, respectively.
The Cookie Business
The Company operates and franchises 711 retail cookie stores: 556 under the
Mrs. Fields brand and 155 under The Original Cookie Company, Incorporated
("Original Cookie") brand. Management believes that Mrs. Fields cookies are
positioned in the premium quality, baked on-premises segment of what management
believes to be the approximately $12 billion U.S. cookie industry. The Company
offers over 50 different types of cookies, brownies and muffins, which are baked
continuously and served fresh throughout the day. Baked products are made using
only high quality ingredients, and all dough is centrally manufactured and
frozen to maintain product quality and consistency. All products pass strict
quality assurance and control steps at both the manufacturing plants and the
stores. In addition, the Company continually creates and tests new products to
attract new customers and satisfy current customers. Product development is
currently focused on sugar-free dough and reduced-fat cookies and brownies.
Mrs. Fields Inc. ("MFI"), one of the predecessors of the Company, was
founded in 1977 by Debbi Fields and, following its initial success, embarked on
an aggressive national expansion program in the early 1980s. By the late 1980s,
however, MFI experienced financial difficulty as a result of excessive debt
levels, certain poor real estate locations, and a recessionary retailing
environment. In connection with a financial restructuring by its lenders, a new
management team was put into place in mid-1994 under the leadership of Larry A.
Hodges, who has extensive experience in the food and retailing industries. Mr.
Hodges introduced a new strategic plan for the Company, which involved the
following key elements: (1) identifying non-core stores to close or franchise,
(2) introducing Company-wide operating procedures to improve store operating
margins, (3) developing a marketing strategy and promotional calendar to turn
around comparable store sales and (4) improving employee morale through
selective new senior hires, increased training and various incentive plans. The
savings from the improved store operations were reinvested in marketing and
other measures designed to improve comparable store sales.
<PAGE>
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of MFI, Original Cookie and Hot Sam by Mrs.
Fields' Holding Company, Inc. ("MFH"), a subsidiary of Capricorn Investors II,
L.P. ("Capricorn"). Capricorn has invested more than $28 million in the Company
through MFH. Capricorn retained Mr. Hodges as Chief Executive Officer of Mrs.
Fields. Management believes that Mrs. Fields has a more well-recognized brand
name than Original Cookie and that Mrs. Fields stores have, during fiscal 1997,
achieved higher average revenue per core store ($350,000 versus $301,000) than
Original Cookie stores. As a result, the Company intends to continue converting
its core and to-be-franchised Original Cookie stores to the Mrs. Fields brand,
which it believes will result in an increase in net sales, comparable store
sales and store contribution for the Company's cookie business.
The Pretzel Business
The Company operates and franchises 323 retail pretzel stores (221
under the Pretzel Time name and 102 under the Hot Sam name), which offer "sweet
dough" soft pretzels and "Bavarian" style pretzels with a variety of toppings.
Pretzel Time's primary product is an all natural, hand-rolled soft pretzel,
freshly baked from scratch at each store location. Pretzel Time stores prepare
pretzels with a variety of flavors and specialty toppings, including cheddar
cheese, cream cheese and pizza sauce. The stores also offer soft drinks and
freshly squeezed lemonade. 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. In addition, Pretzel Time stores
have, during fiscal 1997, achieved higher average revenue per core store
($275,000 versus $241,000) than Hot Sam stores. As a result, the Company intends
to continue converting its core and to-be-franchised Hot Sam stores to Pretzel
Time stores, which it believes will result in an increase in net sales,
comparable store sales and store contribution for the Company's pretzel
business.
Management believes that the retail pretzel business has similar
operating characteristics to the retail cookie business that will permit some
co-branding of the Company's products. In addition, the retail pretzel business
has grown more quickly than the retail cookie business in recent years. Hot Sam
was acquired by the Company in connection with the acquisition of Original
Cookie. In order to expand its presence in the retail pretzel industry, the
Company recently acquired the business of H&M and 60% (56% on September 2, 1997
and 4% on January 2, 1998) of the common stock of Pretzel Time. Pretzel Time is
a franchisor of 221 hand-rolled soft pretzel retail outlets, which are located
in shopping malls as well as at airports, sports arenas, amusement parks and
resort areas throughout the United States and Canada. Prior to the Pretzel
Acquisitions, H&M operated 79 of the franchised stores of Pretzel Time and was
the nonexclusive franchisee and developing agent for Pretzel Time stores in 16
Western and Midwestern states, four provinces in Canada and Mexico.
Business Strategy
The Company's objective is to increase sales and profitability at its
core and franchised stores in prime locations by implementing the key elements
of its business strategy. Management believes that the Company's recent
operating results reflect the successful implementation of its business
strategy. Comparable core store sales have increased for fiscal 1997 as compared
to fiscal 1996. In addition, franchising and licensing revenues have increased
by 44.9% for fiscal 1997 over fiscal 1996. The key elements of the Company's
business strategy are as follows:
Enhance Quality of Company-Owned Store Base. Since current management
assumed responsibility in 1994, the Company has focused on closing and
franchising Company-owned stores that do not meet certain financial and
geographical criteria. From June 1994 through February 1998, the
Company closed 121 Mrs. Fields brand stores and franchised an
additional 144 stores. The Company has targeted 102 additional stores
across all product concepts to be either closed or franchised by the
end of fiscal 1999. Such measures are expected to result in enhanced
operating margins, as unprofitable stores are closed and certain other
stores are converted into franchises, thereby increasing royalty
payments and eliminating general and administrative costs associated
with such stores.
Improve Productivity of Core Stores. The Company is embarking on a
program to improve the performance of its core stores by (i) expanding
product offerings to include breakfast items, such as muffins,
croissants and bagels, and low-fat cookies, brownies and muffins, (ii)
raising the average ticket through increased bundling of product
offerings, (iii) promoting catering services by individual stores to
corporate customers, (iv) decreasing store expenses by reducing waste
in the cookie baking process and controlling the cost of ingredients
and supplies, (v) improving merchandising by enhancing product
presentation and refining product mix and (vi) increasing training and
various incentive programs for management and sales staff.
<PAGE>
Capitalize on the Strong "Mrs. Fields" Brand Name. Management believes
that the Mrs. Fields brand is the most widely recognized and respected
brand name in the retail premium cookie industry, with a 94% brand
awareness among consumers, 20% on an unaided basis and 74% on an aided
basis (based on a 1994 study commissioned by the Company), and that
Mrs. Fields brand stores have, during fiscal 1997, achieved higher
average revenue per core store than Original Cookie stores. As a
result, the Company intends to continue converting its core and
to-be-franchised Original Cookie stores to Mrs. Fields brand stores,
which it believes will result in an increase in net sales, comparable
store sales and store contribution for the Company's cookie business.
Original Cookie stores represent 52% of all Company-owned cookie
stores. In addition, the Company intends to further capitalize on the
Mrs. Fields brand name by (i) further developing and expanding new
channels of distribution for the Company's products, including kiosks
and carts in malls, airports, convention centers, office buildings,
street fronts and sports complexes, (ii) increasing the emphasis on
the mail order business and (iii) developing and capitalizing on
licensing opportunities such as co-branding the Mrs. Fields concept
with prominent names in the retailing and food service industry,
expanding licensing agreements with the Company's existing licensees,
entering into new licensing agreements with food service operators
(such as the Company's existing arrangements with ARAMark, Host
Marriott and United Airlines), and developing product line extensions,
such as frozen cookie dough and in-store bakery products to be sold in
supermarkets and other convenient locations.
Capitalize on the Strong ?Pretzel Time? Brand Name. Through the
acquisition of its 60% controlling interest in Pretzel Time, the
Company has obtained the use of the "Pretzel Time" brand name, one of
the leading brand names in the pretzel retailing segment. Management
believes that there are significant opportunities to improve its
existing Hot Sam store operations by continuing to convert its core and
to-be-franchised Hot Sam stores to Pretzel Time stores. Pretzel Time
stores have, during fiscal 1997, achieved higher average revenue per
core store and store contribution than Hot Sam stores. Hot Sam stores
represent 56% of all Company-owned pretzel stores. Management believes
that the conversion to the Pretzel Time name will result in an increase
in net sales, comparable store sales and store contribution for the
Company's pretzel business. In addition, the Company believes there are
significant new Pretzel Time franchising opportunities.
Develop New Company-Owned and Franchised Stores. The Company plans to
build and franchise new stores, as well as carts and kiosks, in
existing and new markets. The Company has identified over 100 mall and
non-traditional locations, such as amusement parks and other
entertainment centers, that it believes would be ideal for cookie and
pretzel stores. During 1998, the Company intends to focus primarily on
franchising approximately 38 and 14 cookie and pretzel stores,
respectively. After 1998, the Company intends to add approximately 15
new Company-owned cookie and 10 new Company-owned pretzel stores per
year and to franchise approximately 25 new cookie and 25 new pretzel
stores per year. In addition to pursuing new store development
opportunities within the United States, the Company plans to grow
internationally by expanding its franchise operations. As of January 3,
1998, there were 81 franchised Mrs. Fields brand stores open
internationally and approximately 200 Mrs. Fields brand stores
committed for development by franchisees over the next several years in
Latin America, Canada and Asia.
Realize Purchasing and Overhead Cost Savings. As a result of the
Pretzel Contributions, the Company expects to realize significant cost
savings from the elimination of duplicative administrative functions,
the consolidation of management information systems and the reduction
of the cost of food and other supplies as a result of its enhanced
purchasing power with vendors. Management believes that incremental
pre-tax cost savings would have totaled approximately $1.1 million for
the year ended January 3, 1998.
Pursue Further Strategic Acquisitions of Related Businesses. The
Company intends to selectively pursue strategic acquisitions in order
to expand its geographic presence and achieve operating efficiencies.
The Company's management has demonstrated its ability to identify and
integrate new businesses through its acquisitions of the cookie and
pretzel businesses of Original Cookie and Hot Sam, respectively, in
September 1996. Among other acquisitions that it has been considering,
the Company has recently been in discussions concerning the possible
acquisition by the Company of Great American Cookie Company, Inc.
("GACC") or some of its owned or franchised stores. No agreement with
respect to such a transaction has been concluded, and there can be no
assurance that such an agreement will be concluded.
<PAGE>
The Transactions
On July 25, 1997, a subsidiary of MFH acquired substantially all of the
assets of H&M for aggregate consideration of $13.8 million (excluding the
assumption of certain liabilities). On September 2, 1997, MFH acquired 56% of
the shares of common stock of Pretzel Time for an aggregate purchase price of
$4.2 million and extended a $500,000 loan to the founder and minority
stockholder of Pretzel Time. The acquisitions of the pretzel business of H&M and
the common stock of Pretzel Time are referred to herein as the "Pretzel
Acquisitions." Concurrently with the offering of the Old Senior Notes (the
"Offering"), (i) the Company received as a contribution from MFH the business of
H&M and 56% of the shares of common stock of Pretzel Time (the "Pretzel
Contributions") , (ii) the Company received as a contribution from MFH all of
the common stock of MFB, (iii) various debt of the Company, MFB and MFH was
refinanced (collectively, the "Refinancing"), and (iv) the Company paid a
dividend of $1,065,000 and repaid an advance of $1,500,000 to MFH. On January 2,
1998, the Company purchased an additional 4% of the shares of the common stock
of Pretzel Time. The Pretzel Acquisitions, the Pretzel Contributions and the
Refinancing, together with the purchase of the additional 4% of Pretzel Time
common stock are referred to herein as the "Transactions." See "The
Transactions."
<PAGE>
The Company's principal executive offices are located at 462 West
Bearcat Drive, Salt Lake City, Utah 84115, and its telephone number is (801)
463-2000.
Effective January 19, 1998, the Company signed a lease for
approximately 31,000 sq. ft. of new office space located at 2855 E. Cottonwood
Parkway, Suite 400, Salt Lake City, Utah 84121. The Company expects to re-locate
its corporate offices to the new location in May 1998. The Company will continue
to operate certain general and administrative functions from the existing office
space.
<PAGE>
The Exchange Offer
On November 26, 1997, the Company issued $100 million principal amount of
the Old Senior Notes. The Old Senior Notes were sold pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws, in order to enable the
Company to raise funds on a more expeditious basis than necessarily would have
been possible had the initial sale been pursuant to an offering registered under
the Securities Act. Jefferies & Company and BT Alex. Brown Incorporated (the
"Initial Purchasers"), as a condition to their purchase of the Old Senior Notes,
requested that the Company agree to commence the Exchange Offer following the
offering of the Old Senior Notes. The Senior Notes are fully and unconditionally
guaranteed by the Guarantor.
Securities Offered.....................................
Up to $100,000,000 principal amount of 101/8 % Series B Senior
Notes due 2004, which have been registered under the Securities
Act. The terms of the New Senior Notes and the Old Senior Notes
are identical in all material respects, except that (i) the New
Senior Notes have been registered under the Securities Act, (ii)
for certain transfer restrictions and registration rights
relating to the Old Senior Notes and (iii) that the New Senior
Notes will not contain certain provisions relating to an
additional payment to be made to the Holders of the Old Senior
Notes under certain circumstances relating to the timing of the
Exchange Offer described below. See "Summary Description of the
New Senior Notes."
The Exchange Offer.....................................
The New Senior Notes are being offered in exchange for a like
aggregate principal amount of Old Senior Notes. The issuance of
the New Senior Notes is intended to satisfy obligations of the
Company contained in the Registration Rights Agreement, dated
November 26, 1997, among the Company, the Guarantor and the
Initial Purchasers (the "Registration Rights Agreement"). For a
description of the procedures for tendering Old Senior Notes, see
"The Exchange Offer-Procedures for Tendering Old Senior Notes."
Tenders; Expiration Date; Withdrawal...................
The Exchange Offer will expire at 12:00 Midnight, New York City
time, on May 22, 1998, or such later date and time to which it is
extended. Each Holder tendering Old Senior Notes must acknowledge
that it is not engaging in, nor intends to engage in, a
distribution of the New Senior Notes. The tender of Old Senior
Notes pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date (as defined herein), in which case
the Expiration Date will be the latest date and time to which the
Exchange Offer is extended. Any Old Senior Note not accepted for
exchange for any reason will be returned to the tendering Holder
thereof as promptly as practicable after the expiration or
termination of the Exchange Offer. See "The Exchange Offer-Terms
of the Exchange Offer."
United States Federal Income Tax Considerations........
The exchange pursuant to the Exchange Offer should not result in
any income, gain or loss to the Holders or the Company for United
States federal income tax purposes. See "Certain United States
Federal Income Tax Considerations."
<PAGE>
Use of Proceeds........................................
Neither the Company nor the Guarantor will receive any cash
proceeds from the issuance of the New Senior Notes offered
hereby. See "Use of Proceeds."
Exchange Agent.........................................
The Bank of New York (the "Exchange Agent") is serving as
Exchange Agent in connection with the Exchange Offer. The
addresses, and telephone and facsimile numbers, of the Exchange
Agent are set forth in "The Exchange Offer-Exchange Agent" and in
the Letter of Transmittal.
Shelf Registration Statement...........................
Under certain circumstances, certain Holders of Senior Notes
(including Holders who are not permitted to participate in the
Exchange Offer or who may not freely resell New Senior Notes
received in the Exchange Offer) may require the Company to file,
and cause to become effective, a shelf registration statement
under the Securities Act, which would cover resales of Senior
Notes by such Holders. See "Description of the Senior
Notes-Exchange Offer; Registration Rights."
Consequences of Exchanging Old Notes
Holders of Old Senior Notes who do not exchange their Old Senior Notes
for New Senior Notes pursuant to the Exchange Offer will continue to be subject
to the restrictions on transfer of such Old Senior Notes as set forth in the
legend thereon as a consequence of the issuance of the Old Senior Notes pursuant
to exemptions from, or in transactions not subject to, the Securities Act and
applicable state securities laws. In general, the Old Senior Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Based on interpretation by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Company believes that New Senior Notes issued pursuant to the Exchange Offer in
exchange for Old Senior Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any Holder which is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Senior Notes are acquired in the ordinary
course of such Holder's business and such Holder, other than broker-dealers, has
no arrangement with any person to participate in the distribution of such New
Senior Notes. However, the Commission has not considered the Exchange Offer in
the context of a no-action letter and there can be no assurance that the staff
of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each Holder, other than a
broker-dealer, must at the request of the Company furnish a written
representation that it is not an affiliate of the Company, is not engaged in,
and does not intend to engage in, a distribution of such New Senior Notes and
has no arrangement or understanding to participate in a distribution of New
Senior Notes, and that it is acquiring the New Senior Notes in its ordinary
course of business. Each broker-dealer that receives New Senior Notes for its
own account in exchange for Old Senior Notes must acknowledge that such Old
Senior Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such New Senior Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, it may
be necessary to qualify for sale or register thereunder the New Senior Notes
prior to offering or selling such New Senior Notes. The Company has agreed,
pursuant to the Registration Rights Agreement, subject to certain limitations
specified therein, prior to any public offering of Transfer Restricted
Securities (as defined herein) to register or qualify the Transfer Restricted
Securities for offer or sale under the securities laws of such jurisdictions as
any Holder requests. Unless a Holder so requests, the Company does not intend to
register or qualify the sale of the New Senior Notes in any such jurisdiction.
<PAGE>
Summary Description of the New Senior Notes
The terms of the New Senior Notes and the Old Senior Notes are
identical in all material respects, except (i) that the New Senior Notes have
been registered under the Securities Act, (ii) for certain transfer restrictions
and registration rights relating to the Old Senior Notes and (iii) that the New
Senior Notes will not contain certain provisions relating to an additional
payment to be made to Holders of Old Senior Notes under certain circumstances
relating to the timing of the Exchange Offer. The New Senior Notes will bear
interest from the most recent date to which interest has been paid on the Old
Senior Notes or, if no interest has been paid on the Old Senior Notes, from
November 26, 1997, the date of original issuance. Old Senior Notes accepted for
exchange will cease to accrue interest from and after the date of consummation
of the Exchange Offer. Holders whose Old Senior Notes are accepted for exchange
will not receive any payment in respect of such interest on such Old Senior
Notes otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer.
Securities Offered.....................................
Up to $100,000,000 aggregate principal amount of 101/8 % Series B
Senior Notes due 2004, which have been registered under the
Securities Act.
Maturity Date..........................................
December 1, 2004.
Interest Payment Dates.................................
June 1 and December 1 of each year, commencing June 1, 1998.
Guarantee..............................................
The Senior Notes are fully and unconditionally guaranteed on a
senior basis by MFB and, under certain circumstances, certain
existing and future subsidiaries of the Company (collectively,
the ?Guarantors?). The 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 (including MFB's Old Guarantee of
any Old Senior Notes outstanding following consummation of the
Exchange Offer). See ?Description of Senior Notes-Guarantees.?
Ranking................................................
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 (including any Old Senior Notes that remain outstanding
following completion of the Exchange Offer). As of January 3,
1998, the Company (excluding its subsidiaries) had approximately
$0.2 million in indebtedness other than the Senior Notes. As of
January 3, 1998, the aggregate amount of indebtedness of the
Company's subsidiaries was approximately $0.9 million and the
aggregate liquidation preference of mandatorily redeemable
preferred stock of the Company's subsidiaries was approximately
$1.5 million, all of which was issued by a subsidiary other than
the Guarantors and effectively ranks senior in right of payment
to the Senior Notes.
<PAGE>
Although the Indenture limits the ability of the Company and its
subsidiaries to incur additional indebtedness and issue preferred
stock, the Company is permitted to incur additional indebtedness
and issue preferred stock, including secured indebtedness, under
certain circumstances, which will effectively rank senior to the
Senior Notes with respect to the assets securing such
indebtedness. See "Risk Factors-Effective Subordination? and
?Description of Senior Notes-General."
Optional Redemption....................................
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 the redemption prices set forth herein, plus accrued and
unpaid interest thereon to the date of redemption. In addition,
at any time prior to December 1, 2001, the Company may on any one
or more occasions redeem up to an aggregate of 35% of the
aggregate principal amount of Senior Notes ever issued under the
Indenture at a redemption price equal to 110.125% of the
principal amount thereof, plus accrued and unpaid interest
thereon to the redemption date, with the net cash proceeds of one
or more Public Equity Offerings; provided that at least 65% of
the aggregate principal amount of Senior Notes ever issued under
the Indenture remain outstanding immediately after the occurrence
of any such redemption. See ?Description of Senior Notes-Optional
Redemption.?
Change of Control......................................
Upon the occurrence of a Change of Control, each holder of Senior
Notes will have the right to require the Company to repurchase
all or any part of such holder's Senior Notes at an offer price
in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon to the date of
repurchase. See ?Description of Senior Notes-Repurchase at the
Option of Holders-Change of Control.? There can be no assurance
that, in the event of a Change of Control, the Company would have
sufficient funds to purchase all Senior Notes tendered. See ?Risk
Factors-Inability to Repurchase Senior Notes Upon a Change of
Control.?
Certain Covenants......................................
The Indenture contains certain covenants that limit, among other
things, the ability of the Company and its subsidiaries to: (i)
pay dividends, redeem capital stock or make certain other
restricted payments or investments; (ii) incur additional
indebtedness or issue preferred equity interests; (iii) merge,
consolidate or sell all or substantially all of their assets;
(iv) create liens on assets; (v) engage in certain asset sales;
and (vi) enter into certain transactions with affiliates or
related persons. See ?Description of Senior Notes-Certain
Covenants.?
<PAGE>
Form, Denomination and Registration of Notes...........
New Senior Notes exchanged for Old Senior Notes will be eligible
for trading through the facilities of the Depository Trust
Company ("DTC"). New Senior Notes traded through the facilities
of DTC will be represented by a global note or notes in
definitive, fully registered form without interest coupons
deposited with the trustee for the New Senior Notes (the
"Trustee") as custodian for and registered in the name of a
nominee of DTC. New Senior Notes exchanged for Old Senior Notes
which are in the form of registered definitive certificates will
be issued in the form of registered definitive certificates until
otherwise directed by the Holders of such New Senior Notes. See
"Description of the Senior Notes-Book-Entry, Delivery and Form."
Use of Proceeds........................................
The Company will not receive any proceeds from the Exchange
Offer. The net proceeds of the offering of the Old Senior Notes
were used, together with funds from other sources, to fund
certain acquisitions and to refinance certain of the Company's
debt and to pay certain related fees and expenses. See ?The
Transactions? and ?Use of Proceeds.?
<PAGE>
Risk Factors
In addition to the information contained elsewhere in this Prospectus,
Holders of the Old Senior Notes should carefully consider the matters set forth
under "Risk Factors" commencing on page 20 before making a decision to tender
their Old Senior Notes in the Exchange Offer.
<PAGE>
Summary Historical and Pro Forma Financial Data
The following table presents: (i) summary combined historical financial
and store data for Mrs. Fields' Original Cookies, Inc. and subsidiaries (?Mrs.
Fields?) and its predecessors, Mrs. Fields Inc. and subsidiaries, The Original
Cookie Company, Incorporated and the Carved-out Portion (pretzel business) of
Hot Sam Company, Inc. (collectively, the ?Predecessors?), as of December 30,
1995 and December 28, 1996 and for the fiscal years then ended, (ii) summary
consolidated historical financial and store data for Mrs. Fields as of January
3, 1998 and for the fiscal year then ended and (iii) summary consolidated pro
forma financial and store data for Mrs. Fields for the fiscal year ended January
3, 1998 as if each of the Offering, the Pretzel Contributions and the
Refinancing had occurred as of December 29, 1996. The summary consolidated pro
forma data do not purport to represent what Mrs. Fields' results actually would
have been had the Offering, the Pretzel Contributions and the Refinancing
occurred at December 29, 1996 nor do such data purport to project the results of
Mrs. Fields for any future period. The summary historical and pro forma
financial and store data should be read in conjunction with ?Management's
Discussion and Analysis of Financial Condition and Results of Operations,? the
?Unaudited Pro Forma Condensed Consolidated Statement of Operations,? ?Selected
Historical Financial Data? and the related notes thereto, and the historical
financial statements and the related notes thereto, contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MRS. FIELDS AND
PREDECESSORS (1) MRS.FIELDS (1)
---------------------- ----------------------------------
HISTORICAL HISTORICAL PRO FORMA
COMBINED (2) CONSOLIDATED CONSOLIDATED
--------------- ------------------------ -------------
FISCAL YEARS ENDED (3)
-----------------------------------------------------------
DECEMBER DECEMBER JANUARY JANUARY
30, 1995 28, 1996 3, 1998 3,1998 (4)
---------------- -------------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Net store sales.................... $145,537 $ 123,930 $ 123,987 $ 133,617
Net store contribution (5) ...... 19,648 19,280 25,087 26,314
Franchising, licensing and other
revenue, net..................... 5,993 5,278 5,602 8,879
General and administrative expenses 21,037 19,557 16,730 18,923
.
Income (loss) from operations...... (1,091) 1,135 8,415 9,054
Net loss........................... (4,464) (5,988) (974) (4,189)
Other Data:
Cash flows from operating activities . (27) 6,784 919 1,630
Cash flows from investing activities . 1,958 (22,716) (15,505) (15,561)
Cash flows from financing activities . (4,784) 18,793 24,164 23,689
Interest expense, net.............. 4,319 4,701 7,584 11,584
Total depreciation and amortization 10,427 9,192 10,403 11,736
Capital expenditures............... 4,714 3,524 4,678 N/A
EBITDA (6)......................... 9,336 10,327 18,818 20,790
Store contribution for stores in
the process of being closed or
franchised(5).............. $(2,344) $(1,933) $(1,798) $(1,742)
Ratio of earnings to fixed charges(7) - - - -
Store Data:
Percentage change in comparable
store sales (8)................. (1.6%) (1.2%) 0.6% N/A
Total Company-owned stores open
at end of period................. 540 482 481 481
Total franchised or licensed stores
open at end of period............ 415 418 553 553
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MRS. FIELDS
-----------
JANUARY 3,1998
--------------
(Dollars in
thousands)
Balance Sheet Data:
Cash and cash equivalents.................................. $ 16,287
Total assets............................................... 149,684
Mandatorily redeemable cumulative preferred stock of
subsidiary................................................. 902
Total debt and capital lease obligations................... 101,081
Total stockholder's equity................................. 30,765
</TABLE>
(1) On September 17, 1996, Mrs. Fields completed the acquisitions of
substantially all of the assets and assumed certain liabilities of the
Predecessors. In order for the presentations to be comparable 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.
(2) Information for fiscal year 1995 reflects the combined results of the
Predecessors. Information for the fiscal year 1996 reflects the combined
results of the Predecessors (for the period December 31, 1995 through
September 17, 1996) and Mrs. Fields for the period September 18, 1996
through December 28, 1996. Information for these periods for the
Predecessors and Mrs. Fields are set out separately in the ?Selected
Historical Financial Data? but are combined here. This presentation is not
in conformity with generally accepted accounting principles.
(3) Mrs. Fields and its Predecessors operate using a 52/53-week year ending
near December 31.
(4) The Company's consolidated pro forma data for the fiscal year 1997 reflects
the consolidated results of Pretzel Time, H&M and Mrs. Fields assuming the
Offering, the Pretzel Contributions and the Refinancing occurred on
December 29, 1996. See ?Unaudited Pro Forma Condensed Consolidated
Statement of Operations.?
(5) 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. Setting out store contribution for stores in the process of being
closed or franchised as a separate caption is not in accordance with
generally accepted accounting principles. Also, store contribution may not
be comparable to similarly titled measures reported by other companies.
(6) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, minority interest, preferred stock accretion and dividends of
subsidiaries and other income (expense). EBITDA is not intended to
represent cash flows from operations as defined by generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of operating performance or to cash flows as a
measure of liquidity. EBITDA has been included herein because it is one of
the indicators by which Mrs. Fields assesses its financial performance and
its capacity to service its debt. EBITDA may not be comparable to similarly
titled measures reported by other companies.
<TABLE>
<CAPTION>
MRS. FIELDS AND
PREDECESSORS (1) MRS.FIELDS (1)
---------------------- ----------------------------------
HISTORICAL HISTORICAL PRO FORMA
COMBINED (2) CONSOLIDATED CONSOLIDATED
---------------- ------------------------ ------------
FISCAL YEARS ENDED (3)
-----------------------------------------------------------
DECEMBER DECEMBER JANUARY JANUARY
30, 1995 28, 1996 3, 1998 3,1998 (4)
---------------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Income (loss) from operations $(1,091) $ 1,135 $ 8,415 $ 9,054
Add:
Depreciation and amortization. 10,427 9,192 10,403 11,736
--------- ------ ------- ------
EBITDA...................... $ 9,336 $ 10,327 $ 18,818 $ 20,790
========= ======== ======== ========
</TABLE>
(7) 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 years 1995 and 1996, earnings were
insufficient to cover fixed charges by $3,960,000 and $3,905,000,
respectively. For Mrs. Fields fiscal year ended January 3, 1998, earnings
were insufficient to cover fixed charges by $319,000 for pro-forma fiscal
year ended January 3, 1998, earnings were insufficient to cover fixed
charges by $3,534,000.
(8) The Company includes in comparable store sales only those stores that have
been in operation for a minimum of 24 consecutive months. The percentage
change in comparable store sales is calculated from the previous period.
<PAGE>
Risk Factors
Holders of Old Senior Notes should consider carefully all of the
information set forth in this Prospectus. Holders should particularly evaluate
the following risks before tendering their Old Senior Notes in the Exchange
Offer, although the risk factors set forth below (other than the first two risk
factors) are generally applicable to the New Senior Notes as well as the Old
Senior Notes. Information contained in this Prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "should," "estimates," "projected,"
"contemplates" or "anticipates" or the negative thereof or other variations
thereon or comparable terminology. See, e.g., "Prospectus Summary-The Company"
and "Business." No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors, such as the general state of the
economy of the United States could also cause actual results to vary materially
from the future results covered in such forward-looking statements.
Consequences of Failure to Exchange Old Senior Notes
Issuance of the New Senior Notes in exchange for the Old Senior Notes
pursuant to the Exchange Offer will be made following the prior satisfaction, or
waiver, of the conditions set forth in "The Exchange Offer-Certain Conditions to
the Exchange Offer" and only after a timely receipt by the Exchange Agent (as
defined) of such Old Senior Notes, a properly completed and duly executed Letter
of Transmittal in respect of such Old Senior Notes and all other required
documents. Therefore, holders of Old Senior Notes desiring to tender such Old
Senior Notes in exchange for New Senior Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under any
duty to give notification of defects or irregularities with respect to the
tenders of Old Senior Notes for exchange. Old Senior Notes that are not tendered
or are tendered but not accepted will, following the consummation of the
Exchange Offer, continue to be subject to the provisions of the Indenture
regarding transfer and exchange of the Old Senior Notes, the existing
restrictions upon transfer thereof set forth in the legend on the Old Senior
Notes and in the (Offering Circular) dated November 20, 1997 relating to the Old
Senior Notes (the "Offering Circular"). Except in certain limited circumstances
with respect to certain types of Holders of Old Senior Notes, the Company will
have no further obligation to provide for the registration under the Securities
Act of such Old Senior Notes. See "Description of the Notes -Exchange Offer;
Registration Rights." In general, Old Senior Notes, unless registered under the
Securities Act, may not be offered or sold except pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will take any
action to register the Old Senior Notes under the Securities Act or blue sky
laws.
To the extent that Old Senior Notes are tendered and accepted in the
Exchange Offer, a Holder's ability to sell untendered Old Senior Notes could be
adversely affected.
Upon consummation of the Exchange Offer, holders of the Old Senior Notes
will not be entitled to any increase in the interest rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Description of the Notes-Exchange Offer;
Registration Rights."
Consequences of Exchanging Old Senior Notes
Based on interpretations by the staff of the Commission, as set forth in no
action letters issued to third parties, the Company believes that the New Senior
Notes issued in exchange for the Old Senior Notes pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by Holders thereof
(other than any such Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Senior Notes are acquired in the ordinary course of such Holders'
business and such Holders have no arrangement with any person to participate in
the distribution (within the meaning of the Securities Act) of such New Senior
Notes. Each Holder, other than a broker-dealer, must at the request of the
Company furnish a written representation that it is not an affiliate of the
Company, is not engaged in, and does not intend to engage in, a distribution of
such New Senior Notes and has no arrangement or understanding to participate in
a distribution of New Senior Notes, and that it is acquiring the New Senior
Notes in its ordinary course of business. If any Holder is an affiliate of the
Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Senior Notes to be
acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
<PAGE>
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transactions. Each broker-dealer that receives New
Senior Notes for its own account in exchange for Old Senior Notes must
acknowledge that such Old Senior Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities and that it will
deliver a prospectus in connection with any resale of such New Senior Notes.
Each broker-dealer who holds Old Senior Notes acquired for its own account as a
result of market-making activities or other trading activities, and who receives
New Senior Notes in exchange for such Old Senior Notes pursuant to the Exchange
Offer, may be an "underwriter" within the meaning of the Securities Act in
connection with any resale of such New Senior Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Senior Notes received in exchange for Old Senior Notes where such Old Senior
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that starting on
the date of consummation of the Exchange Offer and ending on the close of
business of the 120th day following the date of consummation of the Exchange
Offer, it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution." In addition, to
comply with the securities laws of certain jurisdictions, it may be necessary to
qualify for sale or register thereunder the New Senior Notes prior to offering
or selling such New Senior Notes. The Company has agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified therein,
prior to any public offering of Transfer Restricted Securities (as defined
herein) to register or qualify the Transfer Restricted Securities for offer or
sale under the securities laws of such jurisdictions as any Holder requests.
Unless a Holder so requests, the Company does not intend to register or qualify
the sale of the New Senior Notes in any such jurisdiction.
Substantial Leverage
The Company is and, following the Exchange Offer, will continue to be
highly leveraged. As of January 3, 1998, after giving effect to the use of
proceeds from the offering of the Old Senior Notes, the Company on a
consolidated basis had total indebtedness of approximately $101.1 million and
mandatorily redeemable cumulative preferred stock having an aggregate
liquidation preference of approximately $1.5 million outstanding, together
representing 77% of its total book capitalization, and the Company's ratio of
pro forma Adjusted EBITDA to pro forma net cash interest expense was 2.46x for
the fiscal year ended January 3, 1998. The Company may incur additional
indebtedness and issue preferred stock in the future, subject to limitations
imposed by the Indenture. See ?Capitalization,? ?Unaudited Pro Forma Condensed
Consolidated Statement of Operations,? ?Selected Historical Financial Data,?
?The Transactions? and ?Description of Senior Notes-Certain Covenants.?
The Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance its indebtedness (including the Senior Notes)
depends on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. There can be no assurance that the Company's
business will generate sufficient cash flows from operations or that future
borrowings will be available in an amount sufficient to enable the Company to
service its indebtedness, including the Senior Notes, or to make necessary
capital expenditures, or that any refinancing would be available on commercially
reasonable terms or at all. See ?Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources.?
The degree to which the Company is leveraged could have important
consequences to holders of the Senior Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flows from operations
is required to be dedicated to debt service and will not be available for other
purposes; (ii) the Company's ability to obtain additional financing in the
future could be limited; and (iii) the Indenture contains financial and
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds, dispose of assets or pay cash dividends.
Failure by the Company to comply with such covenants could result in an event of
default, which, if not cured or waived, could have a material adverse effect on
the Company. In addition, the degree to which the Company is leveraged could
prevent it from repurchasing all Senior Notes tendered to it upon the occurrence
of a Change of Control. See ?Description of Senior Notes-Repurchase at the
Option of Holders-Change of Control.?
Effective Subordination
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 to all existing and future senior
indebtedness of the Company. As of January 3, 1998, the Company (excluding its
subsidiaries) had approximately $0.2 million in indebtedness other than the
<PAGE>
Senior Notes. The Senior Notes are fully and unconditionally guaranteed on a
senior basis by the Guarantors. The 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. As of January 3,
1998, the aggregate amount of indebtedness of the Company's subsidiaries was
approximately $0.9 million and the aggregate liquidation preference of
mandatorily redeemable cumulative preferred stock of the Company's subsidiaries
was approximately $1.5 million, all of which was issued by a subsidiary other
than the Guarantors and effectively ranks senior in right of payment to the
Senior Notes. Although the Indenture limits the ability of the Company and its
subsidiaries to incur additional indebtedness and issue preferred stock, the
Company is permitted to incur additional indebtedness and issue preferred stock,
including secured indebtedness, under certain circumstances, which will
effectively rank senior to the Senior Notes with respect to the assets securing
such indebtedness. See ?Description of Senior Notes-General.?
History of Net Losses
Mrs. Fields and its predecessors have incurred net losses during the
past several years. Although the Company has implemented new business strategies
aimed at enhancing revenues and operating results and Mrs. Fields' Original
Cookies, Inc. has recorded positive EBITDA since its formation in September
1996, the Company's operations generally are subject to economic, financial,
competitive, legal and other factors, many of which are beyond its control.
Accordingly, there can be no assurance that the Company will be able to
implement its planned strategies without delay or that these strategies will
result in future profitability. See ?Selected Historical Financial Data? and
?Management's Discussion and Analysis of Financial Condition and Results of
Operations.?
Ability to Integrate Acquisitions
The Company has achieved growth through acquisitions and intends to
continue doing so. While the Company believes there are significant
opportunities for cost savings and volume efficiencies as a result of the
Pretzel Contributions and future acquisitions, there can be no assurance of such
results. Realization of such economic benefits from the Pretzel Contributions
and future acquisitions could also be affected by a number of factors beyond the
Company's control, such as general economic conditions, increased operating
costs, the response of the Company's customers or competitors, and regulatory
developments. There can be no assurance that the Pretzel Contributions or future
acquisitions will result in the economic benefits that management expects on a
timely basis or at all. See ?Business -Business Strategy.?
Dependence on Real Estate Leases; Continuing Obligations on Leases
The Company leases locations for all of its Company-owned stores and
most of its franchised stores and subleases these locations to its franchisees.
Accordingly, the Company is the primary obligor with respect to payment
obligations under such leases. The Company's success depends in part on its
ability to secure leases in high quality shopping malls at rents it believes to
be reasonable. Approximately half of the leases for Company-owned stores and
franchised stores expire during the next five years and generally do not provide
for renewal options in favor of the Company. In addition, the Company currently
plans to open approximately 340 new Company-owned and franchised stores over the
next five years. Management believes that the market for the type of prime mall
locations historically leased by the Company is highly competitive.
Consequently, there can be no assurance that the Company will succeed in
obtaining such leases in the future at rents that it believes to be reasonable
or at all. Moreover, if certain locations should prove to be unprofitable, the
Company would remain obligated for lease payments if it determined to withdraw
from such locations. See ?Business-Properties.?
Dependence on Mall Traffic
The Company believes its products are primarily viewed by its customers
as snack treats and, as such, frequently constitute ?impulse? purchases.
Accordingly, the Company believes its sales are strongly influenced by the
amount and proximity of pedestrian traffic near its stores. In recent years,
visits to major shopping malls, where a large percentage of the Company's stores
are located, have declined from 3.7 visits per month in 1989 to 3.3 visits per
month in 1995, which trend has had a negative impact on the Company's revenues.
There can be no assurance that this trend will not continue or that such trend
can be offset by increased sales per customer. A continued decline in mall
traffic could adversely affect the Company's financial condition and results of
operations.
<PAGE>
Volatility in Cost of Ingredients
The cost of butter, eggs, sugar, flour, chocolate and other ingredients
is subject to fluctuations due to changes in economic conditions, weather,
demand and other factors, many of which are beyond the Company's control.
Although the Company believes that there are alternative suppliers of these
ingredients, the Company has no control over fluctuations in the price of
commodities and no assurance can be given that the Company will be able to pass
on any price increases in its product ingredients to its customers.
Integration of Information Systems
The Company has made a substantial investment in developing a
customized, sophisticated point-of-sale management information system (the ?POS
system?), which gathers information transmitted daily to corporate headquarters
from most of the Mrs. Fields brand core stores. The POS 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. See ?Management's Discussion
and Analysis of Financial Condition and Results of Operations.? Information
transmitted from the Company-owned stores on daily sales permits the Company,
among other things, to monitor performance across the network of stores. The
Company believes that it can improve operating efficiencies by introducing its
improved system into all Company-owned stores. There can be no assurance that
the Company will successfully integrate this system or that a fully integrated
system will be achieved within budget. Therefore, there can be no assurance that
the financial condition and results of operations will not be adversely affected
by the attempts to integrate the POS system.
Management has assessed the Year 2000 issue and has determined that all
financial software, corporate networks, the AS400 system and all other corporate
systems are Year 2000 compliant. The systems used for collecting sales data from
retail locations are not Year 2000 compliant. It has been determined that the
sales collection system will be replaced. This project is currently underway
with initial roll-out into retail locations beginning in August 1998 with
completion to all locations by August 1999. The cost of the project, which is
being completed with the assistance of outside consultants, is $300,000.
Impact of Minimum Wage Increase
Many of the Company's employees are paid an hourly wage based upon the
federal minimum wage. The federal minimum wage increased from $4.75 to $5.15 on
September 1, 1997. As of January 3, 1998, 2,167 of the Company's 4,007 employees
in Company-owned stores earned the federal minimum wage. The September 1, 1997
minimum wage increase is expected to negatively impact the Company's labor
costs, increasing wages by approximately $316,000 annually. There can be no
assurance that the increased labor costs will be fully absorbed through the
Company's efforts to increase efficiencies in other areas of its operations.
These increased labor costs could adversely affect the Company's financial
condition and results of operations.
Dependence Upon Key Franchisees
The Company depended upon five franchisees for 17.4% of its franchise
revenues for the year ended January 3, 1998. For the same period, franchise
revenues made up 3.1% of the Company's total net revenues. There can be no
assurance that these franchise agreements will not be terminated. The
termination of these key franchise agreements may have an adverse affect on the
Company's financial condition and results of operations.
Trademarks
The Company believes that its trademarks have significant value and are
important to the marketing of its retail outlets and products. Although the
Company's trademarks are registered in all 50 states and registered or pending
in 49 foreign countries, there can be no assurance that the Company's trademarks
cannot be circumvented, do not or will not violate the proprietary rights of
others, or would be upheld if challenged or that the Company would not be
prevented from using its trademarks. Any challenge to the Company for its use of
its trademarks could have an adverse effect on the Company's financial condition
and results of operations, through either a negative ruling with regards to the
Company's use, validity or enforceability of its trademarks, or through the time
consumed and the legal costs of defending against such a claim. In addition,
there can be no assurance that the Company will have the financial resources
necessary to enforce or defend its trademarks .
<PAGE>
Dependence Upon Key Personnel
The success of the Company is dependent on the continued services of
its senior management, particularly Larry A. Hodges, the Company's President and
Chief Executive Officer. The loss of the services of Mr. Hodges or other senior
management personnel could have an adverse effect on the Company's operations.
The Company has entered into employment agreements with all of its senior
management personnel. In addition, the Company's continued growth depends, in
part, on attracting and retaining skilled managers and employees as well as
management's ability to effectively utilize its key personnel in light of recent
and future acquisitions. There can be no assurance that management's efforts to
integrate, utilize, attract and retain personnel will be successful. See
?Management.?
Competition and Demographic Trends
The Company competes with other cookie and pretzel retailers, as well
as other confectionery, sweet snack and specialty food retailers, many of which
have greater resources than those of the Company. The specialty retail food and
snack industry is highly competitive with respect to price, service, location
and food quality. Consequently, there can be no assurance that the Company will
compete successfully with these other specialty food retailers. In addition to
the risks associated with current competitors, no assurance can be given as to
the Company's ability to compete with any new entrants into the specialty foods
or snack foods industry.
Moreover, the specialty retail food and snack business is often
affected by changes in consumer preferences, tastes and eating habits, local,
regional and national economic conditions, demographic trends and mall traffic
patterns. Factors such as increased food, labor and benefits costs and the
availability of experienced management and hourly employees may adversely affect
the specialty retail industry in general and the Company's outlets in
particular. Consequently, the Company's success will depend on its ability to
recognize and react to such trends. Any changes in these factors could adversely
affect the profitability of the Company. See ?Business-Competition.?
Risk of Adverse Publicity
The Company's ability to compete depends in part on maintaining its
reputation with the consumer. Multi-unit specialty retail food and snack chains
such as the Company can be substantially adversely affected by publicity
resulting from food quality, illness, injury, or other health concerns
(including food-borne illness claims) or operating issues stemming from one
store, a limited number of stores, or even a competitor's store. Consequently,
there can be no assurance that the Company's financial condition and results of
operations will not be adversely affected by such publicity.
Government Regulation; Litigation
The Company's stores and products are subject to regulation by numerous
governmental authorities, including, without limitation, federal, state and
local laws and regulations governing health, sanitation, environmental
protection, safety and hiring and employment practices, including laws, such as
the Fair Labor Standards Act, governing such matters as minimum wages, overtime
and other working conditions. The Company's products are subject to federal
regulations administered by the Food and Drug Administration. The failure to
obtain or retain the required food licenses or to be in compliance with
applicable governmental regulations, or any increase in the minimum wage rate,
employee benefit costs or other costs associated with employees, could adversely
affect the business, financial condition or results of operations of the
Company. Even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to periodic inspection
and discovery of problems may adversely affect the business of the Company.
In addition, the sale of franchises is regulated by various state laws
as well as by the Federal Trade Commission (the ?FTC?). The FTC requires that
franchisors make extensive disclosure in a Uniform Franchise Prospectus to
prospective franchisees but does not require registration. However, a number of
states require registration of the Uniform Franchise Prospectus with state
authorities or other disclosure in connection with franchise offers and sales.
In addition, several states have ?franchise relationship laws? or ?business
opportunity laws? that limit the ability of the franchisors to terminate
agreements or to withhold consent to renewal or transfer of these agreements.
While the Company believes that it is in compliance with existing regulations,
the Company cannot predict the effect of any future legislation or regulation on
its business operations or financial condition. Additionally, bills have
occasionally been introduced in Congress which would provide for federal
regulation of certain aspects of franchisor-franchisee relationships.
<PAGE>
In the ordinary course of business, the Company is involved in routine
litigation, including franchise disputes. Although the Company has not been
adversely affected in the past by such litigation, there can be no assurance as
to the effect of any future disputes.
Although the Company is not currently subject to any product liability
litigation, there can be no assurance that product liability litigation will not
occur in the future involving the Company's products. The Company's quality
control program is designed to maintain high standards for the food and
materials and food preparation procedures used by Company-owned and franchised
stores. Products are randomly inspected by Company personnel at both the
point-of-sale locations and the manufacturing facility to ensure that they
conform to the Company's standards. In addition to insurance of the Company's
suppliers, the Company maintains insurance relating to personal injury and
product liability in amounts that it considers adequate for the retail food
industry. While the Company has been able to obtain such insurance in the past,
there can be no assurance that it will be able to maintain these insurance
policies in the future. Consequently, any successful claim against the Company,
in an amount materially exceeding its coverage, could have a material adverse
effect on the Company's business, financial condition or results of operations.
All full-time store managers and assistant managers are able to enroll
in a group health insurance plan. However, there have been a number of proposals
before Congress which would require employers to provide health insurance for
all of their full-time and part-time employees. The approval of such proposals
could have a material adverse impact on the results of operations and financial
condition of the Company in particular and the specialty retail industry as a
whole.
Controlling Stockholder
As of the date of this Prospectus, all of the capital stock of the Company
is owned by MFH, and, upon completion of the Exchange Offer, MFH will continue
to own all of the capital stock of the Company. As a result, MFH will be in a
position to elect all of the Company's directors who, in turn, elect all of the
Company's executive officers, and to amend the Company's certificate of
incorporation and by-laws, effect corporate transactions such as mergers and
asset sales and otherwise control the management and policies of the Company
without the approval of any other security holder. Accordingly, MFH will be able
to, directly or indirectly, control all of the affairs of the Company. Without
giving effect to such option plans, approximately 94% of the capital stock of
MFH is and will continue to be owned by Capricorn. The Board of Directors of MFH
has approved the provisions of a Director Stock Option Plan (the "Director Stock
Option Plan") and the Director Stock Purchse Plan, providing for the issuance of
capital stock of MFH to directors of MFH. In addition, it is currently expected
that an option plan (the "Employee Stock Option Plan" and, together with the
Director Stock Option Plan and the Director Stock Purchase Plan, the "Plans")
will be established providing for the issuance of MFH capital stock for officers
and other employees of MFH and its subsidiaries, including the Company. Suc
plans will provide for the issuance of up to 15% of the capital stock of MFH to
directors of MFH and officers and employees of MFH's subsidiaries, including the
Company. See "Management Option Grants and Exercises", "Board Compensation." See
"-Ownership of Capital Stock" and "Certain Relationships and Related
Transactions."
Quarterly Fluctuations and Seasonality
The Company's operating results are subject to seasonal fluctuations.
Historically, the Company has realized its highest level of sales in the fourth
quarter due to increased mall traffic during the Christmas holiday season.
However, there can be no assurance that this seasonal trend will continue or
that the Company can continue to rely on increased sales during the fourth
quarter. Should this seasonal trend change, the Company's financial condition
and results of operations may be adversely affected. See ?Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Seasonality.?
Inability to Repurchase Senior Notes Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Senior Notes
may require the Company to repurchase all or a portion of such holder's Senior
Notes at 101% of the principal amount of the Senior Notes, together with the
accrued and unpaid interest, if any, and Liquidated Damages, if any, to the date
of repurchase. If a Change of Control were to occur, the Company may not have
the financial resources to repay all of its obligations under the Senior Notes
and the other indebtedness that would become payable upon such event. See
"Description of Senior Notes-Repurchase at the Option of Holders-Change of
Control."
<PAGE>
Fraudulent Conveyance Considerations
Management believes that the indebtedness represented by the Senior
Notes and the Guarantees was incurred for proper purposes and in good faith, and
that, after the consummation of the Transactions and the offering of the Old
Senior Notes and the application of the new proceeds therefrom, the Company
remained solvent, had sufficient capital for carrying on its business and would
be able to pay its debts as they matured. Notwithstanding management's belief,
however, if a court of competent jurisdiction in a suit by an unpaid creditor or
a representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time of the incurrence of such
indebtedness, the Company was insolvent, was rendered insolvent by reason of
such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, or intended to hinder, delay or defraud its creditors, and that the
indebtedness was incurred for less than reasonably equivalent value, then such
court could, among other things, (i) void all or a portion of the Company's
obligations to the holders of the Senior Notes, the effect of which would be
that the holders of the Senior Notes may not be repaid in full, and/or (ii)
subordinate the Company's obligations to the holders of the Senior Notes to
other existing and future indebtedness of the Company to a greater extent than
would otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Senior
Notes.
The Company's obligations under the Senior Notes have been and will
continue to be fully and unconditionally guaranteed, jointly and severally, on a
senior basis, by the Guarantors. Management believes that the indebtedness
represented by each of the Guarantees is being incurred by the Guarantors for
proper purposes and in good faith, and that, after the consummation of the
Transactions and the offering of the Old Senior Notes, each of the Guarantors
was solvent, had sufficient capital for carrying on its business and would be
able to pay their debts as they matured. Notwithstanding management's belief,
however, if a court of competent jurisdiction in a suit by an unpaid creditor or
a representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time of the incurrence of such
indebtedness, the Guarantors were insolvent, were rendered insolvent by reason
of such incurrence, were engaged in a business or transaction for which their
remaining assets constituted unreasonably small capital, intended to incur, or
believed that they would incur, debts beyond their ability to pay such debts as
they matured, or intended to hinder, delay or defraud their creditors, and that
the indebtedness was incurred for less than reasonably equivalent value, then
such court could, among other things, (i) void all or a portion of the
Guarantors' obligations to the holders of the Senior Notes, the effect of which
would be that the holders of the Senior Notes may not be repaid in full, and/or
(ii) subordinate the Guarantors' obligations to the holders of the Senior Notes
to other existing and future indebtedness of the Guarantors to a greater extent
than would otherwise be the case, the effect of which would be to entitle such
other creditors to be paid in full before any payment could be made on the
Senior Notes. Among other things, a legal challenge to the Guarantees on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Guarantors as a result of the issuance by the Company of the Senior Notes.
Absence of Public Market; Volatility; Restrictions on Transfers
The New Senior Notes are being offered only to the Holders of the Old
Senior Notes. The Old Senior Notes were issued on November 26, 1997 to
institutional investors and certain accredited investors and are eligible for
trading in the Private Offering, Resale and Trading through Automated Linkages
("PORTAL") Market of the National Association of Securities Dealers, Inc. a
screen-based automated market for trading of securities eligible for resale
under Rule 144A. To the extent that the Old Senior Notes are tendered and
accepted in the Exchange Offer, the trading market for the remaining untendered
Old Senior Notes could be adversely affected.
There is no existing market for the New Senior Notes and there can be
no assurance regarding the future development of a market for the New Senior
Notes, or the ability of the holders of the New Senior Notes, or the price at
which such holders may be able, to sell their New Senior Notes. If such a market
were to develop, the New Senior Notes could trade at prices that may be higher
or lower than the initial offering price of the Old Senior Notes. Prevailing
market prices from time to time will depend on many factors, including then
existing interest rates, the Company's operating results and the market for
similar securities. The Initial Purchasers have advised the Company that they
currently intend to make a market in the New Senior Notes. The Initial
Purchasers are not obligated to do so, however, and any market-making with
respect to the New Senior Notes may be discontinued at any time without notice.
Accordingly, even if a trading market for the New Senior Notes does develop,
there can be no assurance as to the liquidity of that market. The Company does
not intend to apply for listing or quotation of the New Senior Notes on any
securities exchange or stock market.
<PAGE>
THE TRANSACTIONS
Concurrently with the consummation of the Offering, the Company
consummated the Pretzel Contributions and completed the Refinancing. The Company
used the net proceeds of the offering of the Old Senior Notes to complete the
Pretzel Contributions and the Refinancing and to pay related expenses.
The Pretzel Contributions
H&M. On July 25, 1997, a subsidiary of MFH ("MFPC") acquired
substantially all of the assets of H&M for aggregate consideration of $13.8
million (excluding the assumption of certain liabilities), consisting of (i)
$5.8 million of cash, financed through an advance by MFH of $1.5 million and a
$4.3 million bank loan to MFPC, (ii) a $4.0 million principal amount bridge note
of MFPC and (iii) a $4.0 million principal amount subordinated note of MFH
retained by the sellers (such loan and notes, collectively, the "H&M Debt").
Upon consummation of the offering of the Old Senior Notes, the Company assumed
and repaid the H&M Debt and repaid the advance to MFH as part of the
Refinancing.
In connection with the acquisition of the business of H&M, MFPC entered
into franchise agreements and an area development agreement with Pretzel Time.
Upon the Offering, MFPC was merged with and into the Company, and the agreements
were assigned to the Company as a result. The franchise agreements provide for
the franchise by the Company from Pretzel Time of the Pretzel Time stores
previously franchised by H&M or subsequently franchised by the Company and the
payment by the Company to Pretzel Time of an annual franchise royalty equal to
7% of the annual sales by such stores, plus an advertising fee of 1% of weekly
sales. The franchise agreements also provide for the conversion within three
years of the Company's Hot Sam and Pretzel Oven stores to Pretzel Time
franchises on a royalty-free basis for the first five years following the date
of conversion. The area development agreement provides for the grant by Pretzel
Time to the Company of area development rights to open additional Pretzel Time
stores in a territory covering 16 states, predominantly in the western United
States, four western Canadian provinces and in Mexico. The additional stores may
be opened by the Company as the franchisee or by third parties as franchisees.
Under the area development agreement, the Company is obligated to pay to Pretzel
Time a $5,000 franchise fee per new location within the territory. Pretzel Time
is obligated under the area development agreement to pay to the Company an
annual royalty of up to 2% with respect to Pretzel Time franchises opened by
parties other than the Company within the territory.
Pretzel Time. On September 2, 1997, MFH acquired 56% of the shares of
common stock of Pretzel Time for an aggregate purchase price of $4.2 million,
$750,000 of which was paid to Pretzel Time and is being used for working capital
purposes, and the balance of which was paid to Pretzel Time's shareholders for
their shares. In connection with the acquisition, MFH extended a $500,000 loan
evidenced by a note to the founder of Pretzel Time. Upon consummation of the
Offering, MFH contributed to the Company its 56% interest in Pretzel Time and
the related $500,000 note. In addition, MFH assigned its rights to the Company,
and the Company assumed MFH's obligations, under the various agreements
described below. The note issued by the founder of Pretzel Time bears interest
at a rate of 10% per annum and is payable as to principal and interest in
monthly installments beginning in January 1998 by setoff of, and to the extent
of, the founder's bonus payments described below and any 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, the founder has remained an
employee of Pretzel Time and receives annual compensation of $200,000 in
connection therewith, and will receive a bonus based on Pretzel Time's net
income before non-cash items, such as depreciation and amortization. The Company
purchased an additional 4% of the shares of common stock of Pretzel Time from
the founder for $300,000 in cash on January 2, 1998. The founder continues to
own 40% of the common stock of Pretzel Time.
The Company is a party to a management agreement, pursuant to which the
Company is managing Pretzel Time's operations, in return for a management fee
based on Pretzel Time's net income before non-cash items, such as depreciation
and amortization. Pretzel Time, the Company and the founder of Pretzel Time also
entered into a shareholders agreement providing for representation by the
Company and the founder on Pretzel Time's Board of Directors, the right of the
founder to approve certain extraordinary transactions, and the grant by the
Company and the founder to each other of certain preemptive rights upon the
issuance of, and rights of first refusal with respect to the sale of, Pretzel
Time common stock.
<PAGE>
The Refinancing
Pursuant to the Refinancing, the Company repaid approximately $79.1
million aggregate principal amount of indebtedness and accrued but unpaid
interest of the Company, MFB and MFPC. Such indebtedness consisted of (i)
approximately $52.3 million principal amount of indebtedness and accrued but
unpaid interest of the Company incurred in connection with the formation of the
Company in September 1996, (ii) approximately $14.1 million principal amount of
indebtedness and accrued but unpaid interest of MFB incurred in connection with
the formation of MFB in September 1996 and (iii) approximately $12.7 million
principal amount and accrued but unpaid interest of the H&M Debt.
As part of the Refinancing, MFH converted to common equity of the
Company $4.6 million aggregate principal amount of indebtedness of the Company
and contributed to the Company all of the common equity of MFB after converting
$3.5 million face amount of preferred stock issued by MFB, together with accrued
but unpaid dividends of approximately $0.4 million, to common equity. Also as
part of the Refinancing, the Company paid a dividend to MFH in the amount of
approximately $1.1 million and repaid an advance of $1.5 million to MFH.
Approximately $1.1 million was used by MFH to repurchase a portion of the equity
of MFH owned by a shareholder other than Capricorn. After giving effect to such
contributions and to the return of capital described above, the aggregate amount
of Capricorn's current investment in the Company through MFH was more than $28
million. See ?Unaudited Pro Forma Condensed Consolidated Statement of
Operations,? ?Selected Historical Financial Data? and ?Use of Proceeds.?
<PAGE>
USE OF PROCEEDS
Neither the Company nor the Guarantor will receive any cash proceeds
pursuant to the Exchange Offer. In consideration for issuing the New Senior
Notes as contemplated in this Prospectus, the Company will receive the Old
Senior Notes in like principal amount, the terms of which are identical in all
material respects to the New Senior Notes except (i) that the New Senior Notes
have been registered under the Securities Act, (ii) for certain transfer
restrictions and registration rights relating to the Old Senior Notes and (iii)
that the New Senior Notes will not contain certain provisions relating to an
additional payment to be made to Holders of the Old Senior Notes under certain
circumstances relating to the timing of the Exchange Offer. The Old Senior Notes
surrendered in exchange for New Senior Notes will be retired and cancelled and
cannot be reissued. Accordingly, issuance of the New Senior Notes will not
result in any increase in the indebtedness of the Company.
The net proceeds received by the Company from the sale of the Old
Senior Notes, after deducting the underwriting discounts and commissions and
estimated expenses of the offering of the Old Notes, were approximately $94
million. Of this amount, approximately $50.2 million was used to pay debt of the
Company, $13.6 million was used to pay debt of the Guarantor, $12.3 million was
used to pay H&M debt, $3.0 million was used to pay accrued interest (including
prepayment penalties of $0.3 million) on debt being retired and approximately
$2.6 million was used to pay MFH. The remaining balance of $12.3 million has
been and will be used for general corporate purposes.
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of Mrs. Fields' Original Cookies, Inc. and subsidiaries at
January 3, 1998. This table should be read in conjunction with the historical
financial statements and related notes included elsewhere in this Registration
Statement. See ?Selected Historical Financial Data? and ?Unaudited Pro Forma
Condensed Consolidated Statement of Operations.?
<TABLE>
<CAPTION>
Mrs. Fields'
Original Cookies,
Inc. and
subsidiaries
At January 3, 1998
(Dollars in
thousands)
<S> <C>
Cash and Cash Equivalents................................................. $ 16,287
========
Credit Facility(1)........................................................ $ -
--------
Debt and Capital Lease Obligations, including current portions:
101/8% Series A Senior Notes due 2004............................ 100,000
Pretzel Time Debt................................................ 756
Mrs. Fields' Original Cookies, Inc. Capital Lease Obligations... 219
Pretzel Time Capital Lease Obligations........................... 106
--------
Total Debt and Capital Lease Obligations, including current portion.. 101,081
Mandatorily Redeemable Preferred Stock of Pretzel Time (2): 902
--------
Stockholder's Equity:
Common Stock (3)................................................. -
Additional Paid-in Capital....................................... 30,843
Accumulated Deficit.............................................. (78)
---------
Total Stockholder's Equity....................................... 30,765
---------
Total Capitalization...................................................... $132,748
=========
</TABLE>
- ----------------
(1) Under the Indenture, the Company will be permitted to have one or more
credit facilities pursuant to which it will be able to borrow up to a
maximum aggregate principal amount of $15.0 million on a secured basis.
The Company is in preliminary discussions with several prospective
lenders, including the lender under the Company's existing $3.0 million
revolving credit facility, to enter into such a credit facility with
borrowing availability of up to $15.0 million.
(2) Liquidation preference as of January 3, 1998 was $1.5 million.
(3) Less than $1,000.
<PAGE>
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Senior Notes
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Senior Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 12:00
Midnight., New York City time, on May 22, 1998; provided, however, that if the
Company in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal
amount of the Old Senior Notes is outstanding. This Prospectus, together with
the Letter of Transmittal, is first being sent on or about April 24, 1998 to all
Holders of Old Senior Notes known to the Company. The Company's obligation to
accept Old Senior Notes for exchange pursuant to the Exchange Offer is subject
to certain conditions as set forth under "-Certain Conditions to the Exchange
Offer" below.
The Company expressly reserves the right, at any time or from time to
time, to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Senior Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Senior Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Senior Notes not accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
Old Senior Notes tendered in the Exchange Offer must be in
denominations of principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Senior Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
of the Exchange Offer specified below under "-Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Senior Notes as
promptly as practicable, such notice in the case of any extension to be issued
by means of a press release or other public announcement no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
Procedures for Tendering Old Senior Notes
The tender to the Company of Old Senior Notes by a Holder thereof as
set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering Holder and the Company upon the terms
and subject to the conditions set forth in the Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Senior Notes for exchange pursuant to the Exchange Offer
must transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal or (in the
case of a book-entry transfer) an Agent's Message in lieu of such Letter of
Transmittal, to The Bank of New York (the "Exchange Agent") at the address set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Senior Notes must be received by
the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Senior Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date with the Letter of Transmittal or an
Agent's Message in lieu of such Letter of Transmittal, or (iii) the Holder must
comply with the guaranteed delivery procedures described below. The term
"Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility to and received by the Exchange Agent and forming a part of a Book
Entry Confirmation, which states that the Book Entry Transfer Facility has
received an express acknowledgement from the tendering participant, which
acknowledgement states that such participant has received and agrees to be bound
by the Letter of Transmittal and that the Company may enforce such Letter of
Transmittal against such participant. THE METHOD OF DELIVERY OF OLD SENIOR
NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED
THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR OLD SENIOR NOTES SHOULD BE SENT TO THE COMPANY.
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Senior Notes surrendered for
exchange pursuant thereto are tendered (i) by a Holder of the Old Senior Notes
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Senior Notes are registered in the name of a person other
than a signer of the Letter of Transmittal, the Old Senior Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered national
securities exchange with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Senior Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Senior Note not properly tendered or to not accept
any particular Old Senior Note which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange Offer
as to any particular Old Senior Note either before or after the Expiration Date
(including the right to waive the ineligibility of any Holder who seeks to
tender Old Senior Notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Old Senior Notes
either before or after the Expiration Date (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parities. Unless waived, any defects or irregularities in connection with
tenders of Old Senior Notes for exchange must be cured within such reasonable
period of time as the Company shall determine. Neither the Company, the Exchange
Agent nor any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Old Senior Notes for
exchange, nor shall any of them incur any liability for failure to give such
notification.
If the Letter of Transmittal is signed by a person or persons other
than the registered Holder or Holders of Old Senior Notes, such Old Senior Notes
must be endorsed or accompanied by powers of attorney, in either case signed
exactly as the name or names of the registered Holder or Holders that appear on
the Old Senior Notes.
If the Letter of Transmittal or any Old Senior Notes or powers of
attorneys are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among
other things, the New Senior Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the person receiving such
New Senior Notes, whether or not such person is the Holder and that neither the
Holder nor such other person has any arrangement or understanding with any
person to participate in the distribution of the New Senior Notes. If any Holder
or any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company, is engaged in or intends to engage in or has an
arrangement or understanding with any person to participate in a distribution of
such New Senior Notes to be acquired pursuant to the Exchange Offer, such Holder
or any such other person (i) could not rely on the applicable interpretations of
the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Senior Notes for its
own account in exchange for Old Senior Notes, where such Old Senior Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Senior Notes. See "Plan of Distribution."
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
<PAGE>
Acceptance of Old Senior Notes for Exchange; Delivery of New Senior Notes
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Old
Senior Notes properly tendered and will issue the New Senior Notes promptly
after acceptance of the Old Senior Notes. See "-Certain Conditions to the
Exchange Offer" below. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted properly tendered Old Senior Notes for exchange when, as
and if the Company has given oral (promptly confirmed in writing) or written
notice thereof to the Exchange Agent.
For each Old Senior Note accepted for exchange, the Holder of such Old
Senior Note will receive a New Senior Note having a principal amount equal to
that of the surrendered Old Senior Note. Accordingly, registered Holders of New
Senior Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid or, if no interest has
been paid, from November 26, 1997. Old Senior Notes accepted for exchange will
cease to accrue interest from and after the date of consummation of the Exchange
Offer. Pursuant to the Registration Rights Agreement, certain additional
payments are required to be made to Holders of Old Senior Notes under certain
circumstances relating to the timing of the Exchange Offer.
In all cases, issuance of New Senior Notes for Old Senior Notes that
are accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Old Senior
Notes or a timely Book-Entry Confirmation of such Old Senior Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility, (ii) a properly
completed and duly executed Letter of Transmittal or an Agent's Message in lieu
thereof and (iii) all other required documents. If any tendered Old Senior Notes
are not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Senior Notes are submitted for a greater principal
amount than the Holder desires to exchange, such unaccepted or non-exchanged Old
Senior Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Senior Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such non-exchanged Old Senior Notes will
be credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Book-Entry Transfers
The Exchange Agent will make a request to establish an account with
respect to the Old Senior Notes at the Book-Entry Transfer Facility for purposes
of the Exchange Offer within two business days after the date of this
Prospectus. Any financial institution that is a participant in the Book-Entry
Transfer Facility systems must make book-entry delivery of Old Senior Notes by
causing the Book-Entry Transfer Facility to transfer such Old Senior Notes in
the Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. Such participant should transmit its acceptance to the
Book-Entry Transfer Facility on or prior to the Expiration Date or comply with
the guaranteed delivery procedures described below. The Book-Entry Transfer
Facility will verify such acceptance, execute a book-entry transfer of the
tendered Old Senior Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility and then send to the Exchange Agent confirmation of such
book-entry transfer, including an Agent's Message confirming that the Book Entry
Transfer Facility has received an express acknowledgement from such participant
that such participant has received and agrees to be bound by the Letter of
Transmittal and that the Company may enforce the Letter of Transmittal against
such participant. However, although delivery of Old Senior Notes may be effected
through book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof or an Agent's Message in lieu thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "?Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
Guaranteed Delivery Procedures
If a Holder of the Old Senior Notes desires to tender such Old Senior
Notes and the Old Senior Notes are not immediately available, or time will not
permit such Holder's Old Senior Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if (i)
the tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent received from such Eligible Institution a Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the Holder of the Old Senior Notes and the amount of Old
Senior Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
<PAGE>
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Senior Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, together with a
properly completed and duly executed appropriate Letter of Transmittal (or
facsimile thereof or Agent's Message in lieu thereof) with any required
signature guarantees and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Senior Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
together with a properly completed and duly executed appropriate Letter of
Transmittal (or facsimile thereof or Agent's Message in lieu thereof) with any
required signature guarantees and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
Withdrawal Rights
Tenders of Old Senior Notes may be withdrawn at any time prior to 12:00
Midnight , New York City time, on the Expiration Date. For a withdrawal to be
effective, a written notice of withdrawal must be received by the Exchange Agent
at one of the addresses set forth below under "-Exchange Agent." Any such notice
of withdrawal must (i) specify the name of the person having tendered the Old
Senior Notes to be withdrawn, (ii) identify the Older Senior Notes to be
withdrawn (including the principal amount of such Old Senior Notes), and (iii)
(where certificates for Old Senior Notes have been transmitted) specify the name
in which such Old Senior Notes are registered, if different from that of the
withdrawing Holder. If certificates for Old Senior Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Senior Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of theaccount at the Book-Entry Transfer Facility to
be credited with the withdrawn Old Senior Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company whose determination shall be final and binding on all parties. Any
Old Senior Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Senior Notes which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or, in the case of
Old Senior Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above such Old Senior Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Senior Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Senior Notes may be retendered by
following one of the procedures described under "-Procedures for Tendering Old
Senior Notes" above at any time on or prior to 12:00 Midnight, New York City
time, on the Expiration Date.
Certain Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Senior Notes in
exchange for, any Old Senior Notes and may terminate or amend the Exchange
Offer, if at any time before the acceptance of such Old Senior Notes
(i) any federal law, statute, rule or regulation shall have
been adopted or enacted which, in the judgment of the Company,
would reasonably be expected to impair its ability to proceed
with the Exchange Offer;
(ii) if any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under
the Trust Indenture Act of 1939, as amended; or
(iii) there shall occur a change in the current interpretation
by the staff of the Commission which permits the New Senior
Notes issued pursuant to the Exchange Offer in exchange for
Old Senior Notes to be offered for resale, resold and
otherwise transferred by Holders thereof (other than
broker-dealers and any such Holder which is an "affiliate of
the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided
that such New Senior Notes are acquired in the ordinary course
of such Holders' business and such Holders have no arrangement
or understanding with any person to participate in the
distribution of such New Senior Notes.
<PAGE>
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
Exchange Agent
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
Main Delivery to: The Bank of New York,
As Exchange Agent
By Mail, By Hand and Overnight Courier: By Facsimile:
(For Eligible Institutions Only)
The Bank of New York (212) 815-6339
101 Barclay Street
New York, New York 10286 Confirm by telephone:
(212) 815-2742
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER
THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
Fees and Expenses
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer except for reimbursement of mailing
expenses.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $200,000.
Transfer Taxes
Holders who tender their Old Senior Notes for exchange will not be
obligated to pay transfer taxes in connection therewith. If, however, New Senior
Notes are to be delivered to, or are to be issued in the name of, any person
other than the registered holder of the Old Senior Notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of Old Senior
Notes in connection with the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering Holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering Holder.
Consequences of Failure to Exchange Old Senior Notes
Issuance of the New Senior Notes in exchange for the Old Senior Notes
pursuant to the Exchange Offer will be made following the prior satisfaction, or
waiver, of the conditions set forth in "-Certain Conditions to the Exchange
Offer" and only after a timely receipt by the Exchange Agent of such Old Senior
Notes, a properly completed and duly executed Letter of Transmittal in respect
of such Old Senior Notes and all other required documents. Therefore, Holders of
Old Senior Notes desiring to tender such Old Senior Notes in exchange for New
Senior Notes should allow sufficient time to ensure timely delivery. Neither the
Exchange Agent nor the Company is under any duty to give notification of defects
or irregularities with respect to the tenders of Old Senior Notes for exchange.
Old Senior Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to the
provisions of the Indenture regarding transfer and exchange of the Old Senior
Notes, the existing restrictions upon transfer thereof set forth in the legend
on the Old Senior Notes and in the Offering Circular relating to the Old Senior
Notes. Except in certain limited circumstances with respect to certain types of
Holders of Old Senior Notes, the Company will have no further obligation to
provide for the registration under the Securities Act of such Old Senior Notes.
See "Description of the Notes-Exchange Offer; Registration Rights." In general,
Old Senior Notes, unless registered under the Securities Act, may not be offered
or sold except pursuant to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws. The Company does
not currently anticipate that it will take any action to register the Old Senior
Notes under the Securities Act or blue sky laws.
<PAGE>
To the extent that Old Senior Notes are tendered and accepted in the
Exchange Offer, a Holder's ability to sell untendered Old Senior Notes could be
adversely affected.
Upon consummation of the Exchange Offer, Holders of the Old Senior
Notes will not be entitled to any increase in the interest rate thereon or any
further registration rights under the Registration Rights Agreement, except
under limited circumstances. See "Description of the Notes-Exchange Offer;
Registration Rights."
Holders of the New Senior Notes and any Old Senior Notes which remain
outstanding after consummation of the Exchange Offer will vote together as a
single class for purposes of determining whether Holders of the requisite
percentage thereof have taken certain actions or exercised certain rights under
the Indenture.
Consequences of Exchanging Old Senior Notes
Based on interpretations by the staff of the Commission, as set forth
in no-action letters issued to third parties, the Company believes that New
Senior Notes issued pursuant to the Exchange Offer in exchange for Old Senior
Notes may be offered for resale, resold or otherwise transferred by Holders
thereof (other than any Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Senior Notes are acquired in the ordinary course of such
Holder's business and such Holder, other than broker-dealers, has no arrangement
with any person to participate in the distribution of such New Senior Notes.
However, the Commission has not considered the Exchange Offer in the context of
a no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in such other circumstances. Each Holder, other than a broker-dealer, must at
the request of the Company furnish a written representation that it is not an
affiliate of the Company, is not engaged in, and does not intend to engage in, a
distribution of such New Senior Notes and has no arrangement or understanding to
participate in a distribution of New Senior Notes, and that it is acquiring the
New Senior Notes in its ordinary course of business. Each broker-dealer that
receives New Senior Notes for its own account in exchange for Old Senior Notes
must acknowledge that such Old Senior Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities and that it
will deliver a prospectus in connection with any resale of such New Senior
Notes. See "Plan of Distribution." In addition, to comply with the securities
laws of certain jurisdictions, it may be necessary to qualify for sale or
register thereunder the New Senior Notes prior to offering or selling such New
Senior Notes. The Company has agreed, pursuant to the Registration Rights
Agreement, subject to certain limitations specified therein, prior to any public
offering of Transfer Restricted Securities (as defined herein) to register or
qualify the Transfer Restricted Securities for offer or sale under the
securities laws of such jurisdictions as any Holder requests. Unless a Holder so
requests, the Company does not intend to register or qualify the sale of the New
Senior Notes in any such jurisdiction.
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data for
Mrs. Fields' Original Cookies, Inc. and subsidiaries ("Mrs. Fields") and its
predecessors, Mrs. Fields Inc. and subsidiaries ("Mrs. Fields Inc."), The
Original Cookie Company, Incorporated ("Original Cookie") and the Carved-out
Portion (pretzel business) of Hot Sam Company, Inc. ("Hot Sam") (collectively,
the ?Predecessors?), as of the dates and for the periods indicated. The results
of operations for the periods December 31, 1995 through September 17, 1996 and
September 18, 1996 through December 28, 1996 are not indicative of the results
for the full fiscal year. Such selected historical financial data has been
derived from the audited financial statements of Mrs. Fields and its
Predecessors. Due to the acquisitions of the 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 thereto, contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
The Original Cookie Company,
Incorporated and the Carved-out
Mrs. Fields Inc. and Subsidiaries(1) Portion of Hot Sam Company, Inc.(1)
------------------------------------ -----------------------------------
DECEMBER DECEMBER
FISCAL YEARS ENDED (2) 31, 1995 FISCAL YEARS ENDED (2) 31, 1995
---------------------------- ---------------------------
THROUGH THROUGH
DECEMBER DECEMBER DECEMBER SEPTEMBER DECEMBER DECEMBER DECEMBER SEPTEMBER
31, 1993 31, 1994 30, 1995 17, 1996 31, 1993 31, 1994 30, 1995 17, 1996
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Statement of Operations Data:
Net store sales ................. $98,601 $87,863 $59,957 $29,674 $87,956 $89,648 $85,581 $ 54,366
Net store contribution (3)....... 17,005 8,083 6,591 3,796 16,081 13,912 13,057 6,002
Franchising, licensing and other
revenue,net..................... 4,303 7,241 5,993 3,786 - - - -
General and administrative
expenses . 17,736 16,379 12,612 7,984 8,536 9,583 8,425 7,538
Income (loss) from operations.... (1,251) (1,691) (3,526) (1,742) 4,004 (750) 2.435 (2.772)
Net loss......................... (2,243) (5,320) (2,368) (2,304) (333) (5,355) (2,096) (5,645)
Other Data:
Cash flows from operating 5,839 1,728 (4,478) (447) (1,041) 3,699 4,451 (378)
activities .
Cash flows from investing (2,962) (2,030) 2,526 (385) (9,019) (3,779) (568) (1,200)
activities .
Cash flows from financing (2,496) (732) (185) (58) 7,052 3,134 (4,599) (1,380)
activities .
Interest expense................ 1,088 2,155 51 80 4,172 4,381 4,268 2,828
Total depreciation and 4,728 4,415 3,525 1,911 6,668 7,423 6,902 4,937
amortization.......................
Capital expenditures............ 3,856 4,895 4,146 1,054 8,791 3,779 568 1,200
EBITDA (4)...................... 3,477 2,724 (1) 169 10,672 6,673 9,337 2,165
Store contribution for stores
in the process of being
closed or Franchised (3).... $ 6,424 $ 319 $ (802) $ (695) $ 933 $ (542) $(1,542) $ (1,751)
Ratio of earnings to fixed
charges (5).................... - - - - - - - -
Balance Sheet Data:
Working capital (deficit)..... $ (2,673) $(1,067)$ (3,114) $(21,704) $(2,023)$ (46) $ 128 $ (3,640)
Total assets.................. 36,838 30,128 23,033 19,144 75,777 74,490 66,282 59,024
Total debt and capital lease
obligations........................ 87,549 22,850 21,226 21,224 33,822 36,956 32,357 30,977
Total stockholders' equity
(deficit).......................... (66,645) (25,419) (28,017) (30,318) 30,038 24,684 22,588 (8,930)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Mrs. Fields (1)
------------------------
SEPTEMBER FISCAL
18, 1996 YEAR
THROUGH ENDED
DECEMBER JANUARY
28, 1996(2) 3, 1998(2)
---------- ----------
<S> <C> <C>
Statement of Operations Data: (Dollars in thousands)
Net store sales ................ $ 39,890 $ 123,987
Net store contribution (3)...... 9,482 25,087
Franchising, licensing and other
revenue, net.................. 1,492 6,520
General and administrative
expenses ..................... 4,035 16,730
Income from operations.......... 5,649 8,415
Net income (loss)............... 1,961 (974)
Other Data:
Cash flows from operating
activities ................... 7,609 919
Cash flows from investing
activities . (21,131) (15,505)
Cash flows from financing
activities . 20,231 24,164
Interest expense, net........... 1,793 7,584
Total depreciation and 2,344 10,403
amortization..................
Capital expenditures............ 1,638 4,678
EBITDA (4)...................... 7,993 18,818
Store contribution for stores
in the process of being
closed or franchised (3).... $ 513 $ (1,798)
Ratio of earnings to fixed
charges (5).................... 2.92x -
Balance Sheet Data:
Working capital (deficit)...... $(2,889) $ 13,133
Total assets................... 110,055 149,684
Mandatorily redeemable
cumulative preferred
stock of subsidiaries...... 3,597 902
Total debt and capital lease
obligations.................... 67,563 101,081
Total stockholder's equity .... 16,961 30,765
</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. Setting out Store contribution for stores in the process of being
closed or franchised as a separate caption is not in accordance with
generally accepted accounting principles. Also, store contribution may not
be comparable to similarly titled measures reported by other companies.
(4) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, minority interest, preferred stock accretion and dividends of
subsidiaries and other income (expense). EBITDA is not intended to
represent cash flows from operations as defined by generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of operating performance or to cash flows as a
measure of liquidity. EBITDA has been included herein because it is one of
the indicators upon which Mrs. Fields assesses its financial performance
and its capacity to service its debt (see footnote 5). EBITDA may not be
comparable to similarly titled measures reported by other companies.
<TABLE>
<CAPTION>
The Original Cookie Company,
Incorporated and the Carved-out
Mrs. Fields Inc. and Subsidiaries Portion of Hot Sam Company, Inc.
------------------------------------ -----------------------------------
DECEMBER DECEMBER
FISCAL YEARS ENDED 31, 1995 FISCAL YEARS ENDED 31, 1995
---------------------------- ---------------------------
THROUGH THROUGH
DECEMBER DECEMBER DECEMBER SEPTEMBER DECEMBER DECEMBER DECEMBER SEPTEMBER
31, 1993 31, 1994 30, 1995 17, 1996 31, 1993 31, 1994 30, 1995 17, 1996
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations... $(1,251) $(1,691) $(3,526) $(1,742) $ 4,004 $ (750) $ 2,435 $(2,772)
Add:
Depreciation and amortization... 4,728 4,415 3,525 1,911 6,668 7,423 6,902 4,937
-------------------- -------- ----- ------- ------- -------- --------
EBITDA.......................... $ 3,477 $ 2,724 $ (11) $ 169 $10,672 $ 6,673 $ 9,337 $ 2,165
======== ======== ========== ======== ======= ======== ========= =========
</TABLE>
(see notes continued on page 39)
<PAGE>
<TABLE>
<CAPTION>
Mrs. Fields(1)
-----------------------
SEPTEMBER FISCAL
18, 1996 YEAR
THROUGH ENDED
DECEMBER JANUARY
28, 1996(2) 3, 1998(2)
---------- ----------
(dollars in thousands)
<S> <C> <C>
Income from operations.......... $ 5,649 $ 8,415
Add:
Depreciation and amortization... 2,344 10,403
------- -------
EBITDA.......................... $ 7,993 $ 18,818
======= ========
</TABLE>
(5) 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 years 1993, 1994 and 1995 and the period
December 31, 1995 through September 17, 1996, Mrs. Fields, Inc. and
subsidiaries' earnings were insufficient to cover fixed charges by
$2,028,000, $5,129,000, $2,127,000 and $2,099,000, respectively. For fiscal
years 1993, 1994 and 1995 and the period December 31, 1995 through
September 17, 1996, The Original Cookie Company, Incorporated and the
Carved-out Portion of Hot Sam Company, Inc's. (combined) earnings were
insufficient to cover fixed charges by $120,000, $5,131,000, $1,833,000 and
$5,645,000, respectively. For fiscal year ended January 3, 1998, Mrs.
Fields earnings were insufficient to cover fixed charged by $319,000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In 1996, an investor group led by Capricorn Investors II, L.P.
("Capricorn") formed Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields'
Brand, Inc.(collectively, "Mrs. Fields" or the "Company") as subsidiaries of
Mrs. Fields' Holding Company, Inc. ("MFH").
On September 17, 1996, the Company initiated operations when it purchased
substantially all of the assets and assumed certain liabilities of Mrs. Fields
Inc. and subsidiaries, The Original Cookie Company, Incorporated ("Original
Cookie"), and the pretzel business of Hot Sam Company, Inc. ("Hot Sam").
The Company set out to increase sales and profitability of its cookie and
pretzel operations by implementing key elements of its business plan coupled
with strategic acquisitions. A key element of the business plan is closing or
franchising certain Company-owned stores that do not meet specific financial and
geographical criteria established by management. Implementation of this element
of the business plan is expected to result in enhanced operating margins as
these stores are franchised or closed. Stores not planned for franchise or
closure are referred to as "core" stores. Core stores will continue to be
operated by the Company into the foreseeable future. As a result of converting
certain stores to franchises, royalty revenues are expected to increase and
general and administrative expenses associated with operating those stores are
expected to be eliminated.
The Company is pursuing growth in both its cookie and pretzel
businesses through strategic acquisitions. Management expects that significant
operating synergies, expense leveraging and geographic market share can be
achieved through targeted acquisitions. On July 25, 1997, a subsidiary of MFH,
Mrs. Fields' Pretzel Concepts, Inc. ("MFPC") acquired substantially all of the
assets and assumed certain liabilities of H&M Concepts Ltd. Co. ("H&M"), the
largest franchisee of Pretzel Time, Inc.("Pretzel Time"). On September 2, 1997,
MFH acquired 56% of the common stock of Pretzel Time, the franchisor of the
Pretzel Time concept.
On November 26, 1997, concurrent with the offering of the Old Senior
Notes (the "Offering"), the Company received as a contribution from MFH, the
business of H&M and 56% of the shares of common stock of Pretzel Time (the
"Pretzel Contributions"). On that same date the Company received as a
contribution from MFH, all of the common stock of The Mrs. Fields' Brand, Inc.
On January 2, 1998, the Company acquired an additional 4% of Pretzel Time common
stock.
Management believes that the Company is now the largest fresh baked
cookie retailer and the second largest fresh baked, sweet dough pretzel retailer
in the United States. Management expects to achieve significant overhead savings
in connection with these acquisitions which should further improve the Company's
operating results.
Management believes that the Company's 1997 operating results reflect
the successful implementation of its business strategy. Comparable core store
sales in 1997 have increased 0.8% over 1996. Additionally, core store
contribution margins and franchising revenues improved during the same period.
These improvements coupled with overhead savings resulting from the
aforementioned acquisitions have resulted in 1997 pro forma adjusted EBITDA of
$23.1 million compared to historical adjusted EBITDA of $14.6 million for 1996.
Year 2000
Management has assessed the Year 2000 issue and has determined that all
financial software, corporate networks, the AS400 system and all other corporate
systems are Year 2000 compliant. The systems used for collecting sales data from
retail locations are not Year 2000 compliant. It has been determined that the
sales collection system will be replaced. This project is currently underway
with initial roll-out into retail locations beginning in August 1998 with
completion to all locations by August 1999. The estimated cost of the project,
which is being completed with the assistance of outside consultants, is
$300,000.
<PAGE>
Results of Operations of Mrs. Fields and its Predecessors
The following table sets forth, for the periods indicated, certain
information relating to the operations of Mrs. Fields and its Predecessors
expressed in thousands of dollars and percentage changes from period to period.
Annual data in the table reflects the combined results of the Predecessors for
fiscal year 1995, the combined results of the Predecessors (for the period
December 31, 1995 through September 17, 1996) and Mrs. Fields (for the period
September 18, 1996 through December 28, 1996) and the consolidated results of
Mrs. Fields for fiscal year 1997. In order for the presentations to be
comparable, certain historical financial statement information for the
Predecessors has been reclassified to be consistent with the Mrs. Fields
historical financial statement presentation. The most significant
reclassifications relate to segregating the statement of operations data into a
core stores/stores in the process of being closed or franchised format.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------------
% OF % OF
CHG CHG
DECEMBER DECEMBER FROM JANUARY FROM
30, 1995 28, 1996 1995 3, 1998 1996
-------- -------- TO 1996 ---------- TO 1997
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net store sales........ $145,537 $123,930 (14.8%) $123,987 -%
Franchising revenues... 1,870 2,414 29.1 3,574 48.1
Licensing revenues..... 2,031 1,451 (28.6) 2,028 39.8
Other revenue, net..... 2,092 1,413 (32.5) 918 (35.0)
------ ------- -------
Total revenues. 151,530 129,208 (14.7) 130,507 1.0
------- ------- -------
Operating Costs and Expenses:
Selling and store 84,003 69,209 (17.6) 66,832 (3.4)
occupancy costs......
Food cost of sales..... 33,369 29,115 (12.7) 28,127 (3.4)
General and 21,037 19,557 (7.0) 16,730 (14.5)
administrative expenses.
Depreciation and 10,427 9,192 (11.8) 10,403 13.2
------ ------ ------
Total operating costs
and expenses............... 148,836 127,073 (14.6) 122,092 (3.9)
------- ------- -------
Interest and other
expenses, net....... 2,869 4,701 63.9 7,952 69.2
Net loss..............$ (4,464)$ (5,988) 34.1% $ (974) (83.7%)
- -------------------------------------------------------------------------------
Other Data:
Core stores:
Net store sales........... $ 93,775 $ 93,235 (0.6%) $104,316 11.9%
------ ------ --------
Operating costs and expenses:
Selling and store
occupancy costs........ 44,501 44,963 1.0 50,858 13.1
Food cost of sales........ 21,703 22,274 2.6 22,677 1.8
Depreciation and
amortization............ 5,579 4,784 (14.2) 3,896 (18.6)
------ ------ -------
Total operating costs
and expenses.............. 71,783 72,021 0.3 77,431 7.5
------ ------ -------
Core stores contribution $ 21,992 $21,214 (3.5) $ 26,885 26.7
====== ====== =======
Stores in the process of
being closed or franchised:
Net store sales........... $ 51,762 $30,695 (40.7) $19,671 (35.9)
------- ------ ------
Operating costs and expenses:
Selling and store occupancy
costs, food cost of sales
and depreciation and
amortization......... 54,106 32,628 (39.7) 21,469 (34.2)
------ ------ ------
Stores in the process of
being closed or
franchised contribution.... $ (2,344) $(1,933) (17.5) $(1,798) (7.0)
======= ======= =======
EBITDA........................ $ 9,336 $ 10,327 10.6% $ 18,818 82.2%
</TABLE>
<PAGE>
53 Weeks Ended January 3, 1998 Compared to the 52 Weeks Ended December 28, 1996
(comprised of the pre-acquisition period of December 31, 1995 through September
17, 1996 and the post-acquisition period of September 18, 1996 through December
28, 1996)
Company-owned and Franchised or Licensed Store Activity
.........As of January 3, 1998, there were 481 Company-owned stores and 553
franchised or licensed stores in operation. The store activity for the 52 weeks
ended December 28, 1996 and the 53 weeks ended January 3, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Company- Franchised Company- Franchised
Owned or Licensed Owned or Licensed
Stores open as of the beginning of the fiscal year 540 415 482 418
.........Stores opened (including relocations) 5 118 3 76
.........Stores acquired through acquisition - - 83 139
.........Stores closed (including relocations) (39) (122) (10) (87)
.........Non-core (exit plan) stores closed
(September 18, 1996 forward) (17) - (70) -
.........Stores sold to franchisees (9) 9 (3) 3
.........Non-core (exit plan) stores franchised
(September 18, 1996 forward) (3) 3 (9) 9
.........Stores acquired from franchisees 5 (5) 5 (5)
----- ------ ------ ------
Stores open as of the end of the fiscal year 482 418 481 553
==== ====== ====== ======
</TABLE>
.........The activity reflected above resulted in 26,572 and 25,520
Company-owned equivalent store weeks and 21,658 and 25,705 franchisee/licensee
equivalent store weeks during the 52 weeks ended December 28, 1996 and the 53
weeks ended January 3, 1998, respectively.
Revenues
.........Net store Sales. Net store sales in $57,000, or lesser than
1.0% from $123,930,000 to $123,987,000 for the 53 weeks ended January 3,
1998 compared to the 52 weeks ended December 28, 1996.
......... Net store sales from core stores increased $11,081,000, or 11.9%,
from $93,235,000 to $104,316,000 for the 53 weeks ended January 3, 1998 compared
to the 52 weeks ended December 28, 1996. The increase in net store sales from
core stores was primarily attributable to the operation of 69 Pretzel Time core
stores obtained in connection with the Pretzel Acquisitions in July 1997 and an
increase in average transaction amounts resulting from the introduction of
product line extensions and aggressive marketing initiatives, offset in part by
declining transaction counts in certain concepts. Also, three additional core
stores were opened during the 53 weeks ended January 3, 1998 compared to the 52
weeks ended December 28, 1996.
.........Net store sales from stores in the process of being closed or
franchised decreased $11,024,000, or 35.9%, from $30,695,000 to $19,671,000 for
the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28,
1996. This decrease results from the partial year effect of closing 80 stores
and franchising 12 stores during fiscal 1997 and the full year effect of closing
56 stores and franchising 12 stores during fiscal year 1996.
.........Franchising Revenues. Franchising revenues increased $1,160,000,
or 48.1%, from $2,414,000 to $3,574,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. The increase in franchising
revenues was primarily attributable to royalties earned from Pretzel Time
franchised stores obtained in connection with the Pretzel Acquisitions coupled
with 5 new franchise openings in 1997 and the full year effect of 5 new
franchise openings in fiscal year 1996.
.........Licensing Revenues. Licensing revenues increased $577,000, or
39.8%, from $1,451,000 to $2,028,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. The increase in licensing
revenues is primarily attributable to licensing fees earned on new license
agreements entered into during the 53 weeks ended January 3, 1998, and increased
royalties received from existing licensees.
<PAGE>
.........Other Revenue, net. Other revenue, net, decreased $495,000, or
35.0%, from $1,413,000 to $918,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. The decrease in other revenue,
net, is primarily attributable to a favorable adjustment resulting from the
Company re-negotiating a contract with one of its vendors during the 52 weeks
ended December 28, 1996 that did not recur during the 53 weeks ended January 3,
1998.
.........Total Revenues. Total revenue increased by $1,299,000, or 1.0%,
from $129,208,000 to $130,507,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996, for the reasons discussed
above.
Operating Costs and Expenses
.........Selling and Store Occupancy Costs. Total selling and store
occupancy costs decreased $2,377,000, or 3.4%, from $69,209,000 to $66,832,000
for the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December
28, 1996.
......... Selling and store occupancy costs for core stores increased by
$5,895,000, or 13.1%, from $44,963,000 to $50,858,000 for the 53 weeks ended
January 3, 1998 compared to the 52 weeks ended December 28, 1996. Within this
overall increase, selling expenses increased by $3,759,000, or 14.7%, from
$25,650,000 to $29,409,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996. The increase in selling expenses was
primarily attributable to an increase in the minimum wage during the third
quarter of 1996 from $4.15 to $4.75 an hour and an increase in labor hours to
support the increase in sales. Store occupancy costs increased $2,136,000, or
11.1%, from $19,313,000 to $21,449,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. The increase in store
occupancy costs was primarily attributable to the addition of 69 Pretzel Time
core stores in July 1997, and the opening of three core stores during the 53
weeks ended January 3, 1998 coupled with lease renewal increases.
.........Selling and store occupancy costs for stores in the process of
being closed or franchised decreased $8,272,000, or 34.1%, from $24,246,000 to
$15,974,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996. This decrease is primarily the result of closing 80
stores and franchising 12 stores during fiscal year 1997 and the full year
effect of closing 56 stores and franchising 12 stores during fiscal year 1996.
.........Food Cost of Sales. Total food cost of sales decreased $988,000 or
3.4% from $29,115,000 to $28,127,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996.
.........Food cost of sales for core stores increased $403,000, or 1.8%,
from $22,274,000 to $22,677,000 for the 53 weeks ended January 3, 1998. This
increase is primarily the result of the addition of 69 Pretzel Time core stores
in July 1997 (which stores have a lower food cost of sales than cookie stores,
offset by an aggressive product waste control program which was uniformly
applied to all concepts early in the year. Additionally, the Company
re-negotiated certain vendor contracts to capitalize on the Company's economies
of scale.
.........Food cost of sales for stores in the process of being closed or
franchised decreased $1,391,000, or 20.3%, from $6,841,000 to $5,450,000 for the
53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
This decrease is primarily the result of closing 80 stores and franchising 12
stores during fiscal year 1997 and the full year effect of closing 56 stores and
franchising 12 stores during fiscal year 1996.
.........General and Administrative Expenses. General and administrative
expenses decreased $2,827,000, or 14.5%, from $19,557,000 to $16,730,000 for the
53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
The decrease in general and administrative expenses was primarily attributable
to the cost savings achieved by combining the operations of Mrs. Fields Inc. and
subsidiaries, Original Cookie and Hot Sam and Pretzel Time which resulted in:
(i) reduced headcount with corresponding decreases in administrative salaries
and benefits; (ii) decreased professional service fees, including legal and
accounting services, and; (iii) decreased corporate office expenditures,
including general insurance, repairs and maintenance and utilities as a direct
result of closing the Original Cookie and Hot Sam headquarters in Cleveland,
Ohio, the Pretzel Time headquarters in Harrisburgh, Pennsylvania and the H&M
headquarters in Boise, Idaho.
<PAGE>
.........Depreciation and Amortization Expense. Total depreciation and
amortization expense increased by $1,211,000, or 13.2%, from $9,192,000 to
$10,403,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996.
.........Depreciation and amortization expense for core stores decreased
$888,000, or 18.6%, from $4,784,000 to $3,896,000 for the 53 weeks ended January
3, 1998 compared to the 52 weeks ended December 28, 1996. The decrease in
depreciation and amortization expense was primarily attributable to the Company
recording the acquired assets of Mrs. Fields Inc. and subsidiaries, Original
Cookie and Hot Sam at their fair values at the time of purchase on September 17,
1996, resulting in an overall reduction to the store asset base and the
corresponding depreciation. This decrease is partially offset by additional
depreciation expense resulting from the addition of 69 Pretzel Time core stores
in July 1997 and three newly opened core stores in fiscal year 1997.
.........Total Operating Costs and Expenses. Total operating costs and
expenses decreased by $4,981,000, or 3.9%, from $127,073,000 to $122,092,000 for
the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28,
1996, for the reasons discussed above.
.........Interest and Other Expenses, net. Interest and other expenses,
net, increased $3,251,000, or 69.2%, from $4,701,000 to $7,952,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
This increase is primarily attributable to an increase in interest expense as a
result of the purchase of the assets of Mrs. Fields Inc. and subsidiaries,
Original Cookie and Hot Sam on September 17, 1996.
.........Net Loss. The net loss decreased by $4,917,000, or 83.7%, from
$5,988,000 to $974,000 for the 53 weeks ended January 3, 1998 compared to the 52
weeks ended December 28, 1996. The net loss equaled 0.7% of total revenue during
the 53 weeks ended January 3, 1998 compared to 4.6% of total revenue during the
52 weeks ended December 28, 1996. The decrease in net loss is primarily due to
cost savings achieved by combining the operations of Mrs. Fields Inc. and
subsidiaries, Original Cookie and Hot Sam, cost savings associated with the
Pretzel Acquisitions and improved store operations.
.........Contribution from Core Stores. The contribution from core stores
increased by $5,671,000, or 26.7%, from $21,214,000 to $26,885,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996 due
to the combination of the factors described above.
.........Negative Contribution from Stores in the Process of Being Closed
or Franchised. The negative contribution from stores in the process of being
closed or franchised decreased by $135,000, or 7.0%, from $1,933,000 to
$1,798,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks ended
December 28, 1996. The decrease in negative contribution was primarily
attributable to closing 80 stores and franchising 12 stores during fiscal year
1997 and the full year effect of closing 56 stores and franchising 12 stores
during fiscal year 1996.
.........EBITDA. Earnings before interest, taxes, depreciation and
amortization, preferred stock accretion and dividends of subsidiaries, minority
interest and other income (expense) (?EBITDA?) is presented as management
believes that certain investors find it to be a useful tool for measuring the
ability to service debt. EBITDA does not represent net income or cash flows from
operations as these terms are defined by generally accepted accounting
principles and does not necessarily indicate whether cash flows have been or
will be sufficient to fund cash needs. EBITDA increased by $8,491,000, or 82.2%,
from $10,327,000 to $18,818,000 for the 53 weeks ended January 3, 1998 compared
to the 52 weeks ended December 28, 1996, for the reasons described above.
<PAGE>
Fiscal Year Ended December 28, 1996 (comprised of the pre-acquisition period of
December 31, 1995 through September 17, 1996 and the post-acquisition period of
September 18, 1996 through December 28, 1996) Compared to Fiscal Year Ended
December 30, 1995
Company-owned and Franchised or Licensed Store Activity
.........As of December 28, 1996, there were 482 Company-owned stores and
418 franchised or licensed stores in operation. The store activity for the
fiscal years ended December 30, 1995 and December 28, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1996
----- ----
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 669 324 540 415
.........Stores opened (including relocations) 4 69 5 118
.........Stores closed (including relocations) (51) (60) (39) (122)
.........Non-core (exit plan) stores closed
(September 18, 1996 forward) - - (17) -
.........Stores sold to franchisees (83) 83 (9) 9
.........Non-core (exit plan) stores franchised
(September 18, 1996 forward) - - (3) 3
.........Stores acquired from franchisees 1 (1) 5 (5)
------ ------ ------ -------
Stores open as of the end of the fiscal year 540 415 482 418
====== ====== ====== =======
</TABLE>
.........The activity reflected above resulted in 31,434 and 26,572
Company-owned equivalent store weeks and 19,214 and 21,658 franchisee/licensee
equivalent store weeks during fiscal years 1995 and 1996, respectively.
Revenues
.........Net Store Sales. Total net store sales decreased $21,607,000, or
14.8%, from $145,537,000 to $123,930,000 for fiscal year ended 1996 compared to
fiscal year 1995.
.........Net store sales from core stores decreased $540,000, or 0.6%, from
$93,775,000 to $93,235,000 for fiscal year 1996 compared to fiscal year 1995.
The decrease in net store sales from core stores was primarily attributable to a
decline in customer counts from fiscal year 1995 to fiscal year 1996, partially
offset by an increase in the average ticket price resulting from retail pricing
increases and aggressive marketing initiatives.
.........Net store sales from stores in the process of being closed or
franchised decreased $21,067,000, or 40.7%, from $51,762,000 to $30,695,000 for
fiscal year 1996 compared to fiscal year 1995. This decrease is primarily the
result of closing 56 stores and franchising 12 stores during the year.
.........Franchising Revenues. Franchising revenues increased $544,000, or
29.1%, from $1,870,000 to $2,414,000 for fiscal year 1996 compared to fiscal
year 1995. The increase in franchising revenues was primarily attributable to a
full year of royalty revenues from the 83 stores franchised in 1995, royalties
earned from new franchised stores in 1996 and development fees for new
franchised locations.
.........Licensing Revenues. Licensing revenues decreased $580,000, or
28.6%, from $2,031,000 to $1,451,000 for fiscal year 1996 compared to fiscal
year 1995. The decrease in licensing revenue is primarily attributable to
licensing fees earned in fiscal year 1995 that did not recur in fiscal year
1996.
.........Other Revenue, net. Other revenue, net, decreased $679,000, or
32.5%, from $2,092,000 to $1,413,000 for fiscal year 1996 compared to fiscal
year 1995. The decrease in other revenue, net, is primarily attributable to
favorable insurance adjustments in fiscal year 1995 that did not recur in fiscal
year 1996.
.........Total Revenues. Total revenues decreased $22,322,000, or 14.7%,
from $151,530,000 to $129,208,000 for fiscal year 1996 compared to fiscal year
1995, for the reasons discussed above.
<PAGE>
Operating Costs and Expenses
.........Selling and Store Occupancy Costs. Total selling and store
occupancy costs decreased $14,794,000, or 17.6%, from $84,003,000 during fiscal
year 1995 to $69,209,000 during fiscal year 1996.
.........Selling and store occupancy costs for core stores increased by
$462,000, or 1.0%, from $44,501,000 during fiscal year 1995 to $44,963,000
during fiscal year 1996. Within this overall increase, selling expenses
decreased by $330,000, or 1.3%, from $25,980,000 to $25,650,000 for fiscal year
1996 compared to fiscal year 1995. Store occupancy costs increased $792,000, or
4.3%, from $18,521,000 to $19,313,000 for fiscal year 1996 compared to fiscal
year 1995. The increase in store occupancy costs was primarily attributable to
the opening of five core stores during fiscal year 1996 and renewed lease rent
increases.
.........Selling and store occupancy costs for stores in the process of
being closed or franchised decreased $15,256,000, or 38.6%, from $39,502,000 to
$24,246,000 for fiscal year 1996 compared to fiscal year 1995. This decrease is
primarily the result of closing 56 stores and franchising 12 stores during the
period.
.........Food Cost of Sales. Total food cost of sales decreased $4,254,000,
or 12.7%, from $33,369,000 during fiscal year 1995 to $29,115,000 during fiscal
year 1996.
.........Food cost of sales for core stores increased $571,000, or 2.6%,
from $21,703,000 during fiscal year 1995 to $22,274,000 during fiscal year 1996.
The increase was primarily attributable to an increase in the costs of butter
40.8% over 1995, and an increase in distribution costs as a result of the
Company changing its distribution channels for its Mrs. Fields brand stores.
Additionally, management introduced several product line extensions, some with
higher food costs, in an effort to offset the decline in customer counts.
.........Food cost of sales for stores in the process of being closed or
franchised decreased $4,825,000, or 41.4%, from $11,666,000 to $6,841,000 for
fiscal year 1996 compared to fiscal year 1995. This decrease is primarily the
result of closing 56 stores and franchising 12 stores during the period.
.........General and Administrative Expenses. General and administrative
expenses decreased $1,480,000, or 7.0%, from $21,037,000 to $19,557,000 for
fiscal year 1996 compared to fiscal year 1995. The decrease in general and
administrative expenses was primarily attributable to the cost savings achieved
by combining the operations of Mrs. Fields Inc. and subsidiaries, Original
Cookie and Hot Sam which resulted in: (i) reduced headcount with corresponding
decreases in administrative salaries and benefits; (ii) decreased professional
service fees, including legal and accounting services, and (iii) decreased
corporate office expenditures, including general insurance, repairs and
maintenance and utilities as a direct result of closing the Original Cookie and
Hot Sam headquarters building in Cleveland, Ohio.
.........Depreciation and Amortization Expense. Total depreciation and
amortization expense decreased $1,235,000, or 11.8%, from $10,427,000 during
fiscal year 1995 to $9,192,000 during fiscal year 1996.
.........Depreciation and amortization expense for core stores decreased
$795,000, or 14.2%, from $5,579,000 to $4,784,000 for fiscal year 1996 compared
to fiscal year 1995. The decrease in depreciation and amortization expense was
primarily attributable to the Company recording the acquired assets of Mrs.
Fields Inc. and subsidiaries, Original Cookie and Hot Sam at their fair values,
in accordance with purchase accounting, resulting in an overall reduction to the
store asset base.
.........Total Operating Costs and Expenses. Total operating costs and
expenses decreased $21,763,000, or 14.6%, from $148,836,000 during fiscal year
1995 to $127,073,000 during fiscal year 1996, for the reasons described above..
.........Interest and Other Expenses. Interest and other expenses increased
$1,832,000, or 63.9%, from $2,869,000 to $4,701,000 for fiscal year 1996
compared to fiscal year 1995. This increase was primarily attributable to an
increase in interest expense due to increased borrowings as a result of the
purchase of the assets of Mrs. Fields Inc. and subsidiaries, Original Cookie and
Hot Sam on September 17, 1996 and a loss of $277,000 on the sale of property and
equipment during fiscal year 1996 compared to a gain on the sale of property and
equipment of $1,450,000 during fiscal year 1995.
<PAGE>
.........Net Loss. The net loss increased by $1,427,000, or 34.1%, from
$4,464,000 to $5,988,000 for fiscal year 1996 compared to fiscal year 1995. The
net loss equaled 4.6% of total revenue during 1996 compared to 2.9% of total
revenue during fiscal year 1995. The increase in net loss is in part due to an
increase in interest expense as a result of the increased borrowings to
facilitate the purchase of Mrs. Fields Inc. and subsidiaries, Original Cookie
and Hot Sam, net of a reduction in the income tax provision.
.........Contribution from Core Stores. The contribution from core stores
decreased by $778,000, or 3.5%, from $21,992,000 to $21,214,000 for the fiscal
year 1996 compared to fiscal year 1995 due to the combination of the factors
described above.
.........Negative Contribution from Stores in the Process of Being Closed
or Franchised. The negative contribution from stores in the process of being
closed or franchised decreased by $411,000, or 17.5%, from $2,344,000 to
$1,933,000 for fiscal year 1996 compared to fiscal year 1995. The decrease in
negative contribution was primarily attributable to closing 56 stores and
franchising 12 stores during the year.
.........EBITDA. EBITDA is presented as management believes that certain
investors find it to be a useful tool for measuring the ability to service debt.
EBITDA does not represent net income or cash flows from operations as these
terms are defined by generally accepted accounting principles and does not
indicate whether cash flows have been or will be sufficient to fund cash needs.
EBITDA increased by $991,000, or 10.6%, from $9,336,000 to $10,327,000 for
fiscal year 1996 compared to fiscal year 1995, for the reasons described above.
<PAGE>
Liquidity and Capital Resources
General
The Company's principal sources of liquidity are cash flows from
operations, cash on hand obtained primarily from the Offering and available
borrowings under the Company's existing revolving credit facilities. At January
3, 1998, the Company had $16.3 million of cash. It is expected that the
Company's principal uses of cash will be to provide working capital, finance
capital expenditures (including acquisitions and store closure costs), meet debt
service requirements and other general corporate purposes. The Company is highly
leveraged. Based on current operations and anticipated cost savings, the Company
believes that its sources of liquidity will be adequate to meet its anticipated
requirements for working capital, capital expenditures (including acquisitions
and store closure costs), scheduled debt service requirements and other general
corporate purposes. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels or that
cost savings can be achieved. Under the Indenture, the Company is permitted to
have one or more credit facilities pursuant to which it will be able to borrow
up to a maximum aggregate principal amount of $15.0 million on a secured basis.
At January 3, 1998, the Company has a $3.0 million credit facility in place,
none of which is utilized. On February 28, 1998, the Company amended its
revolving credit agreement (the "Agreement") with a commercial bank (the "Bank")
which provides for a maximum commitment of up to $15,000,000 secured by
essentially all of the assets of the Company.
January 3, 1998 Compared to December 28, 1996
As of January 3, 1998, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $20,033,000, an increase of 112.4%, or
$10,600,000, from December 28, 1996 when liquid assets were $9,433,000. Cash
increased 142.8% to $16,287,000 at January 3, 1998 from $6,709,000 at December
28, 1996 primarily as a result of cash obtained from the Offering on November
26, 1997 and from the addition of the Pretzel Contributions. Accounts receivable
increased $1,022,000, or 37.5%, to $3,746,000 at January 3, 1998 from $2,724,000
at December 28, 1996 due to the addition of Pretzel Time franchise receivables.
Current assets increased by $12,931,000, or 81.4% to $28,823,000 at January
3, 1998 from $15,892,000 at December 28, 1996. This increase was primarily the
result of an increase in cash of $9,578,000, accounts receivable of $1,022,000,
and prepaids of $1,601,000.
Long-term assets increased $26,698,000 or 28.4%, to $120,861,000 at January
3, 1998 from $94,163,000 at December 28, 1996. The majority of this increase was
due to additional goodwill and deferred loan costs as a result of the Pretzel
Contributions and the Offering.
Current liabilities decreased by $3,091,000, or 16.5% to $15,690,000 at
January 3, 1998 from $18,781,000 at December 28, 1996. This decrease is due to
the Company liquidating liabilities relating to payroll tax, interest, lease
settlements and store closures existing at December 28, 1996.
The Company's working capital increased by $16,022,000 to $13,133,000 at
January 3, 1998 from a negative $2,889,000 at December 28, 1996. The increase is
primarily due to the cash obtained in connection with the Offering on November
26, 1997.
The Company's cash flow from operating activities of $919,000 for the
year ended January 3, 1998, resulted primarily from store sales and franchising
and licensing revenues less costs and expenses incurred to generate the store
sales and franchising and licensing revenues.
The Company utilized $15,505,000 of cash from investing activities
during the year ended January 3, 1998, primarily for the Pretzel Contributions
and for capital expenditures relating to store remodels and renovations.
Cash flow from financing activities of $24,164,000 was generated during
the year ended January 3, 1998, primarily from the issuance of $108,250,000 in
new long term debt, the proceeds of which were used in part to repay long-term
debt, accrued interest, debt financing costs and a cash dividend to MFH.
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 the Company's working
capital. It is not unusual for Mrs. Fields to have a negative working capital
balance, particularly during the first 11 months of the year. During fiscal
years 1996 and 1997, Mrs. Fields expended $3,524,000 and $4,678,000,
respectively for capital assets and expects to expend approximately $7,500,000
in 1998. Management anticipates that these expenditures will be funded with cash
generated from operations and short-term borrowings under its credit facility as
needed.
<PAGE>
Inflation
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of Mrs. Fields' leases contain escalation
clauses (however, such leases are accounted for on a straight-line basis as
required by generally accepted accounting principles which minimizes
fluctuations in operating income) and many of Mrs. Fields' employees are paid
hourly wages at the Federal minimum wage level. Minimum wage increases will
negatively impact Mrs. Fields' payroll costs in the short term, but management
believes such impact can be offset in the long term through operational
efficiency gains and, if necessary, through product price increases.
Seasonality
The following table presents certain unaudited historical quarterly
financial data for Mrs. Fields for fiscal years 1997, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter (3) Year
(13 weeks) (13 weeks) (13 weeks)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total store sales
1997 $27,642 $26,198 $29,920(2) $40,227 (2) $123,987
1996 $29,361 $28,640 $29,598 $36,331 $123,930
1995 $36,819 $34,723 $34,053 $39,942 $145,537
% of total store sales
1997 22.2% 21.1% 24.1%(2) 32.6%(2) 100.0%
1996 23.7% 23.1% 23.9% 29.3% 100.0%
1995 25.3% 23.9% 23.4% 27.4% 100.0%
Total store cash
contribution (1)
1997 $4,857 $4,694 $6,699 $12,778(2 $29,028
1996 $4,355 $4,484 $6,830(2) $ 9,937 $25,606
1995 $5,349 $5,692 $5,839 $11,285 $28,165
% of total store contribution
1997 16.7% 16.2% 23.1%(2) 44.0%(2) 100.0%
1996 17.0% 17.5% 26.7% 38.8% 100.0%
1995 19.0% 20.2% 20.7% 40.1% 100.0%
</TABLE>
- -------------
(1) Total store contribution before store depreciation and amortization.
(2) Includes the Pretzel Contributions.
(3) Fourth quarter 1995, 1996 and 1997 consists of 13 weeks, 13 weeks and 14
weeks, respectively.
Mrs. Fields sales and store contribution are highly seasonal given the
significant impact of mall business. 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 store contribution is even more significant
than on sales. The impact on store contribution is more significant due to the
fixed nature of certain store level costs (occupancy costs, store manager
salaries, etc.). Once these fixed costs are covered by store sales, the flow
through of sales to store contribution becomes greater. Accordingly, the fourth
quarter is a key determinant to overall profitability for the year.
<PAGE>
BUSINESS
General
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. Mrs. Fields is one
of the most widely recognized and respected brand names in the premium cookie
industry, with a 94% brand awareness among customers, 20% on an unaided basis
and 74% on an aided basis (based on a 1994 study commissioned by the Company).
The Company has recently developed a significant presence in the rapidly
growing, health-oriented pretzel segment as a result of the acquisitions of the
pretzel businesses of Hot Sam and H&M (the largest Pretzel Time franchisee) and
a 60% majority interest in Pretzel Time. As of January 3, 1998, the Company's
retail network consisted of 1,034 locations, of which 711 were cookie stores and
323 were pretzel stores. Of the total 1,034 stores, 481 were Company-owned and
553 were franchised or licensed. The Company's stores average approximately 600
square feet in size and are located predominantly in high-end shopping malls. In
addition, the Company operates kiosks and carts at airports, universities,
stadiums, hospitals and office building lobbies. The Company's objective is to
increase sales and profitability by focusing on its higher-profitability stores
in prime locations (?core stores?). As a result, by the end of fiscal 1999, the
Company plans to close or franchise approximately 64 Company-owned cookie stores
and 38 Company-owned pretzel stores that do not meet certain financial and
geographical criteria. For the fiscal year ended January 3, 1998, the Company
generated pro forma net revenue and adjusted EBITDA of $142.5 million and $23.1
million, respectively.
The Cookie Business
The Company operates and franchises 711 retail cookie stores: 556 under
the Mrs. Fields brand and 155 under the Original Cookie brand. Management
believes that Mrs. Fields cookies are positioned in the premium quality, baked
on-premises segment of the approximately $12 billion (according to a recent
study by KPMG Peat Marwick LLP) U.S. cookie industry. The Company offers over 50
different types of cookies, brownies and muffins, which are baked continuously
and served fresh throughout the day. Baked products are made using only high
quality ingredients, and all dough is centrally manufactured and frozen to
maintain product quality and consistency. All products pass strict quality
assurance and control steps at both the manufacturing plants and the stores. In
addition, the Company continually creates and tests new products to attract new
customers and satisfy current customers. Product development is currently
focused on sugar-free dough and reduced-fat cookies and brownies.
MFI, one of the predecessors of the Company, was founded in 1977 by
Debbi Fields and, following its initial success, embarked on an aggressive
national expansion program in the early 1980s. By the late 1980s, however, MFI
experienced financial difficulty as a result of excessive debt levels, certain
poor real estate locations, and a recessionary retailing environment. In
connection with a financial restructuring by its lenders, a new management team
was put into place in mid-1994 under the leadership of Larry A. Hodges, who has
extensive experience in the food and retailing industries. Mr. Hodges introduced
a new strategic plan for the Company, which involved the following key elements:
(1) identifying non-core stores to close or franchise, (2) introducing
Company-wide operating procedures to improve store operating margins, (3)
developing a marketing strategy and promotional calendar to turn around
comparable store sales and (4) improving employee morale through selective new
senior hires, increased training and various incentive plans. The savings from
the improved store operations were reinvested in marketing and other measures
designed to improve comparable store sales.
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of MFI, Original Cookie and Hot Sam by MFH, a
subsidiary of Capricorn. At January 3, 1998, Capricorn had invested more than
$28 million in the Company through MFH. Capricorn retained Mr. Hodges as Chief
Executive Officer of Mrs. Fields. Management believes that Mrs. Fields has a
more well-recognized brand name than Original Cookie and that Mrs. Fields stores
have, during fiscal 1997, achieved higher average revenue per core store
($350,000 versus $301,000) than Original Cookie stores. As a result, the Company
intends to continue converting its core and to-be-franchised Original Cookie
stores to the Mrs. Fields brand, which it believes will result in an increase in
net sales, comparable store sales and store contribution for the Company's
cookie business.
The Pretzel Business
The Company operates and franchises 323 retail pretzel stores (221
under the Pretzel Time name and 102 under the Hot Sam name), which offer ?sweet
dough? soft pretzels and ?Bavarian? style pretzels with a variety of toppings.
Pretzel Time's primary product is an all natural, hand-rolled soft pretzel,
freshly baked from scratch at each store location. Pretzel Time stores prepare
pretzels with a variety of flavors and specialty toppings, including cheddar
cheese, cream cheese and pizza sauce. The stores also offer soft drinks and
freshly squeezed lemonade. 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. In addition, Pretzel Time stores
have, during fiscal 1997, achieved higher average revenue per core store
($275,000 versus $241,000) than Hot Sam stores. As a result, the Company intends
to continue converting its core and to-be-franchised Hot Sam stores to Pretzel
Time stores, which it believes will result in an increase in net sales,
comparable store sales and store contribution for the Company's pretzel
business.
<PAGE>
Management believes that the retail pretzel business has similar
operating characteristics to the retail cookie business that will permit some
co-branding of the Company's products. In addition, the retail pretzel business
has grown more quickly than the retail cookie business in recent years. Hot Sam
was acquired by the Company in connection with the acquisition of Original
Cookie. In order to expand its presence in the retail pretzel industry, the
Company recently acquired the business of H&M and 60% of the common stock of
Pretzel Time. Pretzel Time is a franchisor of 221 hand-rolled soft pretzel
retail outlets, which are located in shopping malls as well as at airports,
sports arenas, amusement parks and resort areas throughout the United States and
Canada. Prior to the Pretzel Acquisitions, H&M operated 79 of the franchised
stores of Pretzel Time and was the exclusive franchisee and developing agent for
Pretzel Time stores in 16 Western and Midwestern states, four provinces in
Canada and Mexico.
Business Strategy
The Company's objective is to increase sales and profitability at its
core and franchised stores in prime locations by implementing the key elements
of its business strategy. Management believes that the Company's recent
operating results reflect the successful implementation of its business
strategy. Comparable core store sales have increased for fiscal 1997 as compared
to fiscal 1996. In addition, franchising and licensing revenues have increased
by 44.9% for fiscal 1997 over fiscal 1996. The key elements of the Company's
business strategy are as follows:
Enhance Quality of Company-Owned Store Base. Since current management
assumed responsibility in 1994, the Company has focused on closing and
franchising Company-owned stores that do not meet certain financial and
geographical criteria. From June 1994 through February 1998, the
Company closed 121 Mrs. Fields brand stores and franchised an
additional 144 stores. The Company has targeted 102 additional stores
across all product concepts to be either closed or franchised by the
end of fiscal 1999. Such measures are expected to result in enhanced
operating margins, as unprofitable stores are closed and certain other
stores are converted into franchises, thereby increasing royalty
payments and eliminating general and administrative costs associated
with such stores.
Improve Productivity of Core Stores. The Company is embarking on a
program to improve the performance of its core stores by (i) expanding
product offerings to include breakfast items, such as muffins,
croissants and bagels, and low-fat cookies, brownies and muffins, (ii)
raising the average ticket through increased bundling of product
offerings, (iii) promoting catering services by individual stores to
corporate customers, (iv) decreasing store expenses by reducing waste
in the cookie baking process and controlling the cost of ingredients
and supplies, (v) improving merchandising by enhancing product
presentation and refining product mix and (vi) increasing training and
various incentive programs for management and sales staff.
Capitalize on the Strong ?Mrs. Fields? Brand Name. Management believes that
the Mrs. Fields brand is the most widely recognized and respected
brand name in the retail premium cookie industry, with a 94% brand
awareness among consumers, 20% on an unaided basis and 74% on an aided
basis (based on a 1994 study commissioned by the Company), and that
Mrs. Fields brand stores have, during fiscal 1997, achieved higher
average revenue per core store than Original Cookie stores. As a
result, the Company intends to continue converting its core and
to-be-franchised Original Cookie stores to Mrs. Fields brand stores,
which it believes will result in an increase in net sales, comparable
store sales and store contribution for the Company's cookie business.
Original Cookie stores represent 52% of all Company-owned cookie
stores. In addition, the Company intends to further capitalize on the
Mrs. Fields brand name by (i) further developing and expanding new
channels of distribution for the Company's products, including kiosks
and carts in malls, airports, convention centers, office buildings,
street fronts and sports complexes, (ii) increasing the emphasis on
the mail order business and (iii) developing and capitalizing on
licensing opportunities such as co-branding the Mrs. Fields concept
with prominent names in the retailing and food service industry,
expanding licensing agreements with the Company's existing licensees,
entering into new licensing agreements with food service operators
(such as the Company's existing arrangements with ARAMark, Host
Marriott and United Airlines), and developing product line extensions,
such as frozen cookie dough and in-store bakery products to be sold in
supermarkets and other convenient locations.
Capitalize on the Strong ?Pretzel Time? Brand Name. Through the
acquisition of its 60% controlling interest in Pretzel Time, the
Company has obtained the use of the ?Pretzel Time? brand name, one of
the leading brand names in the pretzel retailing segment. Management
believes that there are significant opportunities to improve its
existing Hot Sam store operations by continuing to convert its core and
to-be-franchised Hot Sam stores to Pretzel Time stores. Pretzel Time
stores have, during fiscal 1997, achieved higher average revenue per
core store and store contribution than Hot Sam stores. Hot Sam stores
represent 56% of all Company-owned pretzel stores. Management believes
that the conversion to the Pretzel Time name will result in an increase
in net sales, comparable store sales and store contribution for the
Company's pretzel business. In addition, the Company believes there are
significant new Pretzel Time franchising opportunities.
Develop New Company-Owned and Franchised Stores. The Company plans to
build and franchise new stores, as well as carts and kiosks, in
existing and new markets. The Company has identified over 100 mall and
non-traditional locations, such as amusement parks and other
entertainment centers, that it believes would be ideal for cookie and
pretzel stores. During 1998, the Company intends to focus primarily on
franchising approximately 38 and 14 new cookie and pretzel stores,
<PAGE>
respectively. After 1998, the Company intends to add approximately 15
new Company-owned cookie and 10 new Company-owned pretzel stores per
year and to franchise approximately 25 new cookie and 25 new pretzel
stores per year. In addition to pursuing new store development
opportunities within the United States, the Company plans to grow
internationally by expanding its franchise operations. As of January 3,
1998, there were 81 franchised Mrs. Fields brand stores open
internationally and approximately 200 Mrs. Fields brand stores
committed for development by franchisees over the next several years in
Latin America, Canada and Asia.
Realize Purchasing and Overhead Cost Savings. As a result of the
Pretzel Contributions, the Company expects to realize significant cost
savings from the elimination of duplicative administrative functions,
the consolidation of management information systems and the reduction
of the cost of food and other supplies as a result of its enhanced
purchasing power with vendors. Management believes that incremental
pre-tax cost savings would have totaled approximately $1.1 million for
the fiscal year ended January 3, 1998.
Pursue Further Strategic Acquisitions of Related Businesses. The
Company intends to selectively pursue strategic acquisitions in order
to expand its geographic presence and achieve operating efficiencies.
The Company's management has demonstrated its ability to identify and
integrate new businesses through its acquisitions of the cookie and
pretzel businesses of Original Cookie and Hot Sam, respectively, in
September 1996. Among other acquisitions that it has been considering,
the Company has recently been in discussions concerning the possible
acquisition by the Company of GACC or some of its owned or franchised
stores. No agreement with respect to such a transaction has been
concluded, and there can be no assurance that such an agreement will be
concluded.
Product Offerings
The Company's product offerings consist primarily of (i) fresh baked
cookies, brownies, muffins, and other baked goods and (ii) fresh baked sweet
dough and ?Bavarian? style pretzels. During fiscal year 1997, pro forma for the
Pretzel Contributions, the Company's revenue mix consisted of the following:
Cookies and Brownies.................................. 58%
Pretzels.............................................. 20%
Beverages............................................. 19%
Other................................................. 3%
Cookies. The primary products of the Company's cookie stores are a
variety of cookies, which are baked in view of customers throughout the day.
Secondary product lines include several varieties of brownies, muffins, other
baked goods, gourmet coffees and other beverages. Mrs. Fields stores and
Original Cookie stores also sell decorated cookies which are extra-large cookies
decorated with customer-selected slogans purchased as gifts for special
occasions, such as birthdays, Valentine's day, Father's day and Easter. The
Company plans to emphasize baking and marketing decorated cookies to enhance
sales in Mrs. Fields and Original Cookie brand stores.
Baked products are made using only pure, 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 proprietary formulas of the
Company. All products must pass strict quality assurance and control steps at
both the manufacturing plants and the stores.
Pretzels. Through its Hot Sam and Pretzel Time stores, the Company
offers a wide variety of fresh-baked pretzels. Pretzels have become a popular
snack due to consumers' attraction to salted snacks and the increased demand for
snacks that are low in fat and cholesterol.
Hot Sam is the largest U.S. retailer of fresh-baked ?Bavarian? style
pretzels. Pretzel Time stores offer all natural, hand-rolled sweet dough
pretzels prepared with a variety of flavors and special toppings, including
cheddar cheese, cream cheese and pizza sauce. In addition, Pretzel Time stores
offer specialty pretzels and related products, such as cinnamon pretzels and
cinnamon twists, as well as several recently introduced pretzel products, such
as pretzel dogs, chocolate chip pretzels and caramel crunch pretzels.
Product Development. The Company maintains 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, the Company develops prototypes to determine the initial formula.
For Mrs. Fields products, the formula is then scaled up for test production runs
at one or more approved facilities. 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. The Company continually reviews
<PAGE>
its product mix in an effort to maximize daytime offerings and profitability.
For example, new muffin flavors, bagels, croissants and a revitalized coffee
program were introduced to enhance morning offerings, as cookies begin selling
primarily after mid-day.
In the cookie business, product development efforts are currently
focused on a fresh-baked, sugar-free cookie dough and other products, such as
low-fat brownies, reduced-fat cookies and seasonal items that are designed to
capitalize on consumer trends and draw interest to the Company's store
locations. In the pretzel business, the Company has been testing
?made-from-scratch? hand rolled pretzels, which serve as a platform for a
variety of other products, such as jalapeno, cinnamon raisin and garlic pretzels
with a sweet dough base, meat and cheese filled pretzel pockets and
pretzelwiches (pretzel bun sandwiches).
Store Operations
Store Base. As of January 3, 1998, the Company's store portfolio consisted
of 481 Company-owned stores, 306 domestic franchised locations, 81 international
franchised locations and 166 licensed locations. By concept, the stores are
distributed as follows:
<TABLE>
<CAPTION>
Domestic International
Core To be closed Franchised(1) Franchised Franchised Licensed Total
<S> <C> <C> <C> <C> <C> <C> <C>
Mrs. Fields........................................... 123 10 11 165 81 166 556
Original Cookie(2).................................... 112 16 27 - - - 155
--- --- --- --- --- --- ---
Cookie Subtotal.............................. 235 26 38 165 81 166 711
--- --- --- --- --- --- ---
Pretzel Time.......................................... 68 12 - 141 - - 221
Hot Sam(3)............................................ 76 12 14 - - - 102
--- --- --- --- --- --- ---
Pretzel Subtotal............................. 144 24 14 141 - - 323
--- --- --- --- --- --- ---
Totals.................................. 379 50 52 306 81 166 1,034
=== === === === === === =====
</TABLE>
- ---------------
(1) Includes a total of 102 stores, consisting of 21 Mrs. Fields stores, 43
Original Cookie stores, 12 Pretzel Time stores and 26 Hot Sam stores, that
the Company intends to close or franchise by the end of 1999. Subsequent to
year-end (January 3, 1998) through March 31, 1998, the Company has closed 6
of these stores and franchised 2 of these stores. Management's plan calls
for 58 stores to be closed or franchised durinf the remainder of 1998 and
44 stores to be closed or franchised during 1999.
(2) The Company intends to convert Original Cookie brand stores to Mrs. Fields
brand stores.
(3) Includes 10 stores previously converted from Hot Sam to Pretzel Oven. The
Company intends to convert all such stores to the Pretzel Time concept.
<PAGE>
As of January 3, 1998, the Company's domestic stores were located in 49
states. The following table represents states with ten or more outlets:
Mrs. Fields' original Cookies, Inc.
Store geography List
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
% of
Company- Retail
State Owned Franchised Licensed Total Outlets
- ----- ----- ---------- -------- ----- -------
California 87 50 12 149 15.63%
Ohio 51 4 13 68 7.14%
New York 31 18 18 67 7.03%
Florida 27 20 13 60 6.30%
Illinois 32 10 8 50 5.25%
Texas 27 18 4 49 5.14%
Michigan 31 8 3 42 4.41%
Pennsylvania 18 6 13 37 3.88%
Missouri 5 25 - 30 3.15%
Wisconsin 21 - 6 27 2.83%
Massachusetts 12 6 7 25 2.62%
Arizona 17 2 5 24 2.52%
Connecticut 7 12 5 24 2.52%
New Jersey 9 8 5 23 2.41%
Virginia 9 12 2 23 2.41%
Colorado 5 9 8 22 2.31%
Indiana 14 5 2 21 2.20%
Maryland 9 8 4 21 2.20%
Washington 12 7 - 19 1.99%
Georgia - 13 3 16 1.68%
Utah 7 8 1 16 1.68%
North Carolina 4 7 3 14 1.47%
Nevada 3 3 7 13 1.36%
Minnesota 3 9 - 12 1.26%
Tennessee 3 6 2 11 1.15%
</TABLE>
Configuration. The Company has developed a number of retail
configurations which have wide application and adaptability to a variety of
retail environments. In addition to the stores that have been designed for prime
mall locations, the Company has developed other formats intended to extend its
presence within and beyond mall locations. The introduction of frozen dough
technology has led to a number of new store configurations, expanded product
offerings in smaller outlets and non-traditional formats.
Cookie Stores. All stores are uniformly designed in accordance with the
Mrs. Fields or Original Cookie prototype, making extensive use of glass, painted
wood, brass, mirrors, lighting and point-of-sale displays intended to create an
upscale, open and inviting look. Stores also attractively and efficiently
display their fresh-baked products using custom-made showcases. Store size
ranges from 350 to 800 square feet, and the typical Company-owned store is about
600 square feet with a minimum of about 15 linear feet of counter space.
Locational possibilities for new stores include high traffic regional malls,
central downtown shopping districts and recreational shopping environments.
The Company and its franchisees and licensees also operate cookie
kiosks and carts in certain malls on a year-round basis. Kiosks have 100 to 200
square feet of retail space, supported by off-site storage and preparation
space. Carts have 40 square feet. Because of their small size, carts and kiosks
do not have baking equipment, and are supplied cookie products by a
fully-equipped store usually located in the same mall. The Company plans to add
baking equipment to carts and kiosks in malls, airports, convention centers,
office buildings, street fronts and sports complexes, giving these outlets
greater flexibility in the products they can offer. All designs contain retail
display, small freezers and cash registers. The Company sees significant
expansion opportunities from the use of carts, which create incremental revenue
at a relatively low cost.
<PAGE>
All of the retail store configurations are executed to include the same
high-quality marketing, merchandising and design features which customers have
come to expect from the Company. 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.
Pretzel Stores. Hot Sam stores are uniformly designed in accordance
with the Hot Sam brand, making extensive use of tile, stained wood, lighting and
point-of-sale displays intended to create an upscale, open and inviting look.
Stores also attractively and efficiently display their products using
custom-made showcases. The typical Company-owned pretzel store is about 500
square feet.
Pretzel Time outlets have an average size of 700 square feet in both
kiosks and store locations. Pretzel Time stores are designed to enable customers
to enjoy watching the pretzels being rolled, twisted and baked, which
underscores freshness and lends to the concept's growing appeal.
Location and Leasing. Locational possibilities include any high
pedestrian traffic areas, including second locations within malls, airport
concourses, office building lobbies, hospitals, universities, stadiums, and
supermarket foyers. Taking the impulse nature of its business into
consideration, the Company tries to locate its outlets in areas of high
pedestrian traffic, with easy proximity to pedestrian traffic flow and at a
distance from other food providers of any kind.
The majority of the Company's stores are located in shopping malls, with
the vast majority of these malls falling into the ?A? and ?B? classifications,
or the better-quality malls in the country. As of January 3, 1998, the Company,
including franchise locations, has a presence in 90% of the top 150 (as measured
in sales per foot) ?A? and ?B? malls in the country. Malls in ?A? and ?B?
classifications generally have the following characteristics:
Size greater than 700,000 square feet Sales per square foot
greater than $300
Population density greater than 150,000 people within a
five-mile radius Median family income greater than $50,000
Generally supported by national fashion anchor tenants
Located to minimize competition from other malls
Marketing and Advertising. The Company's in-house marketing department
and an outside promotional agency market products emphasizing product sampling,
local store marketing and brand name identification. The Company advertises
primarily at the store level, rather than through mass media, using the aroma of
fresh-baked cookies and the attractive arrangement of finished products to
create a store ambiance that is conducive to sales. The Company cultivates local
customer loyalty by offering regular 20% discounts to employees in malls where
stores are located and occasional other discounts. The Company historically has
spent relatively little on paid advertising, relying mainly on in-store signage,
promotions and the public relations of Debbi Fields, who makes store visits and
local media appearances throughout the country and internationally for the
Company. In addition to posters and display of products, the Company promotes
products by offering special packaging and selling other promotional items. A
recent promotion for the Company's 20th anniversary featured a tie-in with the
popular Peanuts characters from the syndicated comic strip, a sweepstakes, and
gifts with purchases. The Company is 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. The Company also
promotes its products as gifts, particularly at holiday time.
<PAGE>
Mail Order Business. The Company's mail order division markets a
variety of fresh-baked and other gift items through its mail order gift
catalogue using toll free telephone numbers, including ?1-800-COOKIES.? The mail
order division had $3.8 million in revenues in fiscal year 1997. The Company
believes that there is significant potential in the mail order business and is
developing this division by targeting both corporate customers and individuals
with a history of purchases at Mrs. Fields stores. Sales from the mail order
division for fiscal year 1997 have increased approximately 32.1% over sales for
fiscal year 1996.
Customer Profile. The Company believes that its products are best
targeted to a demographic profile which is relatively young, with upper-middle
income levels. At the time of a May 1994 study, 66% of Mrs. Fields' customers
were female and 34% were male, the mean age of a customer was 35.1 years of age,
and 57% of customers had a household income of $50,000 or more. The Company
believes that this demographic profile remains valid.
Seasonality. The Company's 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 season and
other gift-giving holidays due to increased mall traffic and holiday gift
purchases.
Supplies and Distribution
Ingredients and Supplies. The Company relies primarily on outside
suppliers and distributors for the ingredients used in its products and other
items used in its stores. Mrs. Fields stores receive frozen products, made
according to proprietary recipes of the Company, from the Company's primary
supplier, Van Den Bergh Foods Company (?VDB?). VDB uses 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. VDB's contract for making frozen
products for the Company is renewable every three years. Hot Sam buys frozen
pretzel dough from J&J Foods, Inc. VDB supplies approximately 98% of Mrs. Fields
and Original Cookie frozen bakery product. J&J Foods, Inc. supplies
approximately 94% of the frozen pretzel dough to Hot Sam Stores. The Company has
identified alternative suppliers for frozen dough at Mrs. Fields and Hot Sam.
Pretzel Time stores buy a proprietary dry mix from selected distributors and mix
and bake pretzels at individual stores. Pretzel Time franchisees buy from
various distributors.
Most supplies other than dough (such as beverages and paper products)
are ordered from distributors by either the Company or the franchisee and are
directly shipped to the store. The Company sells exclusively Coca Cola soft
drinks in Mrs. Fields, Original Cookie and Hot Sam stores under an agreement
with Coca-Cola USA Fountain, and recently entered into an agreement with
Coca-Cola USA Fountain to sell on an exclusive basis in its Pretzel Time stores.
Distribution. Blueline Distribution (?Blueline?) handles distribution
of perishable and non-perishable items to Mrs. Fields and Original Cookie stores
weekly. Blueline owns and maintains all of the inventory, but is authorized to
purchase inventory items only from authorized vendors at prices that have been
negotiated by Mrs. Fields. Hot Sam distributes perishable and non-perishable
items weekly to stores using seven different regional distribution companies.
Pretzel Time franchisees use a variety of distributors. The Company ships
equipment related items, including smallwares equipment and oven parts, directly
from a public warehouse in Cleveland, Ohio.
Management Information Systems
The Company has made a substantial investment in developing its
point-of-sale (?POS?) system, which gathers information transmitted daily to
corporate headquarters from most of the Mrs. Fields brand core stores. The POS
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.
Information transmitted from the Company-owned stores on daily sales permits the
Company, among other things, to monitor performance across the network of
stores. Most Company-owned Mrs. Fields stores are equipped with a Sharp A570 or
Sharp 3110 POS register and an IBM computer, enabling store managers to track
and report daily customer traffic counts, sales, average ticket, inventory
levels and labor costs. The Company is upgrading its back-office system to a
Windows 95 environment and is currently upgrading all Mrs. Fields stores to
Pentium 133 machines. The Company plans to install its upgraded back-office
system, along with the POS registers and Pentium 133 machines, in its core
Original Cookie and Hot Sam stores by late 1998 at an approximate cost of
$1,871,000.
<PAGE>
Management has assessed the Year 2000 issue and has determined that all
financial software, corporate networks, the AS400 system and all other corporate
systems are Year 2000 compliant. The systems used for collecting sales data from
retail locations are not Year 2000 compliant. It has been determined that the
sales collection system will be replaced. This project is currently underway
with initial roll-out into retail locations beginning in August 1998 with
completion to all locations by August 1999. The estimated cost of the project,
which is being completed with the assistance of outside consultants, is
$300,000.
The Company believes that it can improve operating efficiencies by
introducing its improved system into all acquired Company-owned stores. There
can be no assurance that the Company will successfully integrate this system or
that a fully integrated system will be achieved within budget. Therefore, there
can be no assurance that the financial condition and results of operations will
not be adversely affected by the attempts to integrate the POS system.
Store Management
Management Structure. The Company monitors all Company-owned stores
with a regionally-based staff of district sales managers. District sales
managers are responsible for monitoring all cookie and pretzel stores in their
territory. Until recently, franchisees had been monitored by a separate staff of
regionally-based franchise operations consultants. The Company has consolidated
the franchise operations consultants with the district sales managers. As a
result each district sales manager is responsible for overseeing approximately
30 Company-owned or franchised cookie and pretzel stores within his or her
region. Each district sales manager reports to one of the three 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.
Management Incentives. 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. 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. The Company believes that its incentive and other programs for
management have achieved a strong retention rate for managers. 72% of the
Company's district sales managers have been with the Company for at least four
years (67% for over five years), and 51% of the Company's store managers have
been with the Company for at least four years (40% for over five years).
Training. The Company believes store managers are a critical component
in creating an effective retail environment, and accordingly has developed
ongoing programs to improve the quality and effectiveness of its store managers
and to increase retention rates. New store managers are required to attend a
two-week training program at the Company's Salt Lake City training facility and
ongoing training courses in new products, standards, and procedures are
available throughout the year to all Company personnel.
Franchise Operations
In accordance with the Company's business strategy, the Company has
been selling, and expects to continue to sell, selected Company-owned stores to
franchisees to reduce costs, increase profitability and provide for liquidity
and development of additional stores in the future. The Company also is actively
seeking to franchise new Mrs. Fields stores.
Cookie Business. Each franchisee pays the Company an initial licensing
fee of $25,000 per Mrs. Fields 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 (including the initial
franchise fee), although the cost of opening a new store can vary based on
individual operating and location costs. The Company also charges franchisees a
fee to handle equipment purchases and to provide other assistance in helping the
franchisee to set up operations. After a store is set up, a franchisee pays
royalty fees to the Company of 6% of the franchised store's annual gross sales,
and an advertising fee of 1% of annual gross sales. The Company does 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 the
Company's franchisees are full-time store operators, passive investors, retired
professionals and people seeking a second source of income. The majority of Mrs.
Fields franchisees own one store. As of January 3, 1998, the five largest Mrs.
Fields franchisees operated 30 stores, and the largest Mrs. Fields franchisee
operated twelve stores.
<PAGE>
Pretzel Business. The Company does not franchise Hot Sam stores. The
Company is a franchisee of 80 Pretzel Time stores, with rights to sub-franchise,
if desired. Each franchisee pays Pretzel Time an initial licensing fee of
$25,000 per new Pretzel Time store location and will be 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.
Pretzel Time also charges franchisees a fee to handle equipment purchases and to
provide other assistance in helping the franchisee to set up operations. 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.
Franchisee Recruiting and Training. Mrs. Fields has been successful in
recruiting franchisees and completing franchise transactions and believes it
will continue to realize significant cash flow from franchising by (i)
emphasizing the use of proprietary dough that minimizes product quality issues
and ensures a consistent product across all outlets, (ii) frequent quality,
service and cleanliness evaluations of franchised stores by operations support
staff and (iii) initial and continuing training of franchisees to improve their
financial and retail sales skills.
The Company believes its franchisees are a critical component in
creating an effective retail environment, and accordingly makes its ongoing
programs available to franchisees to improve their quality and effectiveness.
Franchisees are required to attend a two-week training program at the Company's
Salt Lake City training facility 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, the Company has 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
comprehensive list of segments, with examples of current licensees within the
Company's system:
Concept Licensing. The Company has developed a licensing program for
non-mall retail outlets that enables the Company to enter difficult-to-reach
markets and facilitate brand exposure through ?presence? and ?prestige?
marketing. The Company's licensees duplicate the Mrs. Fields store concept and
purchase dough from the Company's various distributors. Several of these
licensees are contract management companies that manage and operate food service
in host locations. The Company's licensees and their respective distribution
channels include Host Marriott (airports and travel plazas), ARAMark (stadiums
and convention centers) and Holiday Inn Worldwide (hotels).
Retail Licensing. The Company plans to capitalize on its brand
awareness 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 the Company's retail cookie store concept. A
current example is Legacy Brands, which has the exclusive North American rights
to retail frozen dough and offers Mrs. Fields Cookies throughout the supermarket
industry. Another licensee is YES! Entertainment, which has a license to market
the Mrs. Fields Baking Oven for children sold in most toy stores and through
mass merchandisers.
Supply Licensing. The Company currently has an agreement with United
Airlines under which its mail order division sells cookies to United Airlines
and allows United Airlines to promote the Mrs. Fields brand and products to its
first-class customers. The Company is pursuing similar relationships to compete
with other manufacturers' brands selling in this channel of business.
Competition
The Company competes 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 the
Company. The Company competes with these retailers on the basis of price,
quality, location and service. The Company faces competition from a wide variety
of sources, including such companies as GACC, Cinnabon, Inc., TCBY Yogurt Inc.,
Auntie Anne's Soft Pretzels, PretzelMaker and Baskin-Robbins 31 Flavors.
<PAGE>
Properties
As of January 3, 1998, the Company leased 763 retail stores, of which
282 were subleased to franchisees under terms which cover all obligations of the
Company thereunder. Under its franchise agreements, the Company has certain
rights to gain control of a retail site in the event of default under the lease
or the franchise agreement. Most of the Company's 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. See ?Risk Factors-Dependence on Real Estate Leases; Continuing
Obligations on Leases.?
The Company currently leases approximately 20,000 square feet of office
space in Salt Lake City, Utah for its corporate headquarters. The Company owns
substantially all of the equipment used in Company-owned retail outlets and its
corporate headquarters. The Company has recently signed a new lease for an
additional 31,000 square feet of office space. The Company intends to relocate
its corporate offices to the new location during the second quarter of 1998.
Product development, training and mail order operations will continue to operate
in the existing office space.
Employees
As of January 3, 1998, the Company had approximately 4,007 employees in
Company-owned stores, of whom approximately 767 were store managers and
assistant store managers, 45 were full-time sales assistants and 3,195 were
part-time sales assistants. The typical Company store employs five to thirteen
employees. During the period from November through February, the Company may
hire as many as 580 additional part-time employees to handle additional mall
traffic. Most employees are paid on an hourly basis, except store managers. The
Company's employees are not unionized. The Company has never experienced any
significant work stoppages and believes that its employee relations are good.
Many of the Company's employees are paid hourly rates based upon the
federal minimum wage. The federal minimum wage increased from $4.75 to $5.15 on
September 1, 1997. As of January 3, 1998, 2,167 of the Company's 4,007 employees
in Company-owned stores earned the federal minimum wage. The September 1, 1997
minimum wage increase is expected to negatively impact the Company's labor
costs, increasing wages by approximately $316,000 annually, 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.
Trademarks
The Company is the holder of numerous trademarks that have been
federally registered in the United States and in substantially all other
countries located throughout the world. The Company is a party to disputes with
respect to trademarks none of which, in the opinion of management of the
Company, is material to the Company's business, financial condition or results
of operations.
Legal Proceedings; Government Regulation
In the ordinary course of business, the Company is involved in routine
litigation, including franchise disputes and trademark disputes. Except as
described below, the Company is not a party to any legal proceedings which, in
the opinion of management of the Company, after consultation with legal counsel,
is material to the Company's business, financial condition or results of
operations.
The Company has recently been in discussions concerning the possible
acquisition by the Company of Great American Cookie Company, Inc. ("GACC") or
some of its owned or franchised stores. GACC is a publicly reporting company
(under the Exchange Act) . As of March 20, 1998 no agreement with respect to
such a transaction has been concluded, and there can be no assurance that such
an agreement will be concluded.
<PAGE>
In connection with those discussions, on or about September 12, 1997,
nine franchisees of GACC filed an action in the Superior Court of New Jersey,
Mercer County, against the Company, Capricorn and other defendants, challenging
a possible acquisition of GACC by the Company. Goldberg, et al. v. Great
American Cookie Company, et al., Docket No. MER-L-3502-97 (Super Ct. Mercer
County). The complaint asserts that the proposed sale violates Illinois,
Indiana, Maryland, New Jersey and Virginia franchise law, violates North
Carolina, South Carolina and Texas unfair trade practices acts, breaches the
plaintiffs' franchise contracts and tortiously interferes with the plaintiffs'
actual and prospective contractual relationships. Management believes that it
has good and meritorious defenses to the action and intends to defend the case
vigoursly. Currently there are ongoing negotiations between the parties. An
extension date of April 3, 1998 was granted to the defendant to file an answer.
The Company's stores and products are subject to regulation by numerous
governmental authorities, including, without limitation, federal, state and
local laws and regulations governing health, sanitation, environmental
protection, safety and hiring and employment practices.
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the
executive officers and directors of Mrs. Fields as of January 3, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Title
- ---- --- -----
Larry A. Hodges....................... 48 Director, President and Chief Executive Officer
L. Tim Pierce......................... 46 Senior Vice President, Chief Financial Officer and Secretary
Pat W. Knotts......................... 43 Senior Vice President of Operations
Julie Byerlein........................ 39 Senior Vice President of Marketing and Licensing
Garry Remington....................... 45 Senior Vice President of Real Estate
Michael R. Ward....................... 39 Vice President of Administration and Legal Department
Herbert S. Winokur, Jr................ 54 Chairman of the Board of Directors
Richard Ferry......................... 59 Director
Debbi Fields.......................... 41 Director
Nat Gregory........................... 50 Director
Walker Lewis.......................... 53 Director
Peter Mullin.......................... 56 Director
Gilbert Osnos......................... 67 Director
</TABLE>
.........Mr. Hodges has been President and Chief Executive Officer of MFI
and Mrs. Fields since March 1994, and a Director 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., Coinstar, Inc. and Pretzel Time, Inc.
.........Mr. Pierce has been Senior Vice President of MFI and Mrs. Fields
since December 1991, and Chief Financial Officer since August 1993. He was
appointed Corporate Secretary in April 1995. Since joining MFI in 1988 and prior
to becoming Senior Vice President, Mr. Pierce had served as Vice President of
Finance. He was also an Audit Manager and a Senior Audit Manager with Price
Waterhouse in Salt Lake City, Utah, and New York, New York. Mr. Pierce is a
certified public accountant and has also served on the Board of Directors of
Mountain America Credit Union and currently serves as a Director of Pretzel
Time, Inc.
.........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.
.........Ms. Byerlein has been Senior Vice President of Mrs. Fields since
May 1997. Ms. Byerlein's responsibilities include all aspects of marketing,
including development and implementation, product assortment and merchandising,
brand championship and new business development. From 1989 to 1997, Ms. Byerlein
was with Chef America, Inc., manufacturer of Hot Pockets brand sandwiches, first
as Marketing Director and then as Vice President of Marketing.
.........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, and from 1992 to 1994, Mr. Remington
was Vice President and Director of Leasing for the Woolworth Corporation, which
he joined in 1972.
.........Mr. Ward has been Vice President of Administration for Mrs. Fields
since September 1996. Mr. Ward's responsibilities include management of the
Human Resources Department, Benefits and the Legal Department. Between 1991 and
1996, Mr. Ward's responsibilities were overseeing the Legal Department and the
Human Resources Department for MFI. He is admitted to practice law in the State
of Utah.
<PAGE>
.........Mr. Winokur has been Chairman of the Board of Directors of Mrs.
Fields since its inception in September 1996. Mr. Winokur is the Manager of
Capricorn Holdings, L.L.C. (?Capricorn Holdings?), the General Partner of
Capricorn. Mrs. Fields is owned by MFH, a portfolio company of Capricorn which
owns the majority of MFH's stock. Mr. Winokur is also the Managing General
Partner of Capricorn Investors, L.P. (?Capricorn I?). Capricorn and Capricorn I
are private investment partnerships, organized by Mr. Winokur in 1994 and 1987,
respectively, that focus on investments in businesses that require financial
and/or operating restructuring or recapitalization. Mr. Winokur is also a
Managing Partner of Capricorn Management, G.P., which provides advisory and
management services to Capricorn, and is a director of Enron Corp., Nac Re
Corp., WMF Corp., 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.
.........Debbi Fields has been a Director of Mrs. Fields since its
inception in September 1996. Debbi Fields founded a predecessor to Mrs. Fields
in 1977 and served as President and Chief Executive Officer until 1993. She
currently serves on the Board of several non-profit organizations and lectures
throughout the United States to Fortune 500 companies. Debbi Fields is a
director of Outback Steakhouse, Inc.
.........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, an international supplier of oilfield production
equipment, which is a portfolio company of Capricorn I. Prior to that he served
as Executive Vice President 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 has been Chairman of Devon Value Advisers since
January 1997. Prior to that, for 20 years, 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. (?Dillon Read?) from
1995-1997 and his company, Devon Value Advisors, continues to act as a
consultant to Dillon Read. During 1994, he was a Managing Director of Kidder,
Peabody & Co., Inc. From 1992 to 1994, he was 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 (since 1993), American Management Systems,
Incorporated (since 1995), Jostens, Inc. (since 1997), Marakon Associates (since
1995), and was on the Board of Directors of Unilab Corporation from 1994 to
1997.
.........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. 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, and Mr. Osnos served as
interim chief executive officer of County Seat Stores Inc. in 1996. He is also a
founder and past Chairman of the Turnaround Management Association, which he has
been a member of since prior to 1992. Prior to September 1996, Mr. Osnos was on
the Board of Directors of MFI beginning in 1993. Mr. Osnos serves on the Board
of Directors of Furrs/Bishop's, Incorporated. Since the fall of 1997, Mr. Osnos
has also been a director of American Specialty Retail Group, Inc.
<PAGE>
Executive Compensation
.........The following table sets forth information with regard to compensation
for services rendered in all capacities to the Company by the Chief Executive
Officer, the four most highly compensated executive officers other than the CEO
who were serving as executive officers at the end of the last completed fiscal
year and two additional individuals for whom disclosure would have been
provided, but for the fact that the individual was not serving as an executive
officer at the end of the last completed fiscal year. Information set forth in
the table reflects compensation earned by such individuals for services with the
Company or its subsidiaries.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
------------------------------------ -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Other Restricted Underlying
Name and Annual Stock Options/ LTIP All Other
Principal Position Salary Bonus Compensation Award(s) SARs Payouts Compensation
Year ($) ($) ($) ($) (#) ($) ($)
----------- ---------- ------------- ---------- ---------- -------- -----------
Larry Hodges 1997 $300,000 $185,412 $1,875 - - - -
President and CEO 1996 262,834 - 1,656 - - - -
1995 247,313 200,000 1,250 - - - -
L. Tim Pierce 1997 175,000 103,607 1,111 - - - -
Senior Vice President 1996 167,723 - 1,107 - - - 33,000(1)
and CFO 1995 164,180 52,000 1,494 - - - 33,000(1)
Pat Knotts 1997 162,500 27,321 - - - - -
Senior Vice President 1996 172490 267,212 (2) - - - - 23,920(3)
Operations 1995 157635 - - - - - 2,912(4)
Michael Ward 1997 109,904 56,393 537 - - - -
Vice President Legal 1996 - 526 - - - -
and 1995 83,020 8,650 442 - - - -
Administration
83,095
Julie Byerlein(5) 1997 121,375 - - - - - -
Senior Vice President 1996 - - - - - - -
Marketing and Licensing 1995 - - - - - - -
Keith Gerson(6) 1997 116,252 28,250 - - - -
Senior Vice President 1996 112,905 - 681 - - - -
Franchising 1995 117,883 16,426 974 - - - -
Bill Miko(6) 1997 106,777 13,661 - - - - -
Vice President 1996 98,168 16,570 - - - - -
Operations 1995 97,464 - - - - - -
<FN>
(1) Represents forgiveness of a loan made by the Company in 1993.
(2) Represents payments under retention and employment agreements from Original
Cookie/Hot Sam.
(3) Represents payment of relocation expenses of $20,920 and a grant of $3,000
under the Original Cookie 401(k) plan.
(4) Represents a grant under the Original Cookie 401(k) plan.
(5) Started with the Company in May 1997.
(6) Keith Gerson and Bill Miko resigned from the Company in 1997.
</FN>
</TABLE>
Option Grants and Exercises
The Board of Directors of MFH has approved the provisions of the Director
Stock Option Plan and the Director Stock Purchase Plan, providing for the
issuance of capital stock of MFH to directors of MFH. In addition, it is
currently expected that the Employee Stock Option will be established providing
for the issuance of MFH capital stock for officers and other employees of MFH
and its subsidiaries, including the Company. The Plans will provide for the
issuance of up to 15% of the capital stock of MFH to directors of MFH and
officers and employees of MFH's subsidiaries, including the Company.
<PAGE>
Board Compensation
Board members, other than officers of the Company and Mr. Winokur, Mr.
Gregory and Ms. Fields, are compensated for services rendered annually as
follows: (i) $12,000 cash and (ii) grants of options to purchase MFH common
stock and stock pursuant to the Director Stock Option Plan. The directors are
also being offered a one-time opportunity to acquire shares of MFH common stock
pursuant to the Directors Stock Purchase Plan. Such compensation in shares that
would be payable or issuable to Messrs. Winokur and Gregory will be paid by
Capricorn. The Board of Directors of Mrs. Fields meets regularly on a quarterly
basis and more often required.
The Board of Directors of MFH had approved the award of options to purchase
3,350 shares of MFH common stock to each of Messrs. Ferry, Gregory, Lewis, Osnos
and Winokur as of January 1, 1997, at an exercise price of $10.00 per share, and
the award of options to purchase 1,792 shares of MFH common stock at an exercise
price of $16.74 to each of the same directors, with the options of Messrs.
Gregory and Winokur being issued to Capricorn.
Board Committees
Three functioning committees of the Board have been organized including (i)
Executive Committee, (ii) Compensation Committee and (iii) 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 the
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 the Company 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 the Company.
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 the Company's accounting and financial reporting process in
consultation with the Company's independent and internal auditors.
Indemnification and Compensation
The Company's By-Laws authorize the Company 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.
Employment Agreements
All of the executive officers are parties to employment agreements with
the Company. 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 the Company to replace the Fiscal 1994
Incentive Compensation Plan of MFI, benefit plans and an equity-based plan or
arrangement. If the Company terminates employment for cause or if the employee
terminates employment without good reason, the Company has no further obligation
to pay the employee. 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 twenty-four or thirty-six 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 (except 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 market), officer, agent or director of a firm or
person that directly competes with the Company in a line or lines of business of
the Company that accounts for 10% or more of the Company's gross sales, revenues
or earnings before taxes. The employment agreements have customary provisions
for vacation, fringe benefits, payment of expenses and automobile allowances.
The employees who have such employment agreements, and their base salaries, are:
Larry Hodges, President and Chief Executive Officer, $300,000, L. Tim Pierce,
Senior Vice President, Chief Financial Officer and Secretary, $175,000, Pat
Knotts, Senior Vice President of Operations, $175,000, Michael Ward, Vice
President of Administration and Assistant Secretary, $125,000, Julie Byerlein,
Senior Vice President of Marketing, $175,000, and Garry Remington, Senior Vice
President of Real Estate, $175,000.
<PAGE>
OWNERSHIP OF CAPITAL STOCK
As of the date of this Prospectus, all of the capital stock of the Company
is owned by MFH, whose address is 462 West Bearcat Drive, Salt Lake City, Utah
84115. Without giving effect to the Plan approximtely 94% of the outstanding
capital stock of MFH is owned by Capricorn, whose address is 30 East Elm Street,
Greenwich, Connecticut 06830. See "Management-Option Grants and Exercises",
"-Board Compensation", "-Controllin Stockholder" and "Certain Relationships and
Related Transactions".
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Debbi Fields and Affiliates. In November 1996, the Company
entered into a consulting agreement (the ?Consulting Agreement?) with Debbi
Fields, a director of the Company, under which Debbi Fields travels and performs
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
20 additional days a year for additional pay of $5,000 per day. The compensation
increases by 10% a year beginning on January 1, 1999. The Consulting Agreement
expires on December 31, 1999. The Company may terminate the Consulting Agreement
for cause and Debbi Fields may terminate the Consulting Agreement at any time.
Under the Consulting Agreement, Debbi Fields may not disclose any confidential
information of the Company, such as recipes and trade secrets, and may not,
without the prior written consent of the Company, compete with the Company.
In addition, the Company 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 the Company in connection
with book and television series projects. Debbi Fields is required to pay 50
percent of any gross revenues in excess of $200,000 that she receives from the
book and television series projects to the Company as a license fee.
The Company leases certain office space to an entity which is owned in part
by Debbi Fields. Billings to the entity for the period from inception (September
18, 1996) to December 28, 1996 and the fiscal year ended January 3, 1998 totaled
approximately $60,000 and $274,000, respectively, of which approximately $29,000
and $23,000 is included in accounts receivable as of December 28, 1996 and
January 3, 1998, respectively. The Company believes that the arrangements are on
terms that could have been obtained from an unaffiliated third party.
Arrangements with Walker Lewis. Mr. Lewis, a director of the Company, acts
as a consultant and an advisor to Dillon Read. In early 1997, the Company paid
to Dillon Read a fee of approximately $707,000 in connection with the
restructuring of the Company in September 1996. In addition, Mr. Lewis' company,
Devon Value Advisers, has an agreement to provide advisory acquisition and
consulting services to the Company for a fee of $250,000, plus expenses. The
Company believes that the arrangements are on terms that could have been
obtained from an unaffiliated third party.
Arrangements with Peter Mullin. Mr. Mullin, a director of the Company, is
acting as a consultant in connection with certain of the Company's benefit plans
for employees and directors. To date, Mr. Mullin has not received any
compensation in connection with the consulting work and the terms of such
compensation had not been determined as of January 3, 1998.
Korn/Ferry Agreement. The Company has paid fees of approximately $47,000
and $157,000 during the period ended December 28, 1996 and the year ended
January 3, 1998, respectively, to Korn/Ferry International, an executive search
firm of which Richard Ferry, a director of the Company, is the Chairman, in
connection with the hiring of employees for the Company. The Company believes
that the arrangements are on terms that could have been obtained from an
unaffiliated third party.
Arrangements with MFH. The Company and MFH expect to enter into a Tax
Sharing Agreement as defined in and permitted by the Indenture. See ?Description
of Senior Notes-Certain Covenants.?
As of December 28, 1996 and January 3, 1998, the Company had receivables of
approximately $39,000 and $89,000 due from MFH and payables of $137,000 and
$194,000 due to MFH, respectively. The receivables stem primarily from goods
sold and an allocation of payroll and other operating expenses. The Company
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.
<PAGE>
At the time of the offering of the Old Senior Notes, MFH, which is
majority owned by Capricorn, was the holder of a $4,643,000 principal amount
subordinated note of the Company. The Company accrued interest of $130,000 in
fiscal year 1996 and $441,000 through November 26, 1997. All accrued interest
was paid in fiscal year 1997. The principal amount of this note was converted
into common equity of the Company in connection with the Refinancing. Messrs.
Winokur and Gregory, directors of the Company, are, respectively, the manager
and managing director of Capricorn Holdings, the General Partner of Capricorn.
Arrangements with MIDIAL. At the time of the offering of the Old Senior
Notes, a subsidiary of MIDIAL was the holder of $27,000,000 in aggregate
principal amount of senior notes of the Company and $8.4 million in aggregate
principal amount of subordinated notes of the Company as to which the Company
had accrued or paid interest of $683,000 in 1996 and of $3,177,000 through
November 26, 1997. In connection with the Refinancing, the Company repaid all
such notes and related interest. Mr. de Carbonnel, a former director of the
Company, serves as Chairman and Chief Executive Officer of MIDIAL. See ?The
Transactions-The Refinancing.?
Incentive Arrangements. Under the Senior Management Value Creation Plan,
the Board of Directors approved payments of $471,484 to Mr. Hodges, $71,867 to
Mr. Pierce, $71,078 to David Safari and $39,488 to Michael Ward. Mr. Hodges will
convert such payment rights into shares of MFH common stock. The Board of MFH
has approved a one-time opportunity to purchase MFH stock by Mr. Hodges of
30,000 shares for $250,000, by Mr. Mullin of 15,000 shares for $100,000, Mr.
Ferry of 10,000 shares for $66,667, Mr. Lewis of 7,500 shares for $50,000 and
Mr. Osnos of 7,500 shares for $50,000. In addition, the Board of MFH approved
the issuance of 20,000 shares of MFH common stock payable to Messrs. Winokur and
Gregory to Capricorn.
<PAGE>
DESCRIPTION OF SENIOR NOTES
General
The New Senior Notes offered hereby will be issued pursuant to an
Indenture (the ?Indenture?), dated as of November 26, 1997, between the Company,
MFB, and The Bank of New York, as trustee (the ?Trustee?). The terms of the
Senior Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
?Trust Indenture Act?). The New Senior Notes are subject to all such terms, and
Holders of New Senior Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Indenture is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. Copies
of the Indenture and the form of Senior Notes are filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The definitions of
certain terms used in the following summary are set forth below under "-Certain
Definitions." Wherever particular provisions of the Indenture are referred to in
this summary, such provisions are incorporated by reference as a part of the
statements made and such statements are qualified in their entirety by such
reference.
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. As of January 3, 1998, the Company (excluding its
subsidiaries) had approximately $0.2 million in indebtedness other than the
Senior Notes. The Senior Notes are fully and unconditionally guaranteed on a
senior basis by the Guarantors. The 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. As of January 3,
1998, the aggregate amount of indebtedness of the Company's subsidiaries was
approximately $0.9 million and the aggregate liquidation preference of
mandatorily redeemable preferred stock of the Company's subsidiaries was
approximately $1.5 million, all of which was issued by subsidiaries other than
the Guarantors and effectively rank senior in right of payment to the Senior
Notes. Although the Indenture limits the ability of the Company and its
subsidiaries to incur additional indebtedness and issue preferred stock, the
Company is permitted to incur additional indebtedness and issue preferred stock,
including secured indebtedness, under certain circumstances, which will
effectively rank senior to the Senior Notes with respect to the assets securing
such Indebtedness. See ?Risk Factors-Effective Subordination? and "-Certain
Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock."
Principal, Maturity and Interest
The Senior Notes are limited in aggregate principal amount to $200.0
million, of which $100.0 million have been issued, and will mature on December
1, 2004. Interest on the New Senior Notes will accrue at the rate of 101/8% per
annum and will be payable semi-annually in arrears on June 1 and December 1,
commencing on June 1, 1998, to holders of record of the New Senior Notes on the
immediately preceding May 15 and November 15. Interest on the New Senior Notes
will accrue from the most recent date to which interest has been paid on the Old
Senior Notes or, if no interest has been paid on the Old Senior Notes, from
November 26, 1997. Old Senior Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
whose Old Senior Notes are accepted for exchange will not receive any payment in
respect of interest on such Old Senior Notes otherwise payable on any interest
payment date the record date for which occurs on or after the consummation of
the Exchange Offer. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest on
the New Senior Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
holders of the Senior Notes at their respective addresses set forth in the
register of Holders of New Senior Notes; provided that all payments of
principal, premium, if any, and interest with respect to New Senior Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The New Senior Notes will be issued in
denominations of $1,000 and integral multiples thereof. For each Old Senior Note
accepted for exchange, the Holder of such Old Senior Note will receive a New
Senior Notes having a principal amount equal to that of the surrendered Old
Senior Note.
<PAGE>
Old Senior Notes and New Senior Notes will be treated as a single class
of securities under the Indenture.
Guarantees
The Company's payment obligations under the Senior Notes are fully and
unconditionally guaranteed on a senior unsecured basis (the ?Guarantees?) by MFB
and will be jointly and severally, fully and unconditionally guaranteed by any
additional Guarantors. The obligations of each Guarantor under its Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See, however, ?Risk Factors-Fraudulent Conveyance Considerations.? MFB is
currently, under the Old Guarantee, and will continue to be, under the New
Guarantee, the sole Guarantor of the Senior Notes, until there are any such
additional Guarantors.
The Indenture provides that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee under the Indenture, (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists, (iii) such Guarantor, or any
Person formed by or surviving any such consolidation or merger, would have
Consolidated Net Worth (immediately after giving effect to such transaction),
equal to or greater than the Consolidated Net Worth of such Guarantor
immediately preceding the transaction, and (iv) the Company would be permitted
by virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described above under the caption "-Certain Covenants-Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Guarantee; provided that the
Net Proceeds of such sale or other disposition are applied in accordance with
the applicable provisions of the Indenture. See ?Repurchase at the Option of
Holders-Asset Sales.?
Optional Redemption
The Senior Notes are not redeemable at the Company's option prior to
December 1, 2001. Thereafter, the Senior Notes are subject to redemption at any
time at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days' notice, in cash at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 1 of the years indicated below:
Year Percentage
2001....................................... 103.375%
2002....................................... 101.688%
2003 and thereafter........................ 100.000%
Notwithstanding the foregoing, during the first 48 months beginning
November 26, 1997, the Company may on any one or more occasions redeem up to an
aggregate of 35% of the aggregate principal amount of Senior Notes ever issued
under the Indenture at a redemption price equal to 110.125% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the
redemption date, with the net cash proceeds of one or more Public Equity
Offerings; provided that at least 65% of the aggregate principal amount of
Senior Notes ever issued under the Indenture remains outstanding immediately
after the occurrence of any such redemption; and provided further that such
redemption shall occur within 60 days of the date of the closing of any such
Public Equity Offering.
<PAGE>
Selection and Notice
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that no Senior Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Senior Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Senior Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Note shall state the portion of
the principal amount thereof to be redeemed. A new Senior Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Senior Note. Senior Notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on Senior Notes or portions of
them called for redemption.
Mandatory Redemption
Except as set forth below under the caption ??Repurchase at the Option
of Holders,? the Company is not required to make mandatory redemption or sinking
fund payments with respect to the Senior Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such holder's Senior Notes
pursuant to the offer described below (the ?Change of Control Offer?) at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon to the date of repurchase (the ?Change
of Control Payment?). Within 60 days following any Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Senior Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the ?Change of Control Payment Date?), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior Notes
as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Senior
Notes or portions thereof so tendered and (iii) deliver or cause to be delivered
to the Trustee the Senior Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Senior Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each holder of Senior Notes so tendered the Change of Control Payment for such
Senior Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each holder a new Senior Note equal in
principal amount to any unpurchased portion of the Senior Notes surrendered, if
any, provided that each such new Senior Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Senior Notes to require that
the Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization or similar transaction.
It is expected that future Indebtedness of the Company will contain
prohibitions of certain events that would constitute a Change of Control. In
addition, the exercise by the Holders of Senior Notes of their right to require
the Company to repurchase the Senior Notes could cause a default under such
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Company. Finally, the Company's
ability to pay cash to the holders of Senior Notes upon a repurchase may be
limited by the Company's then existing financial resources. See ?Risk
Factors-Inability to Purchase Senior Notes Upon Change of Control.?
<PAGE>
The Company will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Senior Notes validly tendered and not withdrawn under such Change
of Control Offer.
?Change of Control? means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any ?person? (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below); (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company; (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
?person? (as defined above), other than the Principals or their Related Parties,
becomes the ?beneficial owner? (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that a person shall be deemed to have
?beneficial ownership? of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares); or (iv) the first day on which a majority of the members of
the Board of Directors of the Company are not Continuing Directors. For purposes
of this definition, any transfer of an equity interest of an entity that was
formed for the purpose of acquiring Voting Stock of the Company will be deemed
to be a transfer of such portion of such Voting Stock as corresponds to the
portion of such equity of such entity that has been so transferred.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of ?all or substantially
all? of the assets of the Company and its Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
?substantially all,? there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Senior Notes to
require the Company to repurchase such Senior Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of the Company and its Subsidiaries taken as a whole to another Person or group
may be uncertain.
?Continuing Directors? means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
?Principals? means Herbert S. Winokur, Jr. and Capricorn Investors II, L.P.
?Related Party? with respect to any Principal means (a) any greater
than 50% owned Subsidiary, or spouse or immediate family member (in the case of
an individual) of such Principal or (b) trust, corporation, general partnership
or other entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding a greater than 50% controlling interest of which consist,
or a limited partnership, the general partner of which consists, of the
Principals and/or such other Persons referred to in the immediately preceding
clause (a).
Asset Sales
The Indenture will provide that the Company will not, and will not
permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (in the case of
an Asset Sale or Asset Sales aggregating $10,000 or more, evidenced by an
officers' certificate delivered to the Trustee and, in the case of any Asset
Sale having a fair market value or resulting in net proceeds in excess of $5.0
million, evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Subsidiary is in the form
of cash, provided that the amount of (x) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet), of the Company or any
Subsidiary (other than contingent liabilities and liabilities that are by their
terms subordinated to the Senior Notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Subsidiary from further liability
and (y) any securities, notes or other obligations received by the Company or
any such Subsidiary from such transferee that are immediately converted by the
Company or such Subsidiary into cash (to the extent of the cash received), shall
be deemed to be cash for purposes of this provision.
<PAGE>
Within 270 days after the receipt of any Net Proceeds from an Asset
Sale, the Company may apply such Net Proceeds, at its option, (a) to repay
senior Indebtedness of the Company or any Guarantor or (b) to the making of a
Permitted Investment, the making of a capital expenditure in a Permitted
Business or the acquisition of long-term assets in a Permitted Business. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Indebtedness under a Credit Facility or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the first
sentence of this paragraph will be deemed to constitute ?Excess Proceeds.? When
the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will
be required to make an offer to all holders of Senior Notes (an ?Asset Sale
Offer?) to purchase the maximum principal amount of Senior Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount of Senior Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Senior Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Senior Notes
to be purchased on a pro rata basis. Upon completion of such offer to purchase,
the amount of Excess Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company) or
to the direct or indirect holders of the Company's or any of its Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company or dividends or distributions payable to the Company or any Wholly Owned
Subsidiary of the Company that is a Guarantor); (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
Interests of the Company or any direct or indirect parent of the Company or
other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Wholly Owned Subsidiary 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 a payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as ?Restricted Payments?),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the caption
"-Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and its
Subsidiaries after the Issue Date (excluding Restricted Payments
permitted by clause (ii), (iii) or (iv) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net
Income of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the
Issue Date to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit), plus (ii)
100% of the aggregate net cash proceeds (other than any proceeds
referred to in the proviso to the first sentence of the definition of
?Investments?) received by the Company from the issue or sale since the
Issue Date of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that
have been converted into such Equity Interests (other than Equity
Interests (or Disqualified Stock or convertible debt securities) sold
to a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that
was made after the Issue Date is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment.
<PAGE>
The foregoing provisions will not prohibit: (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend by a Subsidiary of the Company to the holders of any
Equity Interests on a pro rata basis; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Subsidiary of the Company held by any member of the Company's (or any of its
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed, during any twelve-month period, an aggregate amount equal to the sum of
$250,000, plus the amount of cash proceeds received by the Company from any
reissuance of Equity Interests by the Company to members of management of the
Company or its Subsidiaries during such period, which aggregate amount shall in
no event exceed $500,000 in any such period, and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction; (vi)
payments to MFH pursuant to the Tax Sharing Agreement; (vii) payments pursuant
to the Pretzel Time Employment Agreement and the Pretzel Time Management
Agreement; and (viii) the redemption or repurchase of preferred stock of Pretzel
Time outstanding on the Issue Date.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $2.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant ?Restricted
Payments? were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, ?incur?) any
Indebtedness (including Acquired Indebtedness) and that the Company will not
issue any Disqualified Stock and will not permit any of its Subsidiaries to
issue any shares of preferred stock; provided that the Company may incur
Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified
Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least (A) from the date of the Indenture to
December 31, 1999, 2.25 to 1 and (B) thereafter, 2.5 to 1, determined
on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period; and
(ii) the Weighted Average Life to Maturity of such
Indebtedness is equal to or greater than the remaining Weighted Average
Life to Maturity of the Senior Notes, provided that this clause (ii)
shall not apply in the case of Acquired Indebtedness.
The provisions of the first paragraph of this covenant will not apply
to the incurrence of any of the following items of Indebtedness (collectively,
?Permitted Indebtedness?):
<PAGE>
(i) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness other than the Senior Notes;
(ii) the incurrence by the Company on the Issue Date of
Indebtedness represented by the Senior Notes in an aggregate principal
amount not to exceed $100.0 million and the Guarantees thereof by the
Guarantors;
(iii) the incurrence by the Company or any of its Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for
the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in
the business of the Company or such Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(iv) the incurrence by the Company or any of its Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace Indebtedness
that was permitted by the Indenture to be incurred;
(v) the incurrence by the Company or any of its Subsidiaries
of intercompany Indebtedness between or among the Company and any of
its Wholly Owned Subsidiaries, provided that (A) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations
with respect to the Senior Notes and (B)(1) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than the Company or a Wholly Owned
Subsidiary and (2) any sale or other transfer of any such Indebtedness
to a Person that is not either the Company or a Wholly Owned Subsidiary
shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be;
(vi) the incurrence by the Company of Hedging Obligations in the
ordinary course of business;
(vii) the incurrence of Indebtedness in connection with one or
more standby letters of credit, guarantees, performance or surety bonds
or other reimbursement obligations, in each case, issued in the
ordinary course of business and not in connection with the borrowing of
money or the obtaining of advances or credit (other than (A) advances
or credit on open account, includible in current liabilities, for goods
and services in the ordinary course of business and on terms and
conditions customary in a Permitted Business and (B) the extension of
credit represented by such letter of credit, guarantee, bond or other
obligation itself), provided that any draw under or call upon any of
the foregoing is repaid in full within 45 days, and provided further
that the aggregate amount of all Indebtedness incurred pursuant to this
clause (vii) shall not exceed $5.0 million at any time outstanding;
(viii) the incurrence of Indebtedness arising from agreements
of the Company or a Subsidiary providing for indemnification,
adjustment of purchase price or similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or Subsidiary (other than guarantees of Indebtedness incurred by
any Person acquiring all or a portion of such business, assets or
Subsidiary for the purpose of financing such acquisition), provided
that the maximum aggregate liability of all such Indebtedness shall at
no time exceed 50% of the gross proceeds actually received by the
Company or such Subsidiary in connection with such disposition;
(ix) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Subsidiary of the Company that is a
Guarantor that was permitted to be incurred by another provision of
this covenant;
(x) the incurrence by Pretzel Time of Indebtedness under a
working capital facility, provided that the aggregate principal amount
of all Indebtedness (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of Pretzel
Time thereunder) outstanding thereunder after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (x), does not exceed an amount equal to $1.0
million;
<PAGE>
(xi) the incurrence by the Company of additional Indebtedness
(including Indebtedness under a Credit Facility) in an aggregate
principal amount (or accreted value, as applicable), including all
Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any other Indebtedness incurred pursuant to this clause (xi),
not to exceed $15.0 million at any time outstanding;
(xii) the incurrence by the Company or any of its subsidiaries
of Acquired Indebtedness in an aggregate amount not to exceed $5.0
million at any time outstanding;
(xiii) the guarantee by the Company or any of its Subsidiaries
(other than MFB) of operating store lease obligations of the Company or
any of its Subsidiaries or any franchisee of the Company or any of its
Subsidiaries in the ordinary course of business and consistent with
past practice;
(xiv) the guarantee by any Subsidiary of the Company of
Indebtedness of the Company under any Credit Facility otherwise
permitted to be incurred under the Indenture;
(xv) the incurrence by the Company of Indebtedness in the form
of notes issued in connection with the repurchase, redemption,
acquisition or retirement of Equity Interests of the Company or any
Subsidiary of the Company in an amount not to exceed $500,000 at any
time outstanding and subordinated in right of payment to the Senior
Notes; and
(xvi) the incurrence by the Company of Indebtedness or the
guarantee by the Company of Indebtedness incurred by franchisees in
connection with the cost of purchasing a franchise and the cost of
equipment in connection with the set-up of a franchise, provided that
such Indebtedness or guarantee does not exceed $3.0 million at any time
outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (a)(i) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (A) on its Capital Stock
or (B) with respect to any other interest or participation in, or measured by,
its profits, or (ii) pay any indebtedness owed to the Company or any of its
Subsidiaries, (b) make loans or advances to the Company or any of its
Subsidiaries or (c) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (i) Existing Indebtedness as in effect on the Issue Date,
(ii) the Indenture and the Senior Notes, (iii) applicable law, (iv) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (v) by reason of customary non-assignment provisions
in leases entered into in the ordinary course of business and consistent with
past practices, (vi) purchase money obligations or Capital Lease Obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iv) above on the property so acquired, (vii)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (viii) customary restrictions imposed on the transfer of
copyrighted or patented materials and customary provisions in agreements that
restrict the assignees of such agreements or any rights thereunder or (ix)
restrictions with respect to a Subsidiary of the Company imposed pursuant to a
binding agreement relating to the sale or disposition of all or substantially
all of the Capital Stock or assets of such Subsidiary.
<PAGE>
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia, (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, (iii) immediately
after such transaction no Default or Event of Default exists and (iv) except in
the case of a merger of the Company with or into a Wholly Owned Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an ?Affiliate Transaction?),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been obtained
in a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (A) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (B) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing, provided that (u) payments to MFH
pursuant to the Tax Sharing Agreement, (v) any employment agreement entered into
by the Company or any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Subsidiary, (w)
transactions between or among the Company and/or its Subsidiaries, (x)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "-Restricted Payments," (y) the payment of
reasonable fees, expense reimbursements and customary indemnification, advances
and other similar arrangements to directors and officers of the Company and its
Subsidiaries and (z) reasonable loans or advances to employees of the Company
and its Subsidiaries in the ordinary course of business of the Company or such
Subsidiary, in each case, shall not be deemed Affiliate Transactions.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Subsidiaries
The Indenture provides that the Company (a) will not, and will not
permit any Wholly Owned Subsidiary of the Company to, transfer, convey, sell,
lease or otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary
of the Company to any Person (other than the Company or a Wholly Owned
Subsidiary of the Company), unless (i) such transfer, conveyance, sale, lease or
other disposition is of all the Capital Stock of such Wholly Owned Subsidiary
and (ii) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described above
under the caption ??Repurchase at the Option of Holders-Asset Sales,? and (b)
will not permit any Wholly Owned Subsidiary of the Company to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Subsidiary of the Company.
<PAGE>
Additional Subsidiary Guarantees
The Indenture provides that if (i) the Company or any of its
Subsidiaries shall acquire or create another domestic wholly owned Subsidiary
after the date of the Indenture having assets (A) with a fair market value in
excess of $100,000 or (B) consisting of one or more stores or (ii) the Company
acquires all remaining common stock of Pretzel Time, then such newly acquired or
created Subsidiary or Pretzel Time, as the case may be, shall become a Guarantor
and execute a Supplemental Indenture and deliver an Opinion of Counsel, in
accordance with the terms of the Indenture.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture provides that the Company will not permit any Subsidiary,
directly or indirectly, to guarantee, or pledge any assets to secure the payment
of (other than as a result of a Permitted Lien), any other Indebtedness of the
Company or any Subsidiary of the Company, unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
the Guarantee of the payment of the Senior Notes by such Subsidiary, which
Guarantee shall be senior to or pari passu with such Subsidiary's guarantee of
or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any
such Guarantee by a Subsidiary of the Senior Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
any sale, exchange or transfer, to any Person not an Affiliate of the Company,
of all of the Company's stock in, or all or substantially all the assets of,
such Subsidiary, which sale, exchange or transfer is made in compliance with the
applicable provisions of the Indenture. The form of such Guarantee will be
attached as an exhibit to the Indenture.
Business Activities
The Indenture provides that the Company will not, and will not permit
any Subsidiary to, engage in any business other than a Permitted Business,
except to such extent as would not be material to the Company and its
Subsidiaries taken as a whole.
In addition, the Indenture provides that (a) the Company will not
engage in any Asset Sale involving MFB, (b) neither the Company nor MFB will
engage in any Asset Sale involving the ?Mrs. Fields? or ?Pretzel Time? brand
name and (c) for so long as MFB is a Subsidiary of the Company, MFB shall not
incur any Indebtedness (other than its Guarantee of the Senior Notes and any
guarantee of Indebtedness under a Credit Facility).
Payments for Consent
The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Senior Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Senior Notes unless such
consideration is offered to be paid or is paid to all holders of the Senior
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the ?Commission?), so
long as any Senior Notes are outstanding, the Company will furnish to the
holders of Senior Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
?Management's Discussion and Analysis of Financial Condition and Results of
Operations? and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Guarantors have agreed that, for so long as any
Senior Notes remain outstanding, they will furnish to the holders of Senior
Notes and to securities analysts and prospective investors, upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
<PAGE>
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes; (ii) default in payment when due of the principal of or premium,
if any, on the Senior Notes; (iii) failure by the Company for 30 days after
notice to comply with any of its other agreements in the Indenture or the Senior
Notes; (iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the Issue
Date, which default (A) is caused by a failure to pay principal of or premium,
if any, or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a ?Payment
Default?) or (B) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $2.5 million or more; (v) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $2.5
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; and (vii) except as permitted by the
Indenture, any Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Senior Notes
may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Senior Notes will become
due and payable without further action or notice. Holders of the Senior Notes
may not enforce the Indenture or the Senior Notes except as provided in the
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding Senior Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Senior Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Senior Notes. If an Event of Default occurs prior
to December 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Senior Notes prior to December 1, 2001, then
the premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Notes.
The holders of a majority in aggregate principal amount of the Senior
Notes then outstanding by notice to the Trustee may on behalf of the holders of
all of the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
<PAGE>
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Senior Notes, the Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of Senior Notes
by accepting a Senior Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Senior Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Senior Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Senior Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Senior Notes
concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Senior Notes
are being defeased to maturity or to a particular redemption date, (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Senior Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred, (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the holders of the outstanding Senior
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred, (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit, (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound, (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that, after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of Senior Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
<PAGE>
Transfer and Exchange
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Senior Note selected for redemption. Also, the Company is not required to
transfer or exchange any Senior Note for a period of 15 days before a selection
of Senior Notes to be redeemed.
The registered holder of a Senior Note will be treated as the owner of
it for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture
or the Senior Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Senior Notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, Senior Notes), and any
existing default or compliance with any provision of the Indenture or the Senior
Notes may be waived with the consent of the holders of a majority in principal
amount of the then outstanding Senior Notes (including consents obtained in
connection with a tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Senior Notes held by a non-consenting Holder): (i)
reduce the principal amount of Senior Notes whose holders must consent to an
amendment, supplement or waiver; (ii) reduce the principal of or change the
fixed maturity of any Senior Note or alter the provisions with respect to the
redemption of the Senior Notes (other than provisions relating to the covenants
described above under the caption ("Repurchase at the Option of Holders"); (iii)
reduce the rate of or change the time for payment of interest on any Senior
Note; (iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Senior Notes (except a rescission of
acceleration of the Senior Notes by the Holders of at least a majority in
aggregate principal amount of the Senior Notes and a waiver of the payment
default that resulted from such acceleration); (v) make any Senior Note payable
in money other than that stated in the Senior Notes; (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of holders of Senior Notes to receive payments of principal of or premium, if
any, or interest on the Senior Notes; (vii) waive a redemption payment with
respect to any Senior Note (other than a payment required by one of the
covenants described above under the caption ("Repurchase at the Option of
Holders"); or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any holder of
Senior Notes, the Company and the Trustee may amend or supplement the Indenture
or the Senior Notes to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Senior Notes in addition to or in place of certificated
Senior Notes, to provide for the assumption of the Company's obligations to
holders of Senior Notes in the case of a merger or consolidation, to make any
change that would provide any additional rights or benefits to the holders of
Senior Notes or that does not adversely affect the legal rights under the
Indenture of any such holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
<PAGE>
Concerning the Trustee
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Senior Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture
and Registration Rights Agreement without charge by writing to Mrs. Fields'
Original Cookies, Inc., 462 West Bearcat Drive, Salt Lake City, Utah, 84115,
Attention: Michael Ward.
Book-Entry, Delivery and Form
New Senior Notes exchanged for Old Senior Notes through the Book-Entry
Transfer Facility may be represented by one or more Global Notes (the "New
Global Notes"). One New Global Note shall be issued with respect to each $100
million aggregate principal amount at maturity of the New Global Notes. The New
Global Notes will be issued on the date of the closing of the Exchange Offer
with the Trustee, as custodian of The Depository Trust Company (the
"Depository"), pursuant to a FAST Balance Certificate Agreement between the
Trustee and DTC and registered in the name of Cede & Co., as nominee of DTC
(such nominee being referred to herein as the "Global Holder").
New Senior Notes exchanged for Old Senior Notes which are in the form
of registered definitive certificates (the "Certificate Notes") will be issued
in the form of Certificated Notes. Such Certificate Notes may, unless the New
Global Note has previously been exchanged for Certificated Notes, be exchanged
for an interest in the New Global Note representing the principal amount of New
Senior Notes being transferred.
The Depository has advised the Company that a limited-purchase trust
company was created to hold securities for its participating organizations
(collectively, the "Participants" or the "Depository's Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depository's system
is also available to the other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the "Depository's
Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depository only through the Depository's Participants or the Depository's
Indirect Participants.
<PAGE>
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the New Global Notes, the Depository will credit
the accounts of Participants with portions of the New Global Notes; and (ii)
ownership of the New Senior Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depository (with respect to the interests of the Depository's participants), the
Depository's Participants and the Depository's Indirect Participants. The laws
of some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer New
Senior Notes will be limited to such extent.
For so long as the Global Holder is the registered owner of any New
Senior Notes the Global Holder will be considered the sole owner of such New
Senior Notes outstanding under the Indenture. Except as provided below, owners
of beneficial interests in a New Global Note will not be entitled to have New
Senior Notes represented by such New Global Note registered in their names, will
not receive or be entitled to receive physical delivery of Certificated New
Senior Notes, and will not be considered the owners or holders thereof under the
Indenture for any purpose. As a result, the ability of a person having a
beneficial interest in New Senior Notes represented by a New Global Note to
pledge such interest to persons or entities that do not participate in the
Depository's system or to otherwise take actions in respect of such interest,
may be affected by the lack of physical certificate evidencing such interest.
Accordingly, each person owning a beneficial interest in a New Global Note must
rely on the procedures of the Depository and, if such person is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a holder
under such New Global Note of the Indenture.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of New Senior Notes by the Depository, or for maintaining, supervising or
reviewing any records of the Depository relating to such New Senior Notes.
Payments in respect of the principal of, premium, if any, and interest
on any New Senior Notes registered in the name of a Global Holder on the
applicable record date will be payable by Trustee to or at the direction of such
Global Holder in its capacity as the registered holder under the Indenture.
Under the terms of the Indenture, the Company and the Trustees may treat the
persons in whose name the New Senior Notes, including the New Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of New Senior Notes (including principal,
premium, if any and interest), or to immediately credit the accounts of the
relevant Participants with such payment, in amounts proportionate to their
respective interests in the New Global Notes in principal amount of beneficial
interests in the relevant security as shown on the records of the Depository.
Payments by the Depository's Participants and the Depository's Indirect
Participants to the beneficial owners of New Senior Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depository's Participant or the Depository's Indirect Participants.
Certificated Securities
If (i) the Company notifies the Trustee in writing that the Depository
is no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the New
Senior Notes in definitive form under the Indenture, then, upon surrender by the
relevant Global Holder of its New Global Note, New Senior Notes in such form
will be issued to each person that such Global Holder and the Depository
identifies as the beneficial owner of the related New Senior Notes. In addition,
subject to certain conditions, any person having a beneficial interest in the
New Global Note may, upon request to the Trustee, exchange such beneficial
interest for Certificated New Senior Notes. Upon any such issuance, the Trustee
is required to register such New Senior Notes in the name of, and cause the same
to be delivered to, such person or persons (or the nominee of any thereof). Such
New Senior Notes would be issued in fully registered forms.
<PAGE>
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the New Senior Notes
represented by the New Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately-available, same-day funds to
the accounts specified by the Holder of interest in such New Global Note. With
respect to Certificated New Senior Notes, the Company will make all payments of
principal, premium, if any, and interest, by wire transfer of
immediately-available funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
Certificated New Senior Notes will also be settled in immediately-available
funds.
Exchange Offer; Registration Rights
The Company, the Guarantor and the Initial Purchasers entered into the
Registration Rights Agreement on November 26, 1997 (the "Issue Date"). Pursuant
to the Registration Rights Agreement, the Company and the Guarantor agreed (i)
to file with the Commission the Registration Statement under the Securities Act
with respect to the New Senior Notes within 60 days, (ii) that the Company and
the Guarantor will use their best efforts to have the Registration Statement
declared effective by the Commission on or prior to 120 days after the Issue
Date, and (iii) unless the Exchange Offer would not be permitted by applicable
law or Commission policy, the Company will commence the Exchange Offer and use
its best efforts to issue on or prior to 30 business days after the date on
which the Registration Statement is declared effective by the Commission, New
Senior Notes in exchange for all Old Senior Notes tendered prior thereto in the
Exchange Offer. If (a) the Company and the Guarantor failed to file the
Registration Statement on or before the date specified for such filing the
Registration Statement is not declared effective by the Commission on or prior
to the date specified for such effectiveness (the "Effectiveness Target Date"),
or (b) the Company fails to consummate the Exchange Offer within 30 business
days of the Effectiveness Target Date with respect to the Registration
Statement, or (c) the Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (c) above a
"Registration Default"), then the Company and the Guarantors will pay liquidated
damages ("Liquidated Damages") to each holder of Old Senior Notes, with respect
to the first 90-day period immediately following the occurrence of the first
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Senior Notes held by such holder. The amount of the Liquidated Damages
will increase by an additional $.05 per week per $1,000 principal amount of Old
Senior Notes with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.20 per week per $1,000 principal amount of Old Senior Notes. All
accrued Liquidated Damages will be paid by the Company on each Damages Payment
Date (which correspond to Interest Payment Dates on the Senior Notes) to the
Global Holder by wire transfer of immediately available funds or by federal
funds check and to holders of Certificated Old Senior Notes by wire transfer to
the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. The company
and the Guarantor initially filed the Registration Statement on January 29,
1998, 64 days after the Issue Date. In addition, the Registration Statement was
declared effective on April 24, 1998, 29 days after the Effectiveness Target
Date. As a result, the Company is obligated to pay $30,000 in Liquidated Damages
to Holders of the Old Senior Notes.
Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
?Accounting Firm? means any of Arthur Andersen LLP, Coopers & Lybrand
L.L.P., Deloitte & Touche LLP, Ernst & Young LLP, KPMG Peat Marwick LLP and
Price Waterhouse LLP or any of their successor firms.
?Acquired Indebtedness? means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, excluding,
however, Indebtedness incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Subsidiary of such specified
Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired
by such specified Person.
?Affiliate? of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, ?control?
(including, with correlative meanings, the terms ?controlling,? ?controlled by?
and ?under common control with?), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
?Asset Sale? means (i) the sale, lease, conveyance or other disposition
of any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption ??Repurchase at the Option of
Holders-Change of Control? and/or the provisions described above under the
caption ??Certain Covenants-Merger, Consolidation, or Sale of Assets? and not by
the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (A) that have a fair market
value in excess of $1.0 million or (B) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or
to another Wholly Owned Subsidiary, (ii) an issuance of Equity Interests by a
Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary,
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "-Certain Covenants-Restricted Payments," (iv) arrangements
providing for the receipt by the Company of franchise and royalty fees but not
otherwise involving the sale of assets of the Company or any of its Subsidiaries
(other than inventory in the ordinary course of business) and (v) a disposition
of any Non-Core Stores will not be deemed to be Asset Sales.
?Capital Lease Obligation? means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
?Capital Stock? means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
?Cash Equivalents? means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition, (iii) marketable direct
obligations issued by any State of the United States or any local government or
other political subdivision thereof rated (at the time of the acquisition of
such security) at least ?AA? by S&P or the equivalent thereof by Moody's and
having maturities of not more than one year from the acquisition of such
security, (iv) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having capital and
surplus in excess of $500 million and a Keefe Bank Watch Rating of ?B? or better
or with any registered broker-dealer whose commercial paper is rated at least
?A-1? by S&P or the equivalent thereof by Moody's, (v) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iv) above entered into with any financial
institution meeting the qualifications specified in clause (iv) above, (vi)
commercial paper rated at least ?A-1? by S&P or the equivalent thereof by
Moody's and, in each case, maturing within six months after the date of
acquisition, and (vii) investments in money market funds all of whose assets
consist of securities described in clauses (ii) through (vi) above.
?Commission? means the Securities and Exchange Commission.
<PAGE>
?Consolidated Cash Flow? means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i) an
amount equal to any extraordinary loss plus any net loss realized in connection
with an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent and in the same proportion that the
net income of such Subsidiary was included in calculating Consolidated Net
Income and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
?Consolidated Net Income? means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Wholly Owned Subsidiary thereof that is a
Guarantor, (ii) the Net Income of any Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
?Consolidated Net Worth? means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
?Credit Facility? means, with respect to the Company, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders (including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith) providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit up to a
maximum aggregate amount of not more than $15.0 million, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
<PAGE>
?Default? means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
?Disqualified Stock? means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Senior Notes mature, provided that a
class of Capital Stock shall not be Disqualified Stock solely as a result of any
maturity or redemption that is conditioned upon, and subject to, compliance with
the covenant described under the caption "-Certain Covenants-Restricted
Payments."
?Equity Interests? means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
?Existing Indebtedness? means Indebtedness of the Company and its
Subsidiaries (including preferred stock of Pretzel Time outstanding on the Issue
Date but excluding any Indebtedness of the Company or any of its Subsidiaries
under any Credit Facility existing on the Issue Date) in existence on the Issue
Date, until such amounts are repaid.
?Fixed Charges? means, with respect to any Person for any period, the
sum, without duplication, of (i) the consolidated interest expense of such
Person and its Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), (ii) the consolidated
interest expense of such Person and its Subsidiaries that was capitalized during
such period, (iii) any interest expense on Indebtedness of another Person that
is guaranteed by such Person or one of its Subsidiaries or secured by a Lien on
assets of such Person or one of its Subsidiaries (whether or not such guarantee
or Lien is called upon), and (iv) the product of (A) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company, times (B) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with GAAP.
?Fixed Charge Coverage Ratio? means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the ?Calculation Date?),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date, and (iv) the financial information of the Company with
respect to any portion of the four fiscal quarters prior to the Issue Date may
be adjusted to eliminate certain historical expenses that are not expected to
recur after the consummation of the Pretzel Contributions so long as such
adjustments are not deemed to be contrary to the requirements of Regulation S-X
under the Securities Act by an Accounting Firm. In calculating the Fixed Charge
Coverage Ratio for any period, to the extent that the proceeds from the
incurrence of any Indebtedness are to be used to fund the acquisition of Equity
Interests or assets in a Permitted Business, the Company may include any pro
forma adjustments permitted by Regulation S-X under the Securities Act in its
calculation of the amount of Consolidated Cash Flow that relate solely to such
acquisition, so long as such pro forma adjustments are not deemed to be contrary
to the requirements of Rule 11-02 of Regulation S-X under the Securities Act in
writing by an Accounting Firm.
<PAGE>
?GAAP? means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
?guarantee? means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
?Guarantors? means (i) MFB and (ii) any other Subsidiary that executes a
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
?Hedging Obligations? means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest or foreign currency exchange rates.
?Indebtedness? means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, as well as all indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and, to the extent not otherwise
included, the guarantee by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be (i) the
accreted value thereof, in the case of any Indebtedness that does not require
current payments of interest, and (ii) the principal amount thereof, together
with any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
?Investments? means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP,
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common stock of the Company shall
not be deemed to be an Investment. If the Company or any Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption ??Certain
Covenants-Restricted Payments.?
?Issue Date? means November 26, 1997.
?Lien? means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction),
provided that the definition of ?Lien? shall not include any option, call or
similar right relating to treasury shares of the Company to the extent that such
option, call or right is granted (i) under any employee stock option plan,
employee stock ownership plan or similar plan or arrangement of the Company or
its Subsidiaries or (ii) in connection with the issuance of Indebtedness
permitted to be incurred pursuant to the covenant described under the caption
??Certain Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock.?
?MFB? means The Mrs. Fields' Brand, Inc., a Delaware corporation and a
wholly owned subsidiary of the Company.
<PAGE>
?MFH? means Mrs. Fields' Holding Company, Inc., a Delaware corporation and
the corporate parent of the Company.
?Moody's? means Moody's Investors Service, Inc.
?Net Income? means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (A) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (B) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
?Net Proceeds? means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale but only as and when
received), net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the permanent repayment of, or permanent reduction in availability or
commitment under, Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
?Non-Core Stores? means the stores listed in Exhibit B to the Indenture.
?Obligations? means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
?Permitted Business? means the same or a similar line of business as
the Company and its Subsidiaries were engaged in on the Issue Date, including,
without limitation, the specialty retail snack-food business.
?Permitted Investments? means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company that is a Guarantor and that is engaged
in a Permitted Business, (b) any Investment in Cash Equivalents, (c) any
Investment by the Company or any Subsidiary of the Company in a Person, if as a
result of such Investment (i) such Person becomes a Wholly Owned Subsidiary of
the Company and a Guarantor that is engaged in a Permitted Business or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Wholly Owned Subsidiary of the Company that is a Guarantor and that is
engaged in a Permitted Business, (d) any Restricted Investment made as a result
of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "-Repurchase at the Option of Holders-Asset Sales," (e) any acquisition
of assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company, (f) any Investments in accounts and notes
receivable acquired in the ordinary course of business, (g) any Investments in
notes of employees, officers, directors and their transferees and Affiliates
issued to the Company representing payment of the exercise price of options to
purchase common stock of the Company, (h) any Investments by the Company in
Hedging Obligations otherwise permitted to be incurred under the Indenture, (i)
any Investments existing on the Issue Date (including, without limitation, a
$500,000 loan to Martin E. Lisiewski outstanding as of the Issue Date) and ( j)
any purchase of any and all remaining common stock of PTI.
?Permitted Liens? means (i) Liens securing Indebtedness under a Credit
Facility that was permitted by the terms of the Indenture to be incurred, (ii)
Liens in favor of the Company, (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company, provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company, (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition and do not extend to
any assets of the Company other than the property so acquired, (v) Liens to
secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business, (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clauses (iii) and (x) of the second paragraph of the
covenant entitled ?Incurrence of Indebtedness and Issuance of Preferred Stock,?
<PAGE>
provided that, in the case of Indebtedness permitted by such clause (iii),
covering only the assets acquired with such Indebtedness, (vii) Liens existing
on the Issue Date, (viii) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor, and (ix) Liens incurred in
the ordinary course of business of the Company or any Subsidiary of the Company
that (A) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (B) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Subsidiary.
?Permitted Refinancing Indebtedness? means any Indebtedness of the
Company or any of its Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries, provided that (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded ( plus the amount of
reasonable expenses incurred in connection therewith), (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Senior Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Senior Notes on terms at least
as favorable to the holders of Senior Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded, and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
?Pretzel Time? means Pretzel Time, Inc., a Pennsylvania corporation.
?Pretzel Time Employment Agreement? means that certain Employment
Agreement, dated as of September 2, 1997, between Pretzel Time and Martin E.
Lisiewski.
?Pretzel Time Management Agreement? means that certain Management
Agreement, dated as of September 2, 1997, between the Company and Pretzel Time.
?Public Equity Offering? means a public offering registered under the
Securities Act (except for any registration pursuant to Form S-8) of common
stock of (i) the Company or (ii) MFH to the extent that the net proceeds thereof
are contributed to the Company as a capital contribution, provided that the
aggregate proceeds from any such public offering shall in no event be less than
$20.0 million.
?Restricted Investment? means an Investment other than a Permitted
Investment.
?S&P? means Standard & Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc.
?Significant Subsidiary? means any Subsidiary that would be a ?significant
subsidiary? as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the Issue
Date.
?Stated Maturity? means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
?Subsidiary? means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (B)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
<PAGE>
?Tax Sharing Agreement? means any tax allocation agreement between the
Company or any of its Subsidiaries with the Company or any direct or indirect
shareholder of the Company with respect to consolidated or combined tax returns
including the Company or any of its Subsidiaries, but, in each case, only to the
extent that amounts payable from time to time by the Company or any such
Subsidiary under any such agreement do not exceed the corresponding tax payments
that the Company or such Subsidiary would have been required to make to any
relevant taxing authority had the Company or such Subsidiary not joined in such
consolidated or combined returns, but instead had filed returns including only
the Company and its Subsidiaries.
?Voting Stock? of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
?Weighted Average Life to Maturity? means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (A) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (B) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
?Wholly Owned Subsidiary? of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person and one
or more Wholly Owned Subsidiaries of such Person.
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Senior Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Senior Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Senior Notes received in
exchange for Old Senior Notes where such Old Senior Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 120 days after the consummation of the Exchange
Offer, it will make this Prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition, until
July 23, 1998, all dealers effecting transactions in the New Senior Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Senior
Notes by broker-dealers. New Senior Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Senior Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or though brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Senior Notes. Any broker-dealer
that resells New Senior Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Senior Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
New Senior Notes and any commission or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 120 days after the consummation of the Exchange Offer,
the Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal or Agent's Message. The Company has
agreed to pay all expenses incident to the Exchange Offer (including the
expenses of one counsel for the Holders of the Notes in an amount up to $50,000)
other than commissions or concessions of any brokers or dealers and will
indemnify the Holders of the Notes (including any broker-dealer) against certain
liabilities, including liabilities under the Securities Act.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. Federal income tax
consequences associated with the exchange of the Old Senior Notes for the New
Senior Notes pursuant to the Exchange Offer. The summary is based upon current
laws, regulations, rulings and judicial decisions all of which are subject to
change, possibly with retroactive effect. the discussion below does not address
all aspects of U.S. Federal income taxation that may be relevant to particular
Holders of Old Senior Notes or New Senior Notes. In addition, the discussion
does not address any aspect of state, local or foreign taxation.
The exchange of the Old Senior Notes for the New Senior Notes pursuant
to the Exchange Offer should not be treated as an "exchange" for U.S. Federal
income tax purposes because the New Senior Notes should not be considered to
differ materially in kind or extent from the New Senior Notes. Rather, the New
Senior Notes received by a Holder should be treated as a continuation of the Old
Senior Notes in the hands of such Holder. As a result there should be no U.S.
Federal income tax consequences to Holders exchanging the Old Senior Notes for
the New Senior Notes pursuant to the Exchange Offer, and any exchanging Holder
of Old Senior Notes should have the same tax basis and holding period in the New
Senior Notes as such Holder had in the Old Senior Notes immediately prior to the
Exchange.
PROSPECTIVE HOLDERS OF THE NEW SENIOR NOTES ARE URGED TO CONSULT THEIR
TAX ADVISORS CONCERNING THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH
HOLDERS' OLD SENIOR NOTES FOR THE NEW SENIOR NOTES, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS.
<PAGE>
LEGAL MATTERS
The validity of the New Senior Notes and the New Guarantee offered
hereby will be passed upon for the Company and MFB by Skadden, Arps, Slate,
Meagher & Flom LLP. A partner in Skadden, Arps, Slate, Meagher & Flom LLP is an
investor in Capricorn.
EXPERTS
The historical financial statements and schedule of Mrs. Fields'
Original Cookies, Inc. and subsidiaries as of December 28, 1996 and January 3,
1998 and for the period from inception (September 18, 1996) to December 28, 1996
and for the year ended January 3, 1998; the historical financial statements of
Mrs. Fields Inc. and subsidiaries as of September 17, 1996 and for the period
from December 31, 1995 to September 17, 1996; the historical financial
statements of The Original Cookie Company, Incorporated and the Carved-out
Portion of Hot Sam Company, Inc. (combined) as of December 30, 1995 and
September 17, 1996 and for years ended December 31, 1994 and December 30, 1995
and for the period ended September 17, 1996; the historical financial statements
of H&M Concepts Ltd. Co. and subsidiaries as of December 29, 1996 and for the
year then ended; and the historical financial statements of Pretzel Time, Inc.
as of December 31, 1995 and December 29, 1996 and for the years then ended,
included in this Prospectus and elsewhere in this registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
The historical financial statements of Mrs. Fields Inc. and
subsidiaries as of December 30, 1995 and for the years ended December 30, 1995
and December 31, 1994 included in this Prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report appearing herein,
and is included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
<PAGE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
On November 26, 1997, Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields")
sold $100,000,000 of Series A Senior Notes due 2004 (the "Offering"). The
proceeds of the Offering were used to: (i) pay $63,407,000 aggregate principal
amount of existing indebtedness of Mrs. Fields and its subsidiaries, including
The Mrs. Fields' Brand, Inc. ("MFB"), which became a wholly owned subsidiary of
Mrs. Fields concurrent with completion of the Offering, together with interest
thereon of $2,995,000; (ii) pay all of the $12,250,000 aggregate principal
amount of H&M debt, together with interest thereon of $444,000; (iii) pay a
dividend of $1,065,000 and the return of a $1,500,000 advance to MFH; and (iv)
pay fees and expenses of the Offering totaling $6,431,000. As part of the
Refinancing, MFH converted to common equity of Mrs. Fields a $4,643,000 note
payable, and contributed to Mrs. Fields all of the common stock of MFB after the
conversion of $3,935,000 of preferred stock of MFB, including accrued but unpaid
dividends, into common equity.
Concurrent with the consummation of the Offering, Mrs. Fields received a
contribution from MFH of the businesses acquired in the Pretzel Acquisitions
(the "Pretzel Contributions"). MFH contributed to Mrs. Fields the net assets of
H&M, MFH's 56% interest in Pretzel Time common stock, a $500,000 note receivable
from the Pretzel Time founder and minority stockholder, and certain related
rights. Mrs. Fields purchased an additional 4% of the shares of common stock of
Pretzel Time from the founder and minority stockholder, for $300,000 in cash on
January 2, 1998.
The unaudited pro forma condensed consolidated statement of operations is
based upon the historical financial statements of Mrs. Fields, H&M and Pretzel
Time, and should be read in conjunction with the audited and unaudited financial
statements, including the notes thereto, of these entities included elsewhere in
this registration statement. The unaudited pro forma condensed consolidated
statement of operations has been prepared using the purchase method of
accounting for the Pretzel Acquisitions. The unaudited pro forma condensed
consolidated statement of operations assumes that the Offering, the Pretzel
Acquisitions, the Pretzel Contributions and the Refinancing occurred as of
December 29, 1996 (the first day of the most recently completed fiscal year).
The Pretzel Contributions have been accounted for utilizing MFH's predecessor
basis. All of the entities presented operate using 52/53-week years ending near
December 31. In the opinion of management of Mrs. Fields, all adjustments
necessary to present fairly the unaudited pro forma condensed consolidated
statement of operations have been made.
The unaudited pro forma condensed consolidated statement of operations is
included in this registration statement for illustrative purposes only. Such
information does not purport to be indicative of the results which would
actually have been effected on the date and for the period indicated, nor is it
indicative of actual or future operating results that may occur. See also "Risk
Factors" included elsewhere in this registration statement.
P-1
<PAGE>
MRS. FIELDS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pretzel Pro Forma
H&M Time Adjustments Pro Forma
Mrs. Fields (See Note 1) (See Note2) (See Note 3) Consolidated
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net store sales $123,987 $ 9,328 $ 302 $ - $133,617
Franchising, net 3,418 - 2,142 - 5,560
Licensing, net 2,184 - - - 2,184
Other, net 918 36 181 - 1,135
----------- -------- -------- --------- --------
Total revenues 130,507 9,364 2,625 142,496
----------- -------- -------- --------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 66,832 6,120 275 - 73,227
Food cost of sales 28,127 1,366 63 - 29,556
General and administrative 16,730 1,326 1,617 (750) (a) 18,923
Depreciation and amortization 10,403 690 118 525 (b) 11,736
----------- ------- -------- ---------- -------
Total operating costs and expenses 122,092 9,502 2,073 (225) 133,442
----------- ------- -------- ---------- -------
Income (loss) from operations 8,415 (138) 552 225 9,054
INTEREST EXPENSE, net (7,584) (370) (120) (3,510) (c) (11,584)
OTHER EXPENSE (368) - (9) - (377)
----------------------------- --------------- ------ -----
Income (loss) before provision for income taxes 463 (508) 423 (3,285) (2,907)
PROVISION FOR INCOME TAXES (655) - (95) 95 (d) (655)
--------------------------- ---------------- ----- -----
Income (loss) before preferred stock
accretion and dividends of subsidiaries and
minority interest (192) (508) 328 (3,190) (3,562)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF
SUBSIDIARIES (644) - (644)
- -
MINORITY INTEREST (138) - - 155 (e) 17
----------------------------------------- --- ------------
Income (loss) from continuing operations $ (974) $ (508) $ 328 $(3,035) $(4,189)
========== ========= ========= ======== ========
OTHER DATA (See Note 4):
Cash flows from operating activities $ 919 $ (94) $ 805 $ - $ 1,630
Cash flows from investing activities (15,505) (32) (24) - (15,561)
Cash flows from financing activities 24,164 (489) 14 - 23,689
EBITDA 18,818 492 730 750 20,790
Ratio of earnings to fixed charges (see note 5) - - 4.53x - -
Deficiency of earnings to fixed charges (note 5) $ (319)$ (508) $ - $ - $ (3,354)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to pro forma condensed
consolidated statement of operations.
<PAGE>
MRS. FIELDS
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Note 1: H&M Contribution
MFH, through its wholly owned subsidiary, MFPC, acquired the net assets and
certain debt of H&M on July 25, 1997, and concurrent with the completion of
the Offering contributed these net assets of H&M and related debt to Mrs.
Fields. Accordingly, in the accompanying pro forma condensed consolidated
statement of operations for the year ended January 3, 1998, H&M's results
of operations from December 29, 1996 to July 24, 1997 are included under
the "H&M" column heading. H&M's results of operations from July 25, 1997 to
January 3, 1998 are included under the "Mrs. Fields" column heading. The
purchase price of $13,750,000 paid by MFH was allocated based on the
estimated fair values of the net assets acquired, as presented below:
Fair value of net assets acquired.......... $ 4,132,000
Goodwill acquired.......................... 9,618,000
------------
Total purchase price....................... $ 13,750,000
===========
The following data reconciles the key components of H&M's results of
operations in the accompanying pro forma condensed consolidated statement
of operations with the key components of H&M's results of operations in its
historical financial statements:
<TABLE>
<CAPTION>
26 weeks ended June 30, 1997 to December 29, 1996
June 29, 1997 July 24, 1997 to July 24, 1997
---------------------- -------------------- ------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Net store sales $8,152 $1,176 $9,328
Operating costs
and expenses 8,228 1,274 9,502
Loss from operations (58) (80) (138)
Net loss (348) (160) (508)
</TABLE>
Note 2: Pretzel Time Contribution
MFH acquired 56.0% of the common stock of Pretzel Time, a $500,000 note
receivable from Pretzel Time's founder and contract rights on September 2,
1997. Concurrent with the completion of the Offering, MFH contributed its
56.0% interest to Mrs. Fields. Accordingly, in the accompanying pro forma
condensed consolidated statement of operations for the year ended January
3, 1998, Pretzel Time's results of operations from December 29, 1996 to
September 1, 1997 are included under the "Pretzel Time" column heading.
Pretzel Time's results of operations from September 2, 1997 to January 3,
1998 are included under the "Mrs. Fields" column heading.
MFH paid $4,200,000 in cash to acquire 56.0% of the common stock of Pretzel
Time and made a $500,000, 5-year maturity loan, with an interest rate of
10.5%, to a minority stockholder and founder of Pretzel Time. Of the
$4,200,000 paid by MFH, $750,000 was paid to Pretzel Time to be used for
working capital purposes. Pretzel Time's accumulated deficit of $347,000 at
the date of acquisition was eliminated and goodwill of $5,882,000 was
recorded.
<PAGE>
MRS. FIELDS
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (continued)
(Unaudited)
The following data reconciles the key components of Pretzel Time's results
of operations in the accompanying pro forma condensed consolidated
statement of operations with the key components of Pretzel Time's results
of operations in its historical financial statements:
<TABLE>
<CAPTION>
24 weeks ended June 16, 1997 to December 30, 1996
June 15, 1997 September 1, 1997 to September 1, 1997
------------------ ---------------------- ------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Net stores sales $ 196 $106 $ 302
Franchising revenu 1,773 369 2,142
Operating costs
and expenses 1,545 528 2,073
Income from operations 424 128 552
Net income 145 183 328
</TABLE>
Note 3: Unaudited Pro Forma Combined Statement of Operations Adjustments
(a) Adjustment to reflect the impact of the reduction in salaries and payroll
expenses related to employees of H&M and Pretzel Time terminated at the
date of the acquisitions assuming that the acquisitions were consummated at
the beginning of the year ended January 3, 1998. The terminations occurred
concurrent with and were a direct result of the acquisitions. These events
are expected to have a continuing impact, as the positions occupied by the
terminated employees have been eliminated.The terminated employees will not
be replaced as the Company has sufficient resources with existing staff to
fulfill the applicable responsibilities. Other costs will not be incurred
that will offset these reductions. The impact is factually supportable as
the employees were terminated at the time of the acquisitions. The Company
believes this adjustment is necessary for investors to realistically assess
the impact of the acquisitions as the Company may not have consummated the
acquisitions.
(b) Adjustment to reflect amortization of goodwill, which goodwill totaling
$15,845,000, was recorded in connection with the purchase of the net assets
of H&M and the majority ownership of Pretzel Time. Goodwill is being
amortized over a 15-year period. Also includes an adjustment to reflect a
reduction in depreciation expense as a result of reducing H&M's property
and equipment to fair market value in connection with the acquisition. The
average estimated depreciable lives for these assets is 7 years.
(c) Adjustment to reflect additional interest expense that would have been
incurred on the $100,000,000 Series A Senior Notes. Adjustment also
reflects a reduction in interest expense related to: (i) the retirement of
$64,098,000 of Mrs. Fields debt with interest rates ranging from 8.78% to
10.0%; (ii) the retirement of $8,250,000 of H&M debt with interest rates
ranging from 8.0% to 16.0%; (iii) the conversion of $4,643,000 of a Mrs.
Fields note payable to equity with an interest rate of 9.78%; (iv) the
additional amortization related to approximately $5,976,000 of deferred
loan costs assumed to be amortized over a 7-year period; and (v) net of
interest income on a $500,000 loan to a minority stockholder and founder of
Pretzel Time with an interest rate of 10.5%.
(d) Adjustment to reflect the reduction in provision for income taxes due to
the results of consolidation of the entities and a pro forma loss before
provision for income taxes for the year ended January 3, 1998.
(e) Adjustment to reflect the recording of the 40.0% minority interest in
Pretzel Time's income from continuing operations.
<PAGE>
MRS. FIELDS
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (continued)
(Unaudited)
Note 4: Pro Forma Consolidated EBITDA for the Year Ended January 3, 1998
<TABLE>
<CAPTION>
MRS. PRETZEL PRO FORMA
FIELDS H&M TIME ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Income (loss) from operations...................... $ 8,415 $ (138) $ 552 $ 225 $ 9,054
Add:
Depreciation and amortization...................... 10,403 690 118 525 11,736
-- ---------- ------ --------- ---- ------
EBITDA........................................ $ 18,818 $ 552 $ 670 $ 750 $20,790
======== ======= ====== ========= =======
</TABLE>
Note 5: Ratio of Earnings to Fixed Charges
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued
and net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For the fiscal year ended January 3, 1998, earnings
were insufficient to cover fixed charges by $319,000. For the period
December 29, 1996 to July 24, 1997, H&M's earnings were insufficient to
cover fixed charged by $508,000. For the period December 30, 1996 to
September 1, 1997 Pretzel Time's earnings were sufficient to cover fixed
charges by $423,000. Mrs. Fields pro forma consolidated earnings were
insufficient to cover fixed charges for the year ended January 3, 1998 by
$3,534,000.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<S> <C>
Page
Mrs. Fields' Original Cookies, Inc. and subsidiaries
Report of Independent Public Accountants.................................................................... F-2
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998..................................... F-3
Consolidated Statements of Operations for the period from inception (September 18, 1996) to December
28, 1996 and for the year ended January 3, 1998.......................................................... F-5
Consolidated Statements of Stockholder's Equity for the period from inception (September 18, 1996) to
December 28, 1996 and for the year ended January 3, 1998................................................. F-6
Consolidated Statements of Cash Flows for the period from inception (September 18, 1996) to
December 28, 1996 and for the year ended January 3, 1998................................................. F-7
Notes to Consolidated Financial Statements.................................................................. F-11
Mrs. Fields Inc. and subsidiaries
Report of Independent Public Accountants (Arthur Andersen LLP).............................................. F-33
Report of Independent Public Accountants (Deloitte & Touche LLP)............................................ F-34
Consolidated Balance Sheets as of December 30, 1995 and September 17, 1996.................................. F-35
Consolidated Statements of Operations for the years ended December 31, 1994 and December 30, 1995
and for the period ended September 17, 1996.............................................................. F-37
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 1994 and December
30, 1995 and for the period ended September 17, 1996..................................................... F-38
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and December 30, 1995
and for the period ended September 17, 1996.............................................................. F-39
Notes to Consolidated Financial Statements.................................................................. F-42
The Original Cookie Company, Incorporated and the Carved-out Portion of Hot Sam Company,
Inc. (Combined)
Report of Independent Public Accountants.................................................................... F-50
Combined Balance Sheets as of December 30, 1995 and September 17, 1996...................................... F-51
Combined Statements of Operations for the years ended December 31, 1994 and December 30, 1995
and for the period ended September 17, 1996.............................................................. F-53
Combined Statements of Stockholders' Equity for the years ended December 31, 1994 and December
30, 1995 and for the period ended September 17, 1996..................................................... F-54
Combined Statements of Cash Flows for the years ended December 31, 1994 and December 30, 1995
and for the period ended September 17, 1996.............................................................. F-55
Notes to Combined Financial Statements...................................................................... F-56
H&M Concepts Ltd. Co. and subsidiaries
Report of Independent Public Accountants.................................................................... F-61
Consolidated Balance Sheets as of December 29, 1996 and June 29, 1997 (unaudited)........................... F-62
Consolidated Statements of Operations for the year ended December 29, 1996 and the 26 weeks ended
June 30, 1996 (unaudited) and June 29, 1997 (unaudited).................................................. F-64
Consolidated Statements of Members' Capital for the year ended December 29, 1996 and the 26 weeks
ended June 29, 1997 (unaudited)......................................................................... F-65
Consolidated Statements of Cash Flows for the year ended December 29, 1996 and the 26 weeks ended
June 30, 1996 (unaudited) and June 29, 1997 (unaudited)................................................. F-66
Notes to Consolidated Financial Statements................................................................. F-68
Pretzel Time, Inc.
Report of Independent Public Accountants................................................................... F-75
Balance Sheets as of December 31, 1995, December 29, 1996 and June 15, 1997 (unaudited).................... F-76
Statements of Operations for the years ended December 31, 1995 and December 29, 1996 and for the
24 weeks ended June 16, 1996 (unaudited) and June 15, 1997 (unaudited).................................. F-77
Statements of Stockholders' Deficit for the years ended December 31, 1995 and December 29, 1996
and for the 24 weeks ended June 15, 1997 (unaudited).................................................... F-78
Statements of Cash Flows for the years ended December 31, 1995 and December 29, 1996 and for the
24 weeks ended June 16, 1996 (unaudited) and June 15, 1997 (unaudited).................................. F-79
Notes to Financial Statements.............................................................................. F-81
</TABLE>
F-1
<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 December
28, 1996 and January 3, 1998, and the related consolidated statements of
operations, stockholder's equity and cash flows for the period from inception
(September 18, 1996) to December 28, 1996 and for the year ended January 3,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mrs. Fields'
Original Cookies, Inc. and subsidiaries as of December 28, 1996 and January 3,
1998, and the results of their operations and their cash flows for the period
from inception (September 18, 1996) to December 28, 1996 and for the year ended
January 3, 1998 in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 17, 1998 (except with respect
to the matter discussed in the eighth paragraph
of Note 3, as to which the date is February 28, 1998)
F-2
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
December 28, January 3,
1996 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,709 $ 16,287
Accounts receivable, net of allowance for doubtful accounts of $68 and $32,
respectively 1,686 2,194
Amounts due from franchisees and affiliates, net of allowance for doubtful
accounts of $320 and $582, respectively 1,038 1,552
Inventories 3,043 3,100
Prepaid rent and other 1,324 2,925
Deferred income tax assets, current portion 2,092 2,765
-------- --------
Total current assets 15,892 28,823
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 16,704 21,099
Equipment and fixtures 10,427 14,100
Land 128 128
-------- --------
27,259 35,327
Less accumulated depreciation and amortization (1,054) (6,125)
-------- --------
Net property and equipment 26,205 29,202
-------- --------
DEFERRED INCOME TAX ASSETS, net of current portion 917 734
-------- --------
GOODWILL, net of accumulated amortization of $966 and $4,996, repsectively 50,005 68,466
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization
of $324 and $1,423, respectively 16,327 15,528
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of $70 - 5,906
-------- --------
OTHER ASSETS 709 1,325
-------- --------
$110,055 $149,684
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 2
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
December 28, January 3,
1996 1998
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,450 $ 472
Current portion of capital lease obligations - 142
Accounts payable 6,201 3,805
Accrued liabilities 3,202 2,826
Store closure reserve, current portion 2,450 3,664
Accrued salaries, wages and benefits 1,811 1,891
Accrued interest payable 1,668 1,082
Sales taxes payable 676 937
Deferred credits 323 871
--------- ----------
Total current liabilities 18,781 15,690
LONG-TERM DEBT, net of current portion 65,113 100,284
STORE CLOSURE RESERVE, net of current portion 2,305 1,802
CAPITAL LEASE OBLIGATIONS, net of current portion - 183
ACCRUED LIABILITIES, net of current portion 2,207 -
DEFERRED CREDITS, net of current portion 1,091 -
--------- --------
Total liabilities 89,497 117,959
--------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI (a majority owned
subsidiary), aggregate liquidation preference of $1,465 - 902
--------- --------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of MFB (a wholly owned
subsidiary), aggregate liquidation preference of $3,597 3,597 -
--------- ---------
MINORITY INTEREST - 58
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized and 400 shares
outstanding - -
Additional paid-in capital 15,000 30,843
Retained earnings (Accumulated deficit) 1,961 (78)
-------- --------
Total stockholder's equity 16,961 30,765
-------- --------
$110,055 $149,684
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Inception
(September 18, Year Ended
1996) to January 3,
December 28, 1996 1998
----------------- ----------
<S> <C> <C>
CORE OPERATING STORES
---------------------
NET STORE SALES $ 30,811 $104,316
-------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 13,415 50,858
Food cost of sales 7,419 22,677
Depreciation and amortization 1,008 3,896
--------- --------
Total operating costs and expenses 21,842 77,431
-------- --------
Income from core operating stores 8,969 26,885
--------- --------
STORES IN THE PROCESS OF BEING CLOSED OR FRANCHISED
NET STORE SALES 9,079 19,671
--------- ---------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 6,077 15,974
Food cost of sales 2,443 5,450
Depreciation and amortization 46 45
--------- ---------
Total operating costs and expenses 8,566 21,469
--------- ---------
Income (loss) from stores in the process of being closed or franchised 513 (1,798)
--------- ---------
FRANCHISING AND LICENSING REVENUE, NET 1,385 5,602
-------- ---------
OTHER REVENUE, NET 107 918
--------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES (4,035) (16,730)
-------- ---------
DEPRECIATION AND AMORTIZATION OF INTANGIBLES (1,290) (6,462)
-------- ---------
Income from operations 5,649 8,415
INTEREST EXPENSE, NET (1,793) (7,584)
OTHER EXPENSE - (368)
-------- ---------
Income before provision for income taxes 3,856 463
PROVISION FOR INCOME TAXES (1,798) (655)
-------- ---------
Income (loss) before preferred stock accretion and dividends of
subsidiairies and minority interest 2,058 (192)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES (97) (644)
MINORITY INTEREST - (138)
-------- ---------
Net income (loss) $ 1,961 $ (974)
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands)
Retained
Additional Earnings
Common Stock Paid-in (Accumulated
Shares Amount Capital Deficit) Total
<S> <C> <C> <C> <C> <C>
BALANCE, September 18, 1996 - $ - $ - $ - $ -
Issuance of common stock for cash 400 - 15,000 - 15,000
Net income - - - 1,961 1,961
----- ----- -------- ------- --------
BALANCE, December 28, 1996 400 - 15,000 1,961 16,961
Parent contribution of
investment in PTI - - 4,200 - 4,200
Parent contribution of note
receivable due from PTI's
minority stockholder and
founder - - 500 - 500
Parent contribution of
investment in MFB - - 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
===== ===== ======= ======== =======
</TABLE>
The accompanying notes to consolidtaed financial statements
are an integral part of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 4
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Inception
(September 18,
1996) to Year Ended
December 28, January 3,
1996 1998
-------------- -------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,961 $ (974)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of effects from acquisitions:
Depreciation and amortization 2,344 10,403
Loss on sale of assets - 368
Deferred income taxes 1,511 210
In-kind interest expense on note payable to stockholder
97 338
Preferred stock accretion and dividends of subsidiaries 97 644
Minority interest - 234
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (294) (353)
Amounts due from franchisees and affiliates (339) (514)
Inventories (159) 136
Prepaid rent and other (31) (895)
Other assets 39 427
Accounts payable and accrued liabilities 239 (6,651)
Store closure reserve (305) (1,666)
Accrued salaries, wages and benefits 212 80
Accrued interest payable 1,668 (586)
Sales taxes payable 542 261
Deferred credits 27 (543)
--------- ---------
Net cash provided by operating activities 7,609 919
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions (including $1,158 of acquisitions expenses) (19,508) (10,949)
Purchase of property and equipment, net of effects from acquisitions
(1,638) (4,678)
Proceeds from the sale of assets 15 122
-------- ---------
Net cash used in investing activities (21,131) (15,505)
-------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 4
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Inception
(September 18,
1996) to Year Ended
December 28, January 3,
1996 1998
---------------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ - $ 108,250
Reduction of long-term debt (1,769) (77,009)
Payment of debt financing costs - (5,976)
Cash advance from MFH - 1,500
Repayment of cash advance to MFH - (1,500)
Payment of cash dividend to MFH - (1,065)
Principal payments on capital lease obligations - (36)
Proceeds from the issuance of common stock 15,000 -
Proceeds from the issuance of mandatorily redeemable cumulative preferred
stock of subsidiary 3,500 -
Proceeds from the issuance of note payable to Harvard 3,500 -
--------- ---------
Net cash provided by financing activities 20,231 24,164
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,709 9,578
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD - 6,709
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 6,709 $ 16,287
======== =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cashpaid for interest was approximately $28 and $8,416 for the period ended
December 28, 1996 and for the year ended January 3, 1998, respectively.
Cashpaid for income taxes was approximately $0 and $217 for the period ended
December 28, 1996 and for the year ended January 3, 1998, respectively.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE>
Page 3 of 4
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On September 18, 1996, the Company acquired certain assets and assumed certain
liabilities of Mrs. Fields Inc., Mrs. Fields Development Corporation, Mrs.
Fields Cookies, The Original Cookie Company, Incorporated and Hot Sam Company,
Inc. In conjunction with the acquisitions, net liabilities were assumed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 93,494
Net cash paid (19,508)
Notes payable issued (65,735)
-------
Net liabilities assumed $ 8,251
========
</TABLE>
In connection with the purchase accounting, the Company recorded certain other
accruals totaling $11,300,000 and provided reserves totaling $10,900,000 for
imapired property and equipment at Company-owned stores the Company intends to
exit through closing or franchising. The accruals consisted of $5,060,000 for
obligations incident to store closures, $2,450,000 for contingent legal and
lease obligations that were firmed up before year end, $3,135,000 for
transaction and finder fees and $655,000 for severance and related costs. In
connection with these accruals and impairment reserves, the Company recorded an
additional $17,680,000 of goodwill and established deferred income taxes (net of
valuation allowances) totaling $4,520,000.
In October 1996, the Company received property in payment of $128 in accounts
receivable due from a customer.
On March 18, 1997, a certain convertible subordinated note issued in connection
with the previously described business combination was not repaid as scheduled.
The noteholder exercised its option to receive an additional note of $1,000 due
to the delayed payment. The Company recorded the note and additional goodwill as
a subsequent component of the business combination accounting.
During the period ended December 28, 1996 and for the year ended January 3,
1998, MFB increased its mandatorily redeemable cumulative preferred stock
liquidation preference by approximately $97 and $338, respectively, in lieu of
paying cash dividends. On November 26, 1997, in connection with the Refinancing,
MFH converted to common equity of the Company $4,643 aggregate principal amount
of convertible subordinated notes and contributed to the Company all of the
common equity of MFB after converting its preferred stock interests totaling
$3,935 to common equity (see Note 6).
On July 25, 1997, certain assets were acquired and certain liabilities were
assumed of H & M Concepts Ltd. Co. by MFPC as follows (see Note 1):
Fair value of assets acquired $15,780
Net cash paid (5,750)
Notes payable issued (8,000)
-------
Net liabilities assumed $ 2,030
=======
In connection with the purchase accounting for this acquisition, MFPC accrued
$1,000 for estimated obligations incident to certain store closures. The Company
also recorded a reserve totaling approximately $2,500 for impaired property and
equipment at stores the Copmpany intends to close. In connection with these
accruals and reserves, the Company recorded $2,800 of goodwill and established
deferred income tax assets (net of valuation allowances) totaling $700.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
<PAGE>
Page 4 of 4
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
On September 2, 1997, 56 percent of the shares of common stock of Pretzel Time,
Inc. ("PTI") were acquired by MFH as follows (see Note 1):
Fair value of assets acquired $ 8,311
Net cash paid (4,200)
-------
Net liabilities assumed $ 4,111
=======
In connection with the purchase accounting for this acquisition, MFH accrued
$500 for estimated obligations incident to certain store closures. In connection
with these accruals, the Company recorded $400 of goodwill and established
deferred income tax assets (net of valuation allowances) totaling $100.
On November 26, 1997, in connection with the Refinancing, MFH contributed all of
the assets and liabilities of MFPC, MFH's 56 percent of the shares of common
stock of PTI and the $500 note receivable due from PTI's founder and minority
stockholder to the Company. Additionally, on November 26, 1997, MFH contributed
all of the common stock of MFB to the Company.
During the period from acquisition (September 2, 1997) to January 3, 1998, PTI
increased its mandatorily redeemable cumulative preferred stock liquidation
preference by approximately $68 in lieu of paying cash dividends. In addition,
for the same period, PTI's mandatorily redeemable cumulative preferred stock was
increased by approximately $238 for the accretion required over time to amortize
the original issue discount.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-10
<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. ("MFH" or the
"Parent"). MFH is a majority owned subsidiary of Capricorn Investors II, L.P.
("Capricorn"). The Company has five wholly owned subsidiaries; namely, The Mrs.
Fields' Brand, Inc. ("MFB"), Mrs. Fields' Cookies Australia, Mrs. Fields'
Cookies (Canada) Ltd., H & M Canada, and Fairfield Foods, Inc. and four
partially owned subsidiaries, the largest of which is Pretzel Time, Inc. ("PTI")
of which the Company owns 60 percent of the common stock as of January 3, 1998.
The Company primarily operates retail stores which sell freshly baked cookies,
brownies, pretzels and other food products through four specialty retail chains.
As of January 3, 1998, the Company owned and operated 144 "Mrs. Fields Cookies"
stores, 155 "Original Cookie Company" stores, 102 "Hot Sam Pretzels" stores and
80 "Pretzel Time" stores, all of which are located in the United States.
Additionally, the Company has franchised or licensed 472 stores in the United
States and 81 stores in 10 other countries. As of January 3, 1998, the Company
operated 379 core operating stores and operated 102 stores which are in the
process of being sold or franchised. All of the stores in the process of being
closed or franchised are expected to be closed or franchised by the end of
fiscal year 1999. The accompanying consolidated statements of operations present
the income or loss from operations for both of these categories of stores.
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
- ---------------------
MFI and Affiliates and OCC 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. Goodwill and trademarks are amortized using
the straight-line method over 15 years. An additional $17,680,000 of goodwill
and $4,520,000 of deferred income tax assets (net of valuation allowances) were
recorded in connection with the Company recording certain other accruals
totaling $11,300,000 and providing reserves totaling $10,900,000 for impaired
property and equipment at Company-owned stores the Company intends to exit
through closing or franchising. Organization costs are amortized using
the straight-line method over five years.
F-11
<PAGE>
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS (continued)
------------------------------------------------------------
In connection with these acquisitions, the Company formulated a plan to exit
certain stores that did not meet certain financial and geographical criteria.
The plan entailed closing all stores that were not profitable and franchising
stores that were profitable but contributed less than $50,000 in store cash
contribution for cookie stores and less than $35,000 in store cash contribution
forpretzel stores.Management identified 138 (13 of these stores were closed
prior to the acquisitions but had continuing obligations) stores to be closed
and 64 stores to be franchised. Of the stores identified to be closed, all but
five of the stores are to be closed by the end of 1998 with the remaining five
stores scheduled for closure during 1999. The timing to implement the plan was
developed based on discussions and relationships with major shopping mall
developers.
Pursuant to the exit plan, at the date of the acquisitions, the Company
established an impairment reserve of $10,900,000 against the property and
equipment of the stores the Company planned to exit to record them at their 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
their net realizable values prior to the acquisitions. During the period from
inception to December 28, 1996 and during the year ended January 3, 1998, the
impairment reserve was depleted by approximately $854,000 and $3,468,000,
respectively, related to the 117 stores to be closed and by approximately
$205,000 and $486,000, respectively, related to the 54 stores to be franchised.
As of December 28, 1996 and January 3, 1998, the remaining impairment reserve
totaled approximately $9,806,000 and $5,853,000, respectively. During the period
from inception to December 28, 1996 and for the year ended January 3, 1998, the
Company closed 17 and 70 stores, respectively, and the Company franchised 3 and
9 stores, respectively.
The $11,300,000 of accruals consisted of $5,060,000 for obligations incident to
store closures, $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.
At the date of the acquisitions, in accordance with 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 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
increasein the reserve related solely to the 138 stores originally identified to
be for information regarding the activitywithin the store closure reserve since
the date of the acquisitions. During the period from inception to December 28,
1996 and for the year ended January 3, 1998, the Company closed 17 and 70
stores, respectively. During the period from inception to December 28, 1996 and
for the year ended January 3, 1998, the net store sales and store contribution
for stores in the process of being closed totaled $5,777,000 and $121,000,
being closed totaled respectively, and $10,599,000 and ($2,038,000),\
respectively.
<PAGE>
As of January 3, 1998, approximately $1,643,000 of the $2,450,000 accrual for
legal and lease obligations has been utilized. The remaining amount of
approximately $807,000 is expected to be utilized during 1998. 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 has been fully utilized for the purposes intended as of January 3,
1998.
H & M Concepts Ltd. Co.
On July 25, 1997, Mrs. Fields' Pretzel Concepts, Inc. ("MFPC"), a wholly owned
subsidiary of MFH, 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. ("PTI"). The
aggregate consideration of $13,750,000 consisted of (i) $5,750,000 of cash,
financed through an advance from MFH of $1,500,000 and a $4,250,000 bank loan to
MFPC, (ii) a $4,000,000 principal amount bridge note of MFPC and (iii) a
$4,000,000 principal amount subordinated note of MFH 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 faire 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, MFH contributed all of the assets and liabilities
of MFPC to the Company and, in consideration thereof, the Company assumed the H
& M Debt, including all accrued but unpaid interest. MFPC 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 book basis of MFPC's assets or
liabilities. MFPC's results of operations have been included in the consolidated
results of the Company for the period from July 25, 1997 to January 3, 1998.
Pretzel Time, Inc.
On September 2, 1997, MFH acquired 56 percent of the shares of common stock of
PTI for an aggregate cash purchase price of $4,200,000, $750,000 of which was
paid to PTI and is being used for working capital purposes, and the balance of
which was paid to the selling shareholders. In connection with the acquisition,
MFH extended a $500,000 loan to the founder of PTI who continued to own 44
percent of the shares of common stock of PTI. The note bears interest at an
annual rate of 10 percent (see Note 8). PTI 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.
Effective November 26, 1997, MFH contributed its 56 percent of the shares of
common stock of PTI to the Company. MFH also contributed to the Company the
$500,000 note due from PTI'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 PTI's assets or
liabilities. The Company has included 56 percent of PTI's results of operations
with the Company's consolidated results of operations from September 2, 1997 to
January 2, 1998.
On January 2, 1998, the Company purchased an additional 4 percent of the shares
of common stock of PTI 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. Beginning with January 2, 1998, the Company is including
60 percent of PTI's results of operations in the Company's consolidated results
of operations.
F-12
<PAGE>
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS (continued)
------------------------------------------------------------
The Mrs. Fields' Brand, Inc.
Prior to November 26, 1997, MFH owned 50.1 percent of the shares of the common
stock of MFB. MFB 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,
MFB 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, MFH acquired the remaining 49.9 percent of the shares of
the common stock of MFB from Harvard Private Capital Holdings, Inc. ("HPCH") for
approximately $2,565,000. The consideration consisted of $1,065,000 in cash and
$1,500,000 in shares of common stock of MFH. In aggregate, the shares issued to
HPCH were valued at $1,500,000 after being appropriately discounted for lack of
controlling interest and marketability. 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 is being amortized using the
straight-line method over 15 years.
Effective November 26, 1997, MFH contributed all of the common stock of MFB to
the Company. As a result of such capital contribution, MFB 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 MFB's assets or liabilities. The Company has included 50.1 percent
of MFB's results of operations with the Company's consolidated results of
operations for the period from inception (September 18, 1996) to December 28,
1996 and for the period from December 29, 1996 to November 25, 1997. The Company
has included 100 percent of MFB's results of operations with the Company's
consolidated results of operations for the period from November 26, 1997 to
January 3, 1998.
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 value of the net aseets acquired) and resulted in recording
approximately $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 unaudited pro forma acquisition information for the period from inception
(September 18, 1996) to December 28, 1996 and for the year ended January 3, 1998
presents the results of operations as if the H&M and PTI acquisitions and the
Series A Senior Note Offering and Refinancing had occurred at the date of
inception (September 18, 1996). The results of operations give effect to certain
adjustments, including amortization of intangible assets and increased interest
expense on acquisition debt. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions and Refinancing been made at the inception of the
Company or of the results which may occur in the future.
F-13
<PAGE>
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS (continued)
------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma Unaudited Information
-------------------------------
Inception
(September 18,
1996) to Year Ended
December 28, January 3,
1996 1998
-------------- ---------
<S> <C> <C>
Total revenues (including store
sales, franchising, licensing
and other) $48,090,000 $142,496,000
Income from operations 6,718,000 9,054,000
Net income (loss) 1,029,000 (4,189,000)
</TABLE>
(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 generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 3, 1998,
the Company had demand deposits at various banks in excess of the $100,000 limit
for insurance by the Federal Deposit Insurance Corporation.
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
repesented in the accompanying consolidated financial statements. Pre-opening
costs associated with new franchised stores are the responsibility of the
franchisee.
F-14
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------------------
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment and fixtures are depreciated over three to seven years
using the straight-line method. Leasehold improvements are amortized over the
life of the lease term, or the estimated life of the improvements, whichever is
shorter, 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.
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
organization costs and covenants not to compete are not significant and are
being amortized using the straight-line method over three to five years.
Deferred Loan Costs
- -------------------
Deferred loan costs totaling $5,976,000 resulted from the sale of $100,000,000
in Series A Senior Notes on November 26, 1997, and are being amortized as
interest expense over the seven-year life of the Senior Notes (see Note 4).
Other Assets
- ------------
Other assets consist primarily of lease deposits and a $500,000 note receivable
from the founder and minority stockholder of PTI (see Note 1).
Long-Lived Assets
- -----------------
The Company assesses and measures for impairment of long-lived assets, including
intangibles, in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of"("SFAS No. 121"). SFAS No. 121 requires that long-lived assets
be reviewed for impairment when events or changes in circumstances indicate that
the book value of an asset may not be recoverable. date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of future undiscounted net cash
flows of the related asset or group of assets over the remaining life in
measuring whether the assets are recoverable. The Company assesses impairment of
long-lived assets at the store level which the Company believes is the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets. As of January 3, 1998, the Company has reserved for any of its
long-lived assets that are considered to be impaired.
Store Closure Reserve
- ---------------------
The Company accrues an estimate for the costs associated with closing a
nonperforming store in the period the determination is made to close the store.
The majority of the costs accrued relate to estimated lease termination costs
and estimated costs of related impaired property and equipment.
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.
F-15
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------------------
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.
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 book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Recent Accounting Pronouncement
- -------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Under current reporting requirements, extraordinary and non-recurring
gains and losses are excluded from income from current operations. SFAS No. 130
requires an "all-inclusive" approach which specifies that all revenues,
expenses, gains and losses recognized during the period be reported in income,
regardless of whether they are considered to be results of operations of the
period. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. The Company does not expect that this statement will have a significant
impact on its financial statement presentation.
Reclassifications
- -----------------
Certain reclassifications have been made in the prior period's consolidated
financial statements to conform with the current year presentation.
F-16
<PAGE>
(3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
--------------------------------------------
Long-Term Debt
- --------------
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 28, January 3,
1996 1998
<S> <C> <C>
Series A senior unsecured notes, interest at 10 1/8 percent payable
semi-annually in arrears on June 1 and December 1, commencing June
1, 1998, due December 1, 2004 $ - $100,000,000
Notes payable to individuals or corporations with interest terms ranging from
non-interest bearing to 15 percent, due at various
dates from 1998 through 2012, requiring monthly payments - 756,000
Senior notes, interest at six-month LIBOR rate (5.75 percent at December 28,
1996) plus an interest margin (3 percent at December 28, 1996) payable
semi-annually, secured by essentially all assets
of the Company, repaid in November 1997 41,966,000 -
Senior notes, interest at 10 percent payable semi-annually, secured by
essentially all assets of MFB, principal due quarterly in varying
installments, repaid in November 1997 10,000,000 -
Convertible subordinated notes, interest at an escalating rate (9.75 percent
at December 28, 1996) payable semi-annually, secured
by essentially all assets of the Company, repaid in November 1997 7,357,000 -
Convertible subordinated note to stockholder, interest at an escalating rate
(9.75 percent at December 28, 1996) payable semi-annually, secured by
essentially all assets of the Company, converted to
equity in November 1997 4,643,000 -
Senior subordinated note to MFB minority stockholder, interest at 10 percent
compounded quarterly beginning December 15, 1996, secured by
essentially all assets of MFB, repaid in November 1997 3,597,000 -
------------ ------------
67,563,000 100,756,000
Less current portion (2,450,000) (472,000)
------------ ------------
$65,113,000 $100,284,000
=========== ============
</TABLE>
In connection with the business combinations discussed in Note 1, the Company
issued approximately $65,735,000 in senior and subordinated notes. Concurrent
with the combinations, $4,643,000 of convertible subordinated notes that were
originally issued as part of the business combinations were issued to MFH.
F-17
<PAGE>
(3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (continued)
Long-Term Debt
- --------------
On November 26, 1997, the Company refinanced its existing debt (the
"Refinancing") by issuing $100,000,000 Series A Senior Notes (the "Senior
Notes") due December 1, 2004. Interest on the Senior Notes accrues at the rate
of 10 1/8 percent per annum and is payable semi-annually in arrears on June 1
and December 1, commencing on June 1, 1998. The Senior Notes are general
unsecured obligations of the Company, rank senior in right of payment to all
subordinated indebtedness of the Company and will rank pari passu in right of
payment with all existing and future senior indebtedness of the Company. In
connection with the Refinancing, the Company recorded deferred loan costs
totaling approximately $5,976,000 that are being amortized over seven years.
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 an aggregate of 35
percent of the principal amount at a redemption price equal to 110.125 percent
of the principal amount thereof, plus accrued and unpaid interest.
The Senior Notes contain certain covenants that will 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
investment except under condition provided in the indenture.
The 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"). The Company has agreed to: (i) file a registration statement
(the "Exchange Offer Registration Statement") on or prior to 60 days after the
date of issuance of the Senior Notes with respect to an offer to exchange the
Senior Notes for a new issue of debt securities of the Company registered under
the Securities Act, with terms substantially identical to those of the Senior
Notes and (ii) to use its best efforts to cause the Exchange Offer Registration
Statement to be declared effective by the Securities and Exchange Commission on
or prior to 120 days after the date of issuance of the Senior Notes.
Pursuant to the Refinancing, the Company repaid approximately $79,096,000
aggregate principal amount of indebtedness and accrued but unpaid interest of
the Company. Such indebtedness consisted of (i) approximately $66,402,000
principal amount of indebtedness and accrued but unpaid interest of the Company
incurred in connection with the MFI and affiliates and OCC and affiliates
business combinations, (ii) approximately $12,374,000 principal amount of
indebtedness and accrued but unpaid interest of the H & M Debt, and (iii)
$320,000 of prepayment penalties associated with retiring the existing debt.
As part of the Refinancing, MFH converted to common equity of the Company
$4,643,000 aggregate principal amount of convertible subordinated notes and
contributed to the Company all of the common equity of MFB after converting its
preferred stock interests totaling $3,935,000 to common equity (see Notes 1 and
6). Also as part of the Refinancing, the Company paid a dividend to MFH in the
amount of approximately $1,065,000 and returned a $1,500,000 advance to MFH,
which was a portion of the cash, provided by MFH in connection with the
acquisitions of H & M and PTI.
F-18
<PAGE>
(3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (continued)
The aggregate amount of principal maturates of debt at January 3, 1998 are as
follows:
Fiscal Year
1998 $ 472,000
1999 168,000
2000 105,000
2001 11,000
2002 -
Thereafter 100,000,000
-------------
$100,756,000
On December 29, 1997, the Company amended its revolving credit agreement (the
"Agreement") with a commercial bank (the "Bank") which provides for a maximum
commitment of up to $3,000,000 secured by essentially all of the assets of the
Company. The Agreement, which was extended through February 28, 1998,
terminated. On February 28, 1998, the Company amended its revolving credit
agreement with a commercial bank (the "Bank") which provides for a maximum
commitment of up to $15,000,000 secured by essentially all of the assets of the
Company. Borrowings under the Agreement bear interest, at the Company's option,
at either the Bank's prime rate plus one fourth of one percent or the one-month
LIBOR rate plus three percent, with interest payable monthly in arrears. As of
February 28, 1998, the Company had no outstanding borrowings under the
Agreement.
Capital Lease Obligations
Future minimum lease payments for equipment held under capital lease
arrangements as of January 3, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1998 $163,000
1999 123,000
2000 46,000
2001 41,000
---------
Total future minimum lease payments 373,000
Less amount representing interest (48,000)
---------
Present value of future minimum lease payments 325,000
Less current portion (142,000)
---------
$183,000
=========
</TABLE>
Total assets held under capital lease arrangements were approximately $376,000
with accumulated amortization of approximately $59,000 as of January 3, 1998.
F-19
<PAGE>
(4) INCOME TAXES
The components of the provision (benefit) for income taxes for the period ended
December 28, 1996 and for the year ended January 3, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 28, January 3,
1996 1998
Current:
Federal $ 207,000 $ 70,000
State 75,000 228,000
Foreign 5,000 57,000
Deferred:
Federal 1,112,000 367,000
State 277,000 55,000
Change in valuation allowance 122,000 (122,000)
------------- --------------
Total provision for income taxes $1,798,000 $ 655,000
============= ==============
</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 period ended December 28, 1996 and for the year ended January 3,
1998:
<TABLE>
<CAPTION>
<S> <C> <C>
December 28, January 3,
1996 1998
Federal statutory income tax rate 34.0% 34.0%
Permanent tax differences - 64.8
Net operating losses utilized - (3.9)
State income taxes, net of federal benefit 5.3 5.3
State franchise minimum taxes - 44.0
Foreign taxes - 12.3
Change in valuation allowance 3.2 (26.3)
Other 4.1 11.3
----- -----
46.6% 141.5%
===== =====
</TABLE>
F-20
<PAGE>
(4) INCOME TAXES (continued)
The significant components of the Company's deferred income tax assets and
liabilities at December 28, 1996 and January 3, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 28, January 3,
1996 1998
Deferred income tax assets:
Fixed asset reserve $ 3,501,000 $ 2,014,000
Store closure reserve 1,868,000 2,202,000
Transaction cost accrual 789,000 565,000
Net operating loss carryforward 782,000 4,875,000
Legal reserve 470,000 302,000
Lease accrual 403,000 92,000
Other reserves - 81,000
Accrued expenses 334,000 230,000
Alternative minimum tax credit carryforward 207,000 207,000
------------ ------------
Total deferred income tax assets 8,354,000 10,568,000
Valuation allowance (4,482,000) (5,160,000)
-------------- ------------
Deferred income tax assets net of valuation allowance 3,872,000 5,408,000
----------- -----------
Deferred income tax liabilities:
Accumulated depreciation and amortization (850,000) (1,548,000)
Other (13,000) (361,000)
--------------- -------------
Total deferred income tax liabilities (863,000) (1,909,000)
----------- ------------
Net deferred income tax assets $ 3,009,000 $ 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 accordance with purchase accounting are not recorded
through the provision for income taxes, but rather, as an increase to goodwill.
During the period ended December 28, 1996 and for the year ended January 3,
1998, valuation allowances of $4,360,000 and $800,000, respectively were
recorded in connection with accounting for the business combinations. As of
January 3, 1998, the Company had net operating loss carryforwards for tax
reporting purposes totaling $12,414,000. Of these net operating loss
carryforwards, $1,814,000 expire in 2011 and $10,600,000 expire in 2012.
(5) STORE CLOSURE RESERVE
As of the consummation date of the MFI and affiliates and OCC and affiliates
business combinations discussed in Note 1, the Company's management began to
assess and formulate a plan to close various Company-owned stores (referred to
herein as "stores in the process of being closed or franchised") that did not
meet certain financial and geographical criteria. The Company initially recorded
an estimated reserve totaling approximately $5,060,000 in accordance with
purchase accounting. During the period from inception to December 28, 1996, the
Company closed 17 stores and as of December 28, 1996, the remaining reserve for
stores to be closed totaled approximately $4,755,000.
During the year ended January 3, 1998, management finalized its plan and
increased its estimate of the cost to close the previously identified stores by
approximately $1,357,000 and adjusted goodwill by a comparable amount. The
F-21
<PAGE>
(5)STORE CLOSURE RESERVE (continued)
reserve was also increased by approximately $538,000 for certain core operating
stores that have been closed or targeted for closure due primarily to leases not
being renewed by the lessor and secondarily to unfavorable operating results.
This portion of the store closure reserve was expensed in the Company's
consolidated statement of operations for the year ended January 3, 1998. The
Company has also recorded reserves of approximately $1,500,000 for stores
acquired in the H & M and PTI acquisitions that management intends to close.
These reserves were recorded as part of the purchase accounting associated with
the acquisition of H & M and PTI (see Note 1). During the year ended January 3,
1998, the Company closed 80 stores and as of January 3, 1998, the remaining
reserve totaled approximately $5,466,000 for the expected costs to close the
remaining stores in fiscal years 1998 and 1999.
Management has identified approximately 52 existing stores for sale to
franchisees. Management believes that the net proceeds from the sale of stores
to franchisees will exceed the total carrying value of the stores as of January
3, 1998.
The Company's management reviews the historic and projected operating
performance of its stores on a periodic basis to identify underperforming stores
for impairment of property investment or targeted closing. The Company's policy
is to expense any net property investment for underperforming stores identified
to have permanent impairment of investment. Additionally, when a store is
identified for targeted closing, the Company's policy is to provide for the
costs of closing the store, which are predominantly estimated lease settlement
costs.
(6) MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCKS OF SUBSIDIARIES
In connection with the MFI and affiliates and OCC and affiliates business
combinations discussed in Note 1, MFB issued 100 shares of mandatorily
redeemable cumulative preferred stock (the "MFB Preferred Stock") which had an
initial liquidation preference of $35,000 per share and a cumulative annual
dividend rate of 10 percent compounded quarterly. During the period ended
December 28, 1996 and the year ended January 3, 1998, MFB elected to add the
dividends to the liquidation preference. As part of the Refinancing, MFH
converted the $3,500,000 face amount of the MFB Preferred Stock together with
accrued but unpaid dividends of approximately $435,000 to common equity and the
related preferred stock certificate was cancelled.
During fiscal year 1996, holders of 14.75 shares of PTI common stock converted
their common stock into 144.5 shares of newly authorized and issued mandatorily
redeemable cumulative preferred stock (the "PTI Preferred Stock"). The PTI
Preferred Stock is nonvoting and the preferred stockholders are entitled to
cumulative preferred dividends of 10 percent per annum for three years, accrued
and payable upon redemption. The PTI Preferred Stock must be redeemed at $10,000
per share, plus unpaid and accumulated dividends, on September 1, 1999. The
excess of the redemption price over the carrying value is being accreted over
the period from issuance to September 1, 1999, using the effective interest
method and is being charged to retained earnings of PTI.
During the period from September 2, 1997 to January 3, 1998, PTI repurchased
17.5 shares of the PTI Preferred Stock for an aggregate of $175,000 or $10,000
per share plus accrued dividends totaling approximately $20,200. During the same
period, PTI elected to add the dividends to the liquidation preference. As of
January 3, 1998, there are 127 shares of PTI Preferred Stock issued and
outstanding with an aggregate liquidation preference of approximately $1,465,000
or $11,535 per share.
(7) COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company has recently been in discussions concerning the possible acquisition
by the Company of Great American Cookie Company, Inc. ("GACC") or some of its
owned or franchised stores. GACC is a publicly traded company (under the
Exchange Act). No agreement with respect to such a transaction has been
concluded, and there can be no assurance that such an agreement will be
concluded. In connection with those discussions, in September 1997, nine
franchisees of GACC filed an action in the Superior Court of New Jersey, Mercer
County, against the Company, Capricorn and other defendants, challenging a
possible acquisition of GACC by the Company. The
F-22
<PAGE>
(7) COMMITMENTS AND CONTINGENCIES (continued)
complaint asserts that the proposed sale violates Illinois, Indiana, Maryland,
New Jersey and Virginia franchise law, violates North Carolina, South Carolina
and Texas unfair trade practices acts, breaches the plaintiffs' franchise
contracts and tortiously interferes with the plaintiffs' actual and prospective
contractual relationships. Management believes that it has good and meritorious
defenses to the action and intends to defend the case vigorously. Currently
there are ongoing negotiations between the parties. The defendants have until
April 3, 1998 to file an answer.
The Company is also the subject of certain other legal actions, which it
considers routine to its business activities. As of January 3, 1998, management,
after consultation with legal counsel, believes that the potential liability to
the Company under 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 noncancellable operating lease agreements with remaining terms of one
to 10 years.
For the period ended December 28, 1996 and the year ended January 3, 1998, rent
expense consisted of:
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year Period Ended Year Ended
December 28, 1996 January 3, 1998
Minimum rentals $ 8,216,000 $ 30,654,000
Contingent rentals 105,000 432,000
Sub-lease rentals (2,220,000) (8,756,000)
------------ -------------
$(6,101,000) $(22,330,000)
============ =============
</TABLE>
As of January 3, 1998, the future minimum lease payments due under these
operating leases, which include required lease payments for those stores that
have been subleased, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1998 $ 30,605,000
1999 26,968,000
2000 21,948,000
2001 18,283,000
2002 15,673,000
Thereafter 24,374,000
------------
$137,851,000
============
</TABLE>
Certain of the leases provide for contingent rentals based on gross revenues.
Total rental expense, including contingent rentals and net of sublease rentals
received, under the above operating leases for the period ended December 28,
1996 and the year ended January 3, 1998 was approximately $6,102,000 and
$22,330,000, respectively. As part of the Company's franchising program, certain
leases have been subleased to franchisees. The future minimum sublease payments
due to the Company under these leases as of January 3, 1998 are as follows:
F-23
<PAGE>
(7) COMMITMENTS AND CONTINGENCIES (continued)
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1998 $ 9,959,000
1999 9,067,000
2000 7,506,000
2001 6,497,000
2002 6,190,000
Thereafter 10,481,000
-----------
$49,700,000
===========
</TABLE>
Subsequent to year-end, the Company entered into an operating lease agreement
for corporate office facilities totaling 31,000 square feet. The lease is
scheduled to commence on May 1, 1998 and will expire April 30, 2008. The lease
includes escalating monthly rental payments totaling $6,900,000 over the life of
the lease, or approximately $57,500 per month on a straight-line basis. These
commitments are not included in the preceding commitment presentation.
Contractual Arrangements
The Company has entered into a supply agreement to buy frozen dough products
through 1998. The agreement stipulates minimum annual purchase commitments of
not less than 16,730,000 pounds of the products during fiscal year 1998. The
terms of the 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 3, 1998 were approximately $550,000. Under the terms
of the agreement, the Company is required to assume any franchisee obligations
which are in default as defined. As of January 3, 1998, the Company has assumed
obligations totaling approximately $203,000 which are included in accrued
liabilities.
The Company recorded deferred credits of approximately $1,204,000 as of
September 18, 1996 associated with the assumption of a long-term marketing and
supply agreement with a supplier in connection with the MFI and affiliates and
OCC and affiliates business combination discussed in Note 1. Under terms of the
agreement, the Company is obligated to purchase a minimum amount of product 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, 2001 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. The
Company recognized approximately $64,000 and $1,393,000 as a reduction to food
cost of sales during the period ended December 28, 1996 and the year ended
January 3, 1998, respectively, related to this arrangement.
In November 1997, PTI 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. The termination date of
this agreement will be the later of December 31, 2002 or when PTI has met its
purchase commitment.
In November 1996, the Company entered into a consulting agreement (the
"Consulting Agreement") with Debbi Fields, a director of the Company, under
which Debbi Fields travels and performs 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 20 additional days a year for
additional pay of $5,000. The compensation increases by 10 percent a year
F-24
<PAGE>
(7)COMMITMENTS AND CONTINGENCIES (continued)
beginning on January 1, 1999. The Consulting Agreement expires on December 31,
1999. The Company may terminate the Consulting Agreement for cause and Debbi
Fields may terminate the Consulting Agreement at any time. Under the Consulting
Agreement, Debbi Fields may not disclose any confidential information of the
Company, such as recipes and trade secrets, and may not, without the prior
written consent of the Company, compete with the Company.
In addition, the Company 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 the Company in connection
with book and television series projects. Debbi Fields is required to pay 50
percent of any gross revenues in excess of $200,000 that she receives from the
book and television series projects to the Company as a license fee.
In connection with the acquisition of H&M, certain franchise agreements and an
area development agreement with PTI were assigned to the Company. The franchise
agreements provide for the franchise by the Company of the PTI stores previously
franchised by H&M and the payment by the Company to PTI of an annual franchise
royalty equal to 7 percent of the annual sales by such stores, plus an
advertising fee of 1 percent of weekly sales. The franchise agreements also
provide for the conversion within three years of the Company's Hot Sam and
Pretzel Oven stores to Pretzel Time franchises on a royalty-free basis for the
first five years following the date of conversion. The area development
agreement provides for the grant by PTI to the Company of area development
rights to open additional Pretzel Time stores in a territory covering 16 states,
predominantly in the western United States, four western Canadian provinces and
in Mexico. The additional stores may be opened by the Company as the franchisee
or by third parties as franchisees. Under the area development agreement, the
Company is obligated to pay to PTI a $5,000 franchise fee per new location
within the territory. PTI is obligated under the area development agreement to
pay to the Company an annual royalty of up to 2 percent with respect to Pretzel
Time franchises opened by parties other than the Company within the territory.
The Company has entered into employment agreements with six key officers with
terms of two to three years. The agreements are for an aggregate annual base
salary of $1,125,000. 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 twenty-four to thirty-six 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 December 28, 1996 and January 3, 1998, the Company had receivables due
from franchisees, primarily related to prepaid rent which the Company had paid
in behalf of franchisees, totaling approximately $1,107,000 and $1,494,000,
respectively. Such amounts are included in amounts due from franchisees and
affiliates and are net of allowance for doubtful accounts totaling $320,000 and
$582,000, respectively.
As of December 28, 1996 and January 3, 1998, the Company had receivables of
approximately $39,000 and $89,000 due from MFH and payables of $137,000 and
$194,000 due to MFH, respectively. Additionally, as of January 3, 1998, the
Company had a receivable totaling approximately $140,000 due from UVEST LLC of
which the Company owns a minority interest. The net amounts are included in
amounts due from franchisees and affiliates as of December 28, 1996 and January
3, 1998.
During the period ended December 28, 1996 and the year ended January 3, 1998,
the Company accrued approximately $130,000 and $441,000, respectively, of
interest expense due MFH related to the convertible subordinated notes MFH
purchased. As part of the Refinancing, MFH converted all of the $4,643,000
convertible subordinated notes to equity and the notes were cancelled (see Note
3).
F-25
<PAGE>
(8) RELATED-PARTY TRANSACTIONS (continued)
The Company leases certain office space to an entity which is owned in part by a
director of the Company. Billings to the entity during the period ended December
28, 1996 and the year ended January 3, 1998 totaled approximately $60,000 and
$274,000, respectively, of which approximately $29,000 and $23,000 is included
in amounts due from franchisees and affiliates as of December 28, 1996 and
January 3, 1998, respectively.
The Company paid fees to Korn/Ferry International ("KFI") totaling approximately
$47,000 and $157,000 during the period ended December 28, 1996 and the year
ended January 3, 1998, respectively. KFI is an executive search firm of which
one of the Company's directors is the Chairman.
A director of the Company is a consultant to the Company in connection with
certain of the Company's benefit plans for employees and directors. To date, the
director has not received any compensation in connection with the consulting
work and the terms of such compensation have not been determined as of January
3, 1998.
A director of the Company is a consultant and an advisor to Dillon Read & Co.,
Inc. ("Dillon Read"). In early 1997, the Company paid to Dillon Read a fee of
approximately $707,000 in connection with the genesis of the Company in
September 1996. In addition, the director's company has an agreement with
Capricorn (which Capricorn has the right to cancel under certain circumstances)
to provide certain advisory and consulting services to the Company for a fee of
$250,000, plus expenses.
As of January 3, 1998, the Company has a loan due from the founder and minority
stockholder of PTI totaling $500,000. The note bears interest at an annual rate
of 10.5 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 PTI stock; provided that
in any calendar year no more than $100,000 may be so offset.
The Company and MFH expect to enter into a tax-sharing arrangement but as of the
date of these financial statements no such agreement was in place.
(9) STOCK-BASED COMPENSATION PLAN
Subject to definitive documentation, the Company's Board of Directors approved a
nonqualified stock option plan (the "Option Plan"), to be effective September
18, 1996. The Option Plan is expected to provide for the issuance of up to 15
percent of the common equity of the Company to officers, other employees and
consultants of the Company. The Board of Directors will determine the number,
type of award and terms and conditions, including any vesting conditions. As of
January 3, 1998, no options had been granted under the Option Plan.
The Company applies APB Opinion No. 25 ("APB No. 25") and related
interpretations in accounting for its stock-based compensation plans as they
relate to employees and directors. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), was issued
during 1995 and requires that financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them. For the period ended December 28, 1996 and the year
ended January 3, 1998, there would have been no difference in net income between
accounting for the Option Plan under APB No. 25 and SFAS No. 123.
(10) 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 period ended December 28, 1996 and the year ended January 3,
1998 were approximately $6,800 and $97,900, respectively.
F-26
<PAGE>
(11) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
----------------------------------------------------------
The Company's obligation related to its $100,000,000 aggregate principal amount
of 10 1/8 percent Series A Senior Notes due 2004 (see Note 3) is fully and
unconditionally guaranteed on a senior basis by one of the Company's wholly
owned subsidiaries. The Guarantees are general unsecured obligations of the
Guarantor, rank senior in right of payment to all subordinated indebtedness of
the Guarantor and rank pari passu in right of payment with all existing and
future senior indebtedness of the Guarantor. There are no restrictions on the
Company's ability to obtain cash dividends or other distributions of funds from
the Guarantor, except those imposed by applicable law. The following
supplemental financial information sets forth, on a condensed consolidating
basis, balance sheets, statements of operations and statements of cash flows for
Mrs. Fields' Original Cookies, Inc. (the "Parent Company"), The Mrs. Fields'
Brand, Inc. (the "Guarantor Subsidiary") and Mrs. Fields' Cookies Australia,
Mrs. Fields' Cookies (Canada) Ltd., H & M Canada, and Fairfield Foods, Inc. and
four partially owned subsidiaries, the largest of which is Pretzel Time, Inc.,
of which the Company owns 60 percent of the common stock as of January 3, 1998
(collectively, the "Non-guarantor Subsidiaries"). The Company has not presented
separate financial statements and other disclosures concerning the Guarantor
Subsidiary because management has determined that such information is not
material to investors.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
F-27
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,091 $ 588 $ 30 $ - $ 6,709
Accounts receivable, net 1,187 486 13 - 1,686
Amounts due from (to)
franchisees and 1,309 (196) (75) - 1,038
affiliates, net
Inventories 3,043 - - - 3,043
Other current assets 3,416 - - - 3,416
---------- ---------- ---------- -------------- ------------
Total current assets 15,046 878 (32) - 15,892
PROPERTY AND EQUIPMENT, net 26,181 1 23 - 26,205
INTANGIBLES, net 50,047 16,285 - - 66,332
INVESTMENTS IN SUBSIDIARIES 3,100 - - (3,100) -
OTHER ASSETS 1,626 - - - 1,626
---------- ---------- ----------- -------------- ------------
$ 96,000 $ 17,164 $ (9) $ (3,100) $ 110,055
========== ========== =========== ============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
==============================================
CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease $ 1,950 $ 500 $ - $ - $ 2,450
obligations
Accounts payable 6,188 6 7 - 6,201
Accrued liabilities 9,782 348 - - 10,130
---------- ----------- ------------ -------------- -------------
Total current liabilities 17,920 854 7 - 18,781
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 52,016 13,097 - - 65,113
OTHER ACCRUED LIABILITIES 5,603 - - - 5,603
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK - 3,597 - - 3,597
STOCKHOLDER'S EQUITY (DEFICIT) 20,461 (384) (16) (3,100) 16,961
Total liabilities and --------------- --------------- ---------------- ---------------- ---------------
stockholder's equity
(deficit) $ 96,000 $ 17,164 $ (9) $ (3,100) $ 110,055
=============== =============== ================ ================= ===============
</TABLE>
F-27
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) TO DECEMBER 28, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ----------- ------------- ------------ -------------
NET REVENUES $ 40,823 $ 559 $ - $ - $ 41,382
---------- ----------- ------------ ------------ -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 19,492 - - - 19,492
Food cost of sales 9,862 - - - 9,862
General and administrative 3,871 146 18 - 4,035
Depreciation and amortization 2,027 317 - - 2,344
---------- ---------- ----------- ------------ ------------
Total operating costs
and expenses 35,252 463 18 - 35.733
========== ========== =========== ============ ============
Income (loss) from operations 5,571 96 (18) - 5,649
INTEREST EXPENSE AND OTHER, net (1,410) (383) - - (1,793)
----------- ---------- ----------- ------------ ------------
Income (loss)before
provision for
income taxes and
equity in net
(loss) of
consolidated
subsidiaries 4,161 (287) (18) - 3,856
PROVISION FOR INCOME TAXES (1,798) - - - (1,798)
--------- ---------- ----------- ----------- ------------
Income (loss)
before preferred
stock accretion
and dividends of
subsidiaries and
equity in net
income of
consolidated
subsidiaries 2,363 (287) (18) - 2,058
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES - (97) - - (97)
EQUITY IN NET (LOSS) OF
CONSOLIDATED SUBSIDIARIES (402) - - 402 -
----------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,961 $ (384) $ (18) $ 402 $ 1,961
=========== ========== ========== ========== ==========
</TABLE>
F-28
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) TO DECEMBER 28, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 6,990 $ 589 $ 30 $ - $ 7,609
---------- ---------- ------------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash paid for acquisitions (12,508) (7,000) - - (19,508)
Purchase of property and
equipment, net (1,622) (1) - - (1,623)
----------- --------- ------------- ------------- ----------
Net cash used in
investing activities (14,130) (7,001) - - (21,131)
----------- --------- ------------- ------------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock 15,000 - - - 15,000
Proceeds from the
issuance of mandatorily
redeemable cumulative
preferred stock of
subsidiary
Proceeds from the - 3,500 - - 3,500
issuance of note payable - 3,500 - - 3,500
Reduction of long-term debt (1,769) - - - (1,769)
----------- --------- ------------- ------------- ----------
Net cash provided
by financing
activities 13,231 7,000 - - 20,231
----------- --------- ------------- ------------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 6,091 588 30 - 6,709
CASH AND CASH EQUIVALENTS,
beginning of year - - - - -
CASH AND CASH EQUIVALENTS, end
of year $ 6,091 $ 588 $ 30 $ - $ 6,709
=========== ========== ============ ============= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 28 $ - $ - $ - $ 28
Interest taxes paid - - - - -
</TABLE>
F-29
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,270 $ 725 $ 1,292 $ - $ 16,287
Accounts receivable, net 1,388 659 147 - 2,194
Amounts due (to) from
franchisees and 2,522 (615) (355) - 1,552
affiliates, net
Inventories 3,094 - 6 - 3,100
Other current assets 5,588 - 102 - 5,690
---------- ----------- ----------- ------------ -------------
Total current assets 26,862 769 1,192 - 28,823
PROPERTY AND EQUIPMENT, net 28,907 1 294 - 29,202
INTANGIBLES, net 59,928 17,725 6,041 - 83,694
INVESTMENT IN SUBSIDIARIES 23,089 - - (23,089) -
OTHER ASSETS 7,902 - 63 - 7,965
---------- ----------- ----------- ------------ --------------
$ 146,688 $ 18,495 $ 7,590 $ (23,089) $ 149,684
========== =========== =========== ============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
======================================================
CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease
obligations $ - $ - $ 614 $ - $ 614
Accounts payable 3,621 36 148 - 3,805
Accrued liabilities 10,499 25 747 - 11,271
---------- ----------- ----------- ------------ --------------
Total current liabilities 14,120 61 1,509 - 15,690
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current
portion 100,000 - 284 - 100,284
OTHER ACCRUED LIABILITIES 1,802 - 183 - 1,985
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK - - 902 - 902
MINORITY INTEREST - - - 58 58
STOCKHOLDER'S EQUITY 30,766 18,434 4,712 (23,147) 30,765
---------- ----------- ----------- ------------ --------------
Total liabilities and
stockholder's equity $ 146,688 $ 18,495 $ 7,590 $ (23,089) $ 149,684
========== =========== =========== ============ ==============
</TABLE>
F-30
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
---------- ----------- ------------- ------------- -------------
REVENUES $ 122,090 $ 2,004 $ 7,077 $ (664) $ 130,507
---------- ---------- ----------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs 63,765 - 3,731 (664) 66,832
Food cost of sales 27,272 - 855 - 28,127
General and administrative 14,753 1,066 911 - 16,730
Depreciation and amortization 8,745 1,125 533 - 10,403
---------- ---------- ----------- ------------- -------------
Total operating costs
and expenses 114,535 2,191 6,030 (664) 122,092
---------- ---------- ----------- ------------- -------------
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
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>
F-31
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 3, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantor Non-Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
---------- ----------- ------------- ------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $ (766) $ 387 $ 1,298 $ - $ 919
----------- ----------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash paid for acquisitions (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
Reduction of long-term
debt and capital lease obligations (63,412) (250) (36) - (63,698)
Investment in MFB (13,347) - - - (13,347)
Payment of debt financing costs (5,976) - - - (5,976)
Payment of cash dividend to MFH (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
Interest taxes paid 181 25 11 - 217
</TABLE>
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields Inc.:
We have audited the accompanying consolidated balance sheet of Mrs. Fields
Inc. (a Delaware corporation) and subsidiaries as of September 17, 1996, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the period from December 31, 1995 to September 17, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mrs. Fields
Inc. and subsidiaries as of September 17, 1996, and the results of their
operations and their cash flows for the period from December 31, 1995 to
September 17, 1996 in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
June 27, 1997
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Mrs. Fields Inc.:
We have audited the accompanying consolidated balance sheet of Mrs. Fields Inc.
and subsidiaries as of December 30, 1995, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended December 30, 1995 and December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mrs. Fields Inc. and subsidiaries
as of December 30, 1995, and the results of their operations and their cash
flows for the years ended December 30, 1995 and December 31, 1994 in conformity
with generally accepted accounting principles.
/s/DELIOTTE & TOUVHE LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 9, 1996
F-34
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
December 30, September 17,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 2,770 $ 1,883
Accounts receivable, net of allowance for doubtful accounts of
$251 and $269, respectively.......................................... 3,650 1,611
Inventories............................................................. 1,563 1,296
Prepaid rent............................................................ -- 420
Other prepaid expenses.................................................. 369 1,042
-------- --------
Total current assets.......................................... 8,352 6,252
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................................. 25,140 23,223
Equipment and fixtures.................................................. 19,335 18,422
-------- --------
44,475 41,645
Less accumulated depreciation and amortization.......................... (30,435) (29,409)
-------- --------
Net property and equipment.................................... 14,040 12,236
-------- --------
DEPOSITS . 641 656
-------- --------
Total assets.................................................. $ 23,033 $ 19,144
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-35
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 30, September 17,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable................................................ $ 1,277 $ 18,352
Current portion of premium on restructured debt................................. 2,088 2,872
Accounts payable................................................................ 3,519 3,708
Accrued liabilities............................................................. 1,462 1,329
Store closure reserve........................................................... 2,260 1,270
Deferred credits................................................................ 860 425
------ ------
Total current liabilities............................................. 11,466 27,956
NOTES PAYABLE, net of current portion................................................ 15,536 --
PREMIUM ON RESTRUCTURED DEBT, net of current portion................................. 2,325 ------
STORE CLOSURE RESERVE, net of current portion........................................ 250 294
UNEARNED REVENUES, net of current portion............................................ 1,473 1,212
------- ------
Total liabilities..................................................... 31,050 29,462
------- ------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 7 and 8)
MINORITY INTEREST IN MAJORITY OWNED SUBSIDIARY:
20,000,000 cumulative preferred stock; involuntary liquidation preference
of $23,153 and $24,834, respectively, including $3,153 and $4,834,
respectively, of unrecorded dividends in arrears............................. 20,000 20,000
------- ------
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock, $.001 par value; 21,885,000 shares authorized
and issued, involuntary liquidation preference of $28,342 and $32,085,
respectively, including $6,457 and $10,200, respectively, of unrecorded
dividends in arrears......................................................... 22 22
Common stock, $.001 par value; 200,000,000 shares authorized and
outstanding.................................................................. 200 200
Additional paid-in capital...................................................... 83,863 83,863
Accumulated deficit............................................................. (112,067) (114,371)
Cumulative translation adjustment............................................... (35) (32)
-- --
Total stockholders' deficit........................................... (28,017) (30,318)
--------- ---------
Total liabilities and stockholders' deficit........................... $ 23,033 $ 19,144
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-36
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Years Ended Period Ended
December 31, December 30, September 17,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net store sales............................................ $ 87,863 $ 59,956 $ 29,674
Net franchising............................................ 1,171 1,870 1,793
Net licensing.............................................. 3,993 2,031 892
Net other . 2,077 2,092 1,101
------ ------ -----
Total revenues................................... 95,104 65,949 33,460
------- ------- ------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs.......................... 55,527 36,965 17,782
Food cost of sales......................................... 20,474 13,373 6,525
General and administrative................................. 16,379 12,612 7,984
Depreciation and amortization.............................. 4,415 3,525 1,911
Provision for store closure costs.......................... -- 3,000 1,000
------- ------- -----
Total operating costs and expenses............... 96,795 69,475 35,202
------- ------- ------
Loss from operations............................. (1,691) (3,526) (1,742)
INTEREST EXPENSE (2,155) (51) (80)
(LOSS) GAIN ON SALE OF ASSETS................................... (1,283) 1,450 (277)
------- ------ -----
Loss before provision for income taxes........... (5,129) (2,127) (2,099)
PROVISION FOR INCOME TAXES...................................... (191) (241) (205)
------- ----- -----
Net loss......................................... $(5,320) $(2,368) $ (2,304)
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
F-37
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(dollars and shares in thousands)
Cumulative
Preferred Additional Cumulative
Stock Common Stock Paid-in Accumulated Translation Treasury Stock
Shares Amount Shares Amount Capital Deficit Adjustment Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994..................... -- $-- 150,000 $150 $39,761 $(104,379) $714 1,292 $(2,891 (66,645)
Amended and Restated Restructuring Agreement:.
Issuance of common stock to lenders...... -- -- 50,0000 50 (2,941) -- -- (1,292) 2,891 --
Issuance of preferred stock to lenders... 21,885 22 -- -- 21,863 -- -- -- -- 21,885
Reduction of premium on restructured debt -- -- -- -- 25,180 -- -- -- -- 25,180
Foreign currency translation adjustment.... -- -- -- -- -- -- 308 -- -- 308
Sales and liquidations of investments in
foreign subsidiaries ........................ -- -- -- -- -- -- (827) -- -- (827)
Net loss................................... -- -- -- -- -- (5,320) -- -- -- (5,320)
------ --- ------- ---- ------- -------- ---- ---- ---- -------
BALANCE, December 31, 1994................... 21,885 22 200,000 200 83,863 (109,699) 195 -- -- (25,419)
Foreign currency translation adjustment.... -- -- -- -- -- -- (230) -- -- (230)
Net loss................................... -- -- -- -- -- (2,368) -- -- -- (2,368)
------ --- ------- ---- ------- -------- ---- ---- ---- -------
BALANCE, December 30, 1995................... 21,885 22 200,000 200 83,863 (112,067) (35) -- -- (28,017)
Foreign currency translation adjustment.... -- -- -- -- -- -- 3 -- -- 3
Net loss................................... -- -- -- -- -- (2,304) -- -- -- (2,304)
------ --- ------- ---- ------- ---- ---- ---- ---- -------
BALANCE, September 17, 1996.................. 21,885 $ 22 200,000 $200 $83,863 $(114,371) $(32) -- $-- (30,318)
====== ==== ======= ==== ======= ========= ====== ==== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-38
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Increase (Decrease) in Cash and Cash Equivalents
Years Ended Period Ended
December 31, December 30, September 17,
1994 1995 1996
----------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $ (5,320) $ (2,368) $ (2,304)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................... 4,415 3,525 1,911
Amortization of premium on restructured debt..................... -- -- (1,541)
In-kind expense on note payable.................................. 2,129 (1,610) 1,598
Provision for store closure costs................................ -- 3,000 1,000
Net loss (gain) on asset sales, disposals and store closures..... 1,283 (1,450) 277
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable..................... (1,778) (163) 2,039
Decrease in inventories........................................ 650 853 267
Increase in prepaid rent....................................... -- -- (420)
Decrease (Increase) in other prepaid expenses.................. 1,789 (337) (673)
Increase in deposits........................................... -- -- (15)
Decrease in accounts payable and accrued liabilities........... (1,026) (5,821) (194)
Decrease in store closure reserve.............................. -- -- (1,696)
Decrease in deferred credits................................... (414) (107) (696)
----- ----- -----
Net cash provided by (used in) operating activities............ 1,728 (4,478) (447)
------ ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................... (4,895) (4,146) (1,054)
Proceeds from the sale of assets...................................... 2,865 6,672 669
------ ------ ---
Net cash (used in) provided by investing activities............ (2,030) 2,526 (385)
------- ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable................................... (37) (145) (58)
Payments for debt restructuring....................................... (695) (40) --
----- ----- --
Net cash used in financing activities.......................... (732) (185) (58)
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollars in thousands)
Increase (Decrease) in Cash and Cash Equivalents
Years Ended Period Ended
December 31, December 30, September 17,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
EFFECT OF FOREIGN EXCHANGE RATES....................................... $ 35 $ -- $ 3
------ ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................. (999) (2,137) (887)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
THE PERIOD.......................................................... 5,906 4,907 2,770
------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD......................... $4,907 $ 2,770 $ 1,883
====== ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $26, $1,661 and $24 for the years
ended December 31, 1994 and December 30, 1995 and for the period ended
September 17, 1996, respectively.
Cash paid for income taxes was approximately $106, $128 and $39 for the
years ended December 31, 1994 and December 30, 1995 and for the period ended
September 17, 1996, respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1994 and December 30, 1995 and for the
period ended September 17, 1996, the Company, in accordance with the Amended and
Restated Restructuring Agreement, entered into the following noncash financing
activities:
During 1994, the Company's lenders canceled approximately $56,900 of
existing long-term notes payable in exchange for $15,000 of new Series
A secured notes, 50,000,000 shares of newly issued common stock and
approximately 1,292,000 shares of common stock previously held as
treasury stock, and 21,885,000 shares of cumulative preferred stock of
Mrs. Fields Inc. and 20,000,000 shares of cumulative preferred stock
of a majority-owned subsidiary of the Company. In connection with this
transaction, the Company also credited additional paid-in capital for
approximately $25,200 upon the reduction of premium on restructured
debt.
Prior to June 30, 1994 (the effective date of the Amended and
Restated Restructuring Agreement), the Company converted accrued
interest payable incurred through June 30, 1994 into approximately
$3,400 of senior and subordinated interest deferral notes. In
addition, the Company amortized approximately $1,300 of its premium on
restructured debt as a reduction to interest expense during the period
from January 1, 1994 to June 30, 1994.
The Company converted accrued interest payable incurred from January
1, 1995 through March 31, 1995 and from July 1, 1994 through December
31, 1994 into approximately $520 and $1,000 of Series A interest
deferral notes, respectively. In addition, the Company amortized
approximately $2,100 and $1,000 of its premium on restructured debt as
a reduction to interest expense during the year ended December 30,
1995 and from July 1, 1994 through December 31, 1994, respectively.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-40
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollars in thousands)
The Company converted accrued interest payable from December 31, 1995 through
September 17, 1996 into $1,598 of 15 percent interest bearing Series A interest
deferral notes.
During the years ended December 31, 1994 and December 30, 1995 and for the
period ended September 17, 1996, the Company also entered into the following
noncash investing and financing activities:
In accordance with the Company's franchise financing arrangement, the Company
assumed long-term debt of franchisees which was in default totaling
approximately $274, $132 and $0 during the years ended December 31, 1994 and
December 30, 1995 and the period ended September 17, 1996, respectively.
In connection with its sale of several cookie stores, the Company accepted notes
receivable in the approximate amount of $392 and $305 during the years ended
December 31, 1994 and December 30, 1995, respectively. In addition, during the
years ended December 31, 1994 and December 30, 1995 and the period ended
September 17, 1996, the Company charged off approximately $956, $1,960 and $651
of assets against accrued expenses.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-41
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Mrs. Fields Inc. ("MFI"), a Delaware corporation, was incorporated on May 2,
1986 and is a holding company for its wholly owned subsidiaries Mrs. Fields
Cookies Australia, Mrs. Fields Cookies, Ltd. (Canada) plus other inactive
subsidiaries (collectively termed "Mrs. Fields International") and its majority
owned subsidiary, Mrs. Fields Development Corporation ("MFD") and MFD's wholly
owned subsidiary, Mrs. Fields Cookies ("MFC"). Collectively, these entities are
referred to herein as the "Company".
Nature of Operations
The most significant part of the Company's operations are its retail stores
which sell freshly baked cookies, brownies and other food products. As of
September 17, 1996, the Company operates 147 "Mrs. Fields Cookies" stores all of
which are located in the United States. Additionally, the Company has franchised
approximately 163 stores in the United States and approximately 55 stores in
nine other countries.
Additionally, 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.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company usually experiences its highest
revenues in the fourth calendar quarter. Because the Company's stores are
heavily concentrated in shopping malls, the Company's sales performance is
somewhat dependent on the performance of those malls. The results for the period
ended September 17, 1996 presented in the accompanying consolidated financial
statements may not be indicative of results that would have been achieved for an
entire calendar year.
Effective September 18, 1996, the Company sold substantially all of its net
assets to Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields' Brand, Inc.
(see Note 11). Subsequently, the Company has been solely involved in liquidating
remaining assets and collecting certain outstanding notes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company operates using a 52/53-week year ending near December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of MFI, Mrs.
Fields International, MFD and MFC. 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
three suppliers. Management believes that other suppliers could provide similar
products with comparable terms.
F-42
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and 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 December
30, 1995 and September 17, 1996 and at various times during the periods then
ended, the Company had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventory consisted of the following at December 30, 1995 and
September 17, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
Food and beverages.......... $ 910,000 $ 792,000
Smallwares.................. 653,000 504,000
---------- ----------
$1,563,000 $1,296,000
</TABLE>
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment and fixtures are depreciated over three to seven years
using the straight-line method. Leasehold improvements are amortized over the
life of the lease term, or the estimated life of the improvements, whichever is
shorter, 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 included in the determination of net
income or loss.
Accounting for the Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"). SFAS No. 121 requires that long-lived assets be reviewed for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of
future undiscounted net cash flows of the related asset over the remaining life
in measuring whether the assets are recoverable. As of September 17, 1996, the
Company has reserved for any of its long-lived assets that are considered to be
impaired.
Revenue Recognition
The Company recognizes franchising and licensing revenues on an accrual
basis as those revenues are earned. Product sales are recognized as the product
is delivered or shipped to the customer.
F-43
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Leases
The Company has various operating lease commitments on both Company-owned
and franchised store locations and equipment. Operating leases with escalating
payment terms, including leases underlying subleases with franchisees, are
expensed on a straight-line basis over the life of the related lease.
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.
Fair Value of Financial Instruments
The notes payable and cumulative preferred stock (see Note 6) are presented
in the accompanying consolidated balance sheet at a total of $60,237,000 as of
September 17, 1996. All such obligations were subsequently settled in two sales
transactions (see Note 11) for $41,800,000.
Cumulative Foreign Currency Translation Adjustment
The assets and liabilities of foreign operations are translated into United
States dollars using exchange rates in effect at the end of the accounting
period. Revenues and expenses are translated using the average exchange rate
during the period. Differences in exchange rates arising from foreign currency
translation are recorded as a separate component of stockholders' deficit. In
connection with a sale or liquidation of an investment in a foreign subsidiary,
the accumulated translation adjustment attributable to that subsidiary is
transferred from stockholders' deficit and is reported as a gain or loss.
3. NOTES PAYABLE
On June 30, 1994, the Company entered into the Amended and Restated
Restructuring Agreement (the "Restructuring Agreement") with its lenders of
long-term debt (the "Lenders"). In connection with the Restructuring Agreement,
the Lenders exchanged approximately $56,900,000 of existing long-term notes
payable for $15,000,000 of new Series A secured notes, 51,292,000 shares of the
Company's common stock, 21,885,000 shares of cumulative preferred stock of MFI
and 20,000,000 shares of cumulative preferred stock of MFD.
After the issuances of common stock, the Lenders' total ownership interest
in the Company's common stock was approximately 85 percent. Because the total
estimated future cash payments (including interest and principal) required as of
June 30, 1994 under the terms of the new Series A secured notes was less than
the principal amount plus the previous carrying amount of the unamortized
premium on restructured debt by approximately $25,200,000, the Company reduced
the premium on restructured debt by that amount. The remaining unamortized
premium on restructured debt will be amortized over the life of the Series A
secured notes to produce an effective interest rate of zero percent.
F-44
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Notes payable consist of the following as of December 30, 1995 and
September 17, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
Series A secured notes, interest at 13 percent, payable quarterly, secured by
all common stock and essentially all assets of the Company, principal due in
varying installments through March 31, 1998....................................... $15,000,000 $15,000,000
Series A interest deferral notes, interest at 13 percent, payable quarterly, secured
by all common stock and essentially all assets of the Company, principal due
March 31, 1998.................................................................... 1,511,000 1,511,000
Series A interest deferral notes, interest at 15 percent, secured by all common
stock and essentially all assets of the Company, principal and interest
originally due August 15, 1996, subsequently extended through September 20,
1996.............................................................................. -- 1,598,000
Other................................................................................ 302,000 243,000
Premium on restructured debt......................................................... 4,413,000 2,872,000
---------- -----------
21,226,000 21,224,000
Less current portion................................................................. (3,365,000) (21,224,000)
---------- ------------
$17,861,000 $ --
=========== ============
</TABLE>
The Series A secured notes and the Series A interest deferral notes were
paid by the Company on September 20, 1996 in connection with the receipt of
proceeds from two simultaneous but separate asset sale transactions (see Note
11). As a result, all of the Series A notes referred to above are reflected as
current liabilities in the accompanying September 17, 1996 consolidated balance
sheet.
4. INCOME TAXES
The components of the provision (benefit) for income taxes for the years ended
December 31, 1994 and December 30, 1995 and for the period ended September 17,
1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................................. $ -- $ -- $ --
State................................................................... 191,000 241,000 205,000
Deferred:
Federal................................................................. -- -- (1,125,000)
State................................................................... -- -- (109,000)
Change in valuation allowance........................................... -- -- 1,234,000
- ---- --- ---------
Total provision for income taxes.............................. $191,000 $241,000 $ 205,000
======== ======== =========
</TABLE>
The Company incurred financial reporting losses for the years ended
December 31, 1994 and December 30, 1995 and for the period ended September 17,
1996 for which no benefits have been recorded in the accompanying consolidated
statements of operations due to appropriate valuation allowances being provided.
The provisions for income taxes are solely related to minimum state income tax
requirements.
Current deferred income tax assets relate to temporary differences between
financial statement and income tax recognition of bad debts, unearned revenues,
and the store closure reserve. Long-term deferred income tax
F-45
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
assets relate to temporary differences between financial statement and income
tax recognition of depreciation and write-downs of certain property and
equipment, net operating losses and other income tax credit carryforwards.
Management has provided a valuation allowance equal to the amount of the
deferred income tax assets arising from the Company's net operating loss
carryforwards. As of September 17, 1996, the Company had net operating loss
carryforwards for tax reporting purposes totaling approximately $90,900,000.
These net operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
2001............................. $ 214,000
2002............................. 4,600,000
2003............................. 19,993,000
2004............................. 7,693,000
2005............................. 9,143,000
Thereafter (through 2011)........ 49,257,000
-----------
$90,900,000
===========
</TABLE>
Subsequent to the sale of substantially all of its assets (see note 1), the
Company utilized certain of its net operating loss carryforwards to offset the
related gain. The remainder of the net operating loss carryforwards may not be
used.
5. STORE CLOSURE RESERVE
As of December 30, 1995, the Company had a store closure reserve of
approximately $2,510,000 for the anticipated costs to franchise or close 26
stores during 1996. During the period from December 31, 1995 to September 17,
1996, the Company closed 12 stores and provided for additional store closure
expenses totaling $1,000,000. As of September 17, 1996, the remaining store
closure reserve totaled approximately $1,564,000, of which approximately
$1,270,000 is current and approximately $294,000 is long-term. In management's
opinion, the store closure reserve is adequate for stores identified to be
closed.
The Company's management reviews the historic and projected operating
performance of its stores on an annual basis to identify underperforming stores
for impairment of property investment or targeted closing. The Company's policy
is to write-off any net property investment for underperforming stores
identified to have permanent impairment of investment. When a store is
identified for targeted closing, the Company's policy is to provide for the
costs of closing the store, which are predominantly estimated lease settlement
costs.
6. CUMULATIVE PREFERRED STOCK
In connection with the Restructuring Agreement, the Company issued
21,885,000 and 20,000,000 shares of cumulative preferred stock of MFI and MFD,
respectively. The MFD preferred stock is reflected as "minority interest in
majority owned subsidiary" in the accompanying consolidated balance sheet. The
MFI and MFD cumulative preferred stocks have dividend rates of 18 percent and 10
percent, respectively, which accumulate on a semi-annual basis. The dividends
are computed based upon the liquidation preference rates which are defined in
the Restructuring Agreement as $1.00 per share plus any unrecorded dividends in
arrears for each issue and are payable only as declared by the Board of
Directors. As of September 17, 1996, the Board of Directors had not declared
dividends for either series of preferred stock. Accordingly, dividends in
arrears on the MFI and MFD preferred stocks which have not been recorded in the
accompanying consolidated financial statements as of September 17, 1996 totaled
$10,200,000 and $4,834,000, respectively.
F-46
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In the event of liquidation or dissolution of the Company, the holders of
the cumulative preferred stocks of MFI and MFD will be entitled to receive from
the assets of the Company available for distribution prior to any distribution
to common stockholders an amount per share equal to the sum of (i) $1.00 for
each outstanding preferred share and (ii) an amount equal to all unpaid
dividends on such preferred shares through the distribution date. As of
September 17, 1996, the distribution preference for the MFI and MFD preferred
stockholders totaled $32,085,000 and $24,834,000, respectively. Also, if a
change in control of the Company occurs, preferred stockholders shall have the
right to convert all (but not less than all) of their preferred shares into
notes payable in an amount equal to the liquidation preference value of their
preferred shares. The Company also has the right at any time to redeem shares of
the MFI and MFD preferred stocks at a price of $1.00 per share plus all accrued
but unpaid dividends through the date of redemption.
Subsequent to period end, the Company completed two sales transactions (see
Note 11) wherein all of the cumulative preferred stock was redeemed at a
discount.
7. OPTION AGREEMENT
As part of the Restructuring Agreement, the Lenders granted two directors
an option to acquire common stock from the Lenders which, if the option was
exercised as of September 17, 1996, would constitute approximately 51 percent of
the Company's issued common stock. The option is exercisable through September
30, 1999 in whole, but not in part, at a price approximating the amount of debt
forgiven by the Lenders plus interest at nine percent from the date of the grant
of the option. In the event the option is exercised, the directors are also
required to offer other minority stockholders the same price per share for their
common stock.
In connection with the two sales transactions described in Note 11, the two
directors waived their options to acquire common stock from the Lenders.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is the subject of certain legal actions, which it considers
routine to its business activities. As of September 17, 1996, management, after
consultation with legal counsel, believes that the potential liability to the
Company under such actions is adequately accrued or insured 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 10 years. The future minimum lease payments due under these operating
leases, which include required lease payments for those stores that have been
subleased, as of September 17, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1997..................... $12,395,000
1998..................... 10,684,000
1999..................... 8,376,000
2000..................... 5,737,000
2001..................... 3,757,000
Thereafter............... 4,855,000
----------
$45,804,000
==========
</TABLE>
F-47
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Certain of the leases provide for contingent rentals based on gross
revenues. Total rental expense including contingent rentals and net of sublease
rentals received, under the above operating leases for the years ended December
31, 1994 and December 30, 1995 and for the period ended September 17, 1996 was
approximately $18,611,000, $13,697,000 and $7,405,000, respectively. As part of
the Company's franchising program, certain leases have been subleased to
franchisees. The future minimum sublease payments due to the Company under these
leases as of September 17, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1997................. $ 3,741,000
1998................. 3,119,000
1999................. 2,512,000
2000................. 1,776,000
2001................. 1,038,000
Thereafter........... 374,000
-----------
$12,560,000
===========
</TABLE>
Contractual Arrangements
The Company has entered into a supply agreement to buy frozen dough
products through 1998. The agreement stipulates minimum annual purchase
commitments for 1997 and 1998. 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 December 30, 1995 and September 17, 1996 were approximately
$1,084,000 and $707,400, respectively. Under the terms of the agreement, the
Company is required to assume any franchisee borrowings which are in default as
defined. As of December 30, 1995 and September 17, 1996, the Company has assumed
loans totaling approximately $132,000 and $240,000, respectively, which are
included in notes payable.
As of December 30, 1995, the Company had recorded deferred credits of
approximately $1,486,000 under a long-term marketing and supply agreement with a
supplier. Under the terms of the agreement, the Company was obligated to
purchase a minimum amount of product from the supplier. In April 1996, the
Company and the supplier renegotiated the agreement whereby the supplier would
reduce the unearned portion to $504,000 and advance the Company $800,000 in
exchange for an extension of the termination date and a modification of the
purchase commitment. The termination date of the renegotiated agreement will be
the later of March 31, 2001 or when the Company has met its purchase commitment.
The Company reduced food costs by approximately $1,082,000 during the period
ended September 17, 1996 related to this arrangement and its renegotiation. The
remaining balance of approximately $1,204,000 is included in deferred credits as
of September 17, 1996.
9. RELATED-PARTY TRANSACTIONS
Under the terms of a licensing agreement with an entity which is owned in
part by a former director of the Company, the Company is required to pay an
annual software maintenance fee. During the years ended December 31, 1994 and
December 30, 1995 and for the period ended September 17, 1996, the Company paid
maintenance fees of approximately $100,000, $100,000 and $17,000, respectively,
which are included in general and administrative expenses.
F-48
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company leases certain office space to an entity which is owned in part
by a former director of the Company. Billings to the entity during the years
ended December 31, 1994 and December 30, 1995 and for the period ended September
17, 1996 totaled approximately $198,000, $152,000 and $136,000, respectively, of
which approximately $30,000, $21,000 and $9,000, respectively, are included in
accounts receivable as of December 31, 1994, December 30, 1995 and September 17,
1996.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors the Mrs. Fields 401(k) Plan (the "Plan") for all
eligible employees. Under the terms of the Plan, employees can 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
December 31, 1994 and December 30, 1995 and for the period ended September 17,
1996 were approximately $38,000, $42,000 and $23,000, respectively.
11. SUBSEQUENT EVENT
On September 17, 1996, the Company completed two simultaneous but separate
asset sale transactions wherein the Company (i) sold certain assets and
relinquished certain liabilities of the Company in accordance with an Asset
Purchase Agreement dated August 7, 1996, among the Company, Mrs. Fields'
Original Cookies, Inc. and Capricorn Investors II, L.P., and (ii) sold certain
assets of the Company in accordance with an Asset Purchase Agreement dated
August 7, 1996, as amended by the First Amendment dated as of September 17,
1996, among the Company, The Mrs. Fields' Brand, Inc. and Capricorn Investors
II, L.P.
The combined sales price for the net assets sold was approximately $41,800,000.
The Company received approximately $12,157,000 in cash and approximately
$29,643,000 in senior and subordinated notes.
The proceeds from these net asset sales were used in part to repay the Series A
notes and the Series A interest deferral notes on September 20, 1996
(see Note 3).
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Original Cookie Company, Incorporated
and Hot Sam Company, Inc.:
We have audited the accompanying combined balance sheets of The Original
Cookie Company, Incorporated and the carved-out portion of Hot Sam Company,
Inc., both Delaware corporations (subsidiaries of Chocamerican, Inc.) as of
December 30, 1995 and September 17, 1996, and the related combined statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1994 and December 30, 1995, and for the period December 31, 1995 to September
17, 1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The
Original Cookie Company, Incorporated and the carved-out portion of Hot Sam
Company, Inc. as of December 30, 1995 and September 17, 1996, and the results of
their operations and their cash flows for the years ended December 31, 1994 and
December 30, 1995, and for the period December 31, 1995 to September 17, 1996 in
conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Cleveland, Ohio
July 11, 1997
F-50
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED BALANCE SHEETS
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
December 30, September 17,
1995 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 3,613 $ 655
Accounts receivable....................................................... 61 340
Inventories............................................................... 1,663 1,728
Prepaids and other........................................................ 1,951 984
------- ------
Total current assets............................................ 7,288 3,707
------- ------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................................... 37,387 31,329
Furniture and fixtures.................................................... 8,540 7,719
Buildings and improvements................................................ 608 639
Land...................................................................... 69 69
------ ------
46,604 39,756
Accumulated depreciation and amortization................................. (26,682) (22,687)
------ ------
Net property and equipment...................................... 19,922 17,069
------ ------
OTHER ASSETS, net . 196 256
------ ------
COST IN EXCESS OF FAIR VALUE OF NET ASSETS OF PURCHASED
BUSINESS, net of accumulated amortization of $8,208 and $9,092,
respectively................................................................ 38,876 37,992
------- ------
$ 66,282 $59,024
======== ======
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined balance sheets.
F-51
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED BALANCE SHEETS (continued)
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
(dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 30, September 17,
1995 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................................ $ 1,286 $ 1,696
Accrued payroll and related expenses.................................... 2,592 2,208
Accrued liabilities..................................................... 3,113 3,443
Related-party payable................................................... 169 --
------ ------
Total current liabilities..................................... 7,160 7,347
------ ------
LONG-TERM LIABILITIES:
Deferred lease credit................................................... 1,764 1,653
Store closure reserve................................................... 1,384 1,002
Related-party notes payable............................................. 32,357 30,977
Other................................................................... 1,029 1,102
------ ------
Total long-term liabilities................................... 36,534 34,734
------ ------
COMMITMENTS (NOTE 9)
STOCKHOLDERS' EQUITY:
Common stock 10,000 10,000
Additional paid-in capital.............................................. 15,873 15,873
Accumulated deficit..................................................... (3,285) (8,930)
------- -------
Total stockholders' equity.................................... 22,588 16,943
------- ------
Total liabilities and stockholders' equity.................... $ 66,282 $59,024
======= =======
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined balance sheets.
F-52
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 30, 1995 AND
FOR THE PERIOD DECEMBER 31, 1995 TO SEPTEMBER 17, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
Years Ended 1995 to
December 31, December 30, September 17,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES....................................................... $ 89,648 $ 85,581 $ 54,366
--------- --------- --------
COST AND EXPENSES:
Cost of goods sold......................................... 22,946 19,996 12,728
Selling and occupancy expenses............................. 47,483 47,032 31,935
General and administrative expenses........................ 9,583 8,425 5,538
Severance and related expenses............................. -------- -- 2,000
Depreciation and amortization.............................. 7,423 6,902 4,937
Provision for store closure costs.......................... 2,963 791 --
-------- ------- -------
Total costs and expenses......................... 90,398 83,146 57,138
-------- ------- -------
(LOSS) INCOME FROM OPERATIONS................................... (750) 2,435 (2,772)
INTEREST EXPENSE, net........................................... (4,381) (4,268) (2,828)
OTHER EXPENSE -- -- (45)
- -------- ------- ---------
LOSS BEFORE INCOME TAXES........................................ (5,131) (1,833) (5,645)
PROVISION FOR INCOME TAXES...................................... 224 263 --
--------- ------- ---------
NET LOSS........................................................ $ (5,355) $ (2,096) $ (5,645)
======== ======== =========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-53
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 30, 1995
AND FOR THE PERIOD DECEMBER 31, 1995 TO SEPTEMBER 17, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (Deficit) Equity
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................................... $10,000 $15,873 $ 4,166 $ 30,039
Net loss.............................................. -- -- (5,355) (5,355)
- ------ ------ ------- -------
BALANCE, DECEMBER 31, 1994................................. 10,000 15,873 (1,189) 24,684
Net loss.............................................. -- -- (2,096) (2,096)
- ------ ------- ------- -------
BALANCE, DECEMBER 30, 1995................................. 10,000 15,873 (3,285) 22,588
Net loss.............................................. -- -- (5,645) (5,645)
- ------ ------- ------- -------
BALANCE, SEPTEMBER 17, 1996................................ $10,000 $15,873 $(8,930) $ 16,943
======= ======= ======= ========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-54
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 30, 1995
AND FOR THE PERIOD DECEMBER 31, 1995 TO SEPTEMBER 17, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
Years Ended 1995 to
December 31, December 30, September 17,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $ (5,355) $ (2,096) $(5,645)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities--
Depreciation and amortization.................................. 7,423 6,902 4,937
Changes in assets and liabilities--
Decrease (increase) in accounts receivable................ 206 (61) (279)
Decrease (increase) in related-party
receivables/payables................................... 428 18 (169)
Decrease (increase) in inventories........................ 215 461 (65)
Decrease in prepaids and other............................ 105 695 967
(Increase) decrease in other assets....................... (108) 64 (60)
(Decrease) increase in accounts payable................... (660) (476) 410
Increase (decrease) in accrued payroll and related
expenses............................................... 323 (331) (384)
Increase (decrease) in accrued liabilities................ 460 (1,196) 330
Increase in other long-term liabilities................... 229 231 73
Increase (decrease) in deferred lease credit.............. 48 38 (111)
Increase (decrease) in store closure reserve.............. 385 202 (382)
------ ------- -------
Net cash provided by (used in) operating activities....... 3,699 4,451 (378)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net......................... (3,779) (568) (1,200)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayment to) related party................. 3,134 (4,599) (1,380)
------ ------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period........................ 3,054 (716) (2,958)
Balance, beginning of the period................................. 1,275 4,329 3,613
------ ------- ------
Balance, end of the period....................................... $ 4,329 $ 3,613 $ 655
======= ======= ======
SUPPLEMENTAL CASH FLOW INFORMATION:
State and local income taxes paid................................ $ 389 $ 234 $ 82
======= ======= ======
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these combined statements.
F-55
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS:
The Original Cookie Company, Incorporated ("OCCI") and Hot Sam Company,
Inc. ("HSCI") (collectively, the "Companies") are wholly owned subsidiaries of
Chocamerican, Inc., which is a wholly owned subsidiary of Midial S.A., a French
company (collectively, the "Parent"). The Companies operated specialty retailing
outlets providing prepared goods. OCCI operated approximately 240 stores in over
35 states, offering a variety of fresh baked cookies and brownies and beverages.
HSCI operated approximately 190 stores in over 30 states providing a variety of
fresh baked pretzels and pretzel sticks, toppings and beverages.
On September 17, 1996, all of the operations of the Companies including
certain assets and liabilities were sold to a nonrelated party (the "Buyer") who
assumed responsibility for all retail locations as of that date. Except for
approximately $2,000,000 of payments to employees for severance and related
costs which is included in the operating results for the period December 31,
1995 to September 17, 1996, these combined financial statements do not reflect
any effect of such sale.
The Companies traditionally experienced their highest revenues in the
fourth calendar quarter. Because the Companies stores were heavily concentrated
in shopping malls, the Companies' sales performance was somewhat dependent on
the performance of those malls. Because of such seasonality and the extra
payroll costs noted above, the results for the period December 31, 1995 to
September 17, 1996 are not necessarily indicative of results that would have
been achieved for an entire calendar year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fiscal Year
The Companies' fiscal year ends on the Saturday closest to December 31,
which results in a 52 or 53-week year.
Basis of Presentation
The combined financial statements include the accounts of OCCI and HSCI
except that these statements do not reflect the results of the operations and
the related assets and liabilities of a group of retail food locations owned and
operated by HSCI primarily under the name of Corn Dog. The Corn Dog operations
were sold to a nonrelated entity in April 1996 and the accompanying combined
financial statements exclude these operations and net assets, as well as the
results of the sale. All significant intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-56
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
Inventories
The Companies' inventories were stated at the lower of cost (first-in,
first-out method) or market value. Inventories consisted of the following at
December 30, 1995 and September 17, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
Food and beverages......... $1,170,000 $1,215,000
Small wares................ 493,000 513,000
---------- ----------
$1,663,000 $1,728,000
========== ==========
</TABLE>
Property and Equipment
The Companies' policy is to provide depreciation using the straight-line
method over a period which is sufficient to amortize the cost of the asset
during its useful life.
The estimated useful lives for depreciation purposes are:
Leasehold improvements......... 5 to 10 years
Furniture and fixtures......... 3 to 10 years
Buildings and improvements..... 10 to 50 years
Intangible Assets
Cost in excess of fair value of net assets of purchased business which was
recorded as part of the acquisition of the Companies by the Parent was amortized
on a straight-line basis over 40 years. Management evaluated the expected cash
flows of such assets periodically and determined no adjustments were
appropriate. Subsequent to September 17, 1996, the Companies expensed all such
intangibles in connection with recording the effects of the sales of the
operations.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Companies consider all
temporary cash investments purchased with an original maturity of three months
or less to be cash equivalents.
Leases
The Companies have various operating lease commitments on their retail
store locations. Operating leases with escalating payment terms are expensed on
a straight-line basis over the life of the related lease.
Asset Impairment
The Companies adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" for the period December 31, 1995 to September 17,
1996. SFAS No. 121 requires the Companies to evaluate the recoverability of
long-lived assets based on expected future cash flows. Prior to the adoption of
SFAS No. 121, the Companies accounted for long-lived operating assets as
discussed both above and in Note 6. The adoption of this standard did not have a
material impact on the Companies' financial position or results of operations.
F-57
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
Revenue Recognition
Revenues from product sales were recognized at the point of sale to the
customer.
Income Taxes
The Companies recognize deferred income tax assets or liabilities for
expected future income tax consequences of events that have been recognized in
the financial statements or income 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.
3. STOCKHOLDERS' EQUITY:
The Companies common stock at December 31, 1994, December 30, 1995 and
September 17, 1996 is comprised of the following:
OCCI has common stock with a par value $1 per share, 10,000,000 shares
authorized, issued and outstanding.
HSCI has common stock with a par value $1 per share, 10 shares authorized,
issued and outstanding.
4. RELATED-PARTY NOTES PAYABLE:
In addition to debt incurred as part of the purchase by the Parent, the
Companies' cash requirements were provided for by the Parent. These amounts were
evidenced by notes, bearing interest rates ranging from 8% to 12%, and consisted
of $32,357,000 as of December 30, 1995 and $30,977,000 as of September 17, 1996.
The notes were paid in part by the Companies subsequent to September 17, 1996 in
connection with the receipt of proceeds from the sale of certain assets and
liabilities to the Buyer.
5. INCOME TAXES:
The Companies have been included in the consolidated income tax returns of
a subsidiary of the Parent which was in a cumulative loss carryforward position
during all of the periods presented in the accompanying combined financial
statements.
The Companies incurred financial reporting losses for the years ended
December 31, 1994 and December 30, 1995 and the period December 31, 1995 to
September 17, 1996 for which no benefits have been recorded in the accompanying
combined statements of operations due to appropriate valuation allowances being
provided. The provisions for income taxes are solely related to minimum state
income tax requirements.
Deferred income tax assets relate to temporary differences between
financial statement and income tax recognition of depreciation, store closure
reserve and other accrued liabilities. Management has provided a valuation
allowance equal to the amount of the deferred income tax assets.
6. STORE CLOSURE RESERVE:
The Companies annually reviewed the historic and projected operating
performance of their stores and identified underperforming stores for impairment
of property investment and/or targeted closing The Companies' policy was to
write-off any net property investment for underperforming stores identified to
have permanent impairment of investment. Additionally, when a store was
identified for targeted closing, the Companies' policy was to provide for the
costs of
F-58
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
closing the store, which are predominantly estimated lease settlement costs
and/or estimated lease payments after the date of the store closing.
An analysis of the activity in the store closure reserve is as follows for the
years ended December 31, 1994 and December 30, 1995, and for the period December
31, 1995 to September 17, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
---- ---- ----
BEGINNING BALANCE....................................... $ 397,000 $1,182,000 $1,384,000
PROVISION............................................... 2,963,000 791,000 --
PAYMENTS AND OTHER DEDUCTIONS........................... (2,178,000) (589,000) (382,000)
----------- ---------- ----------
ENDING BALANCE.......................................... $1,182,000 $1,384,000 $1,002,000
=========== ========== ==========
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
The Companies' employees participate in a defined contribution saving plan
which was funded by voluntary employee contributions and by contributions from
the Companies. The Companies' expense for the years ended December 31, 1994 and
December 30, 1995 was $149,000 and $143,000, respectively, and for the period
December 31, 1995 to September 17, 1996 was $106,000.
The Companies do not provide for any other postretirement benefits.
8. RELATED-PARTY TRANSACTIONS:
The Parent provides certain services to the Companies, such as human
resources, accounting and legal, among others. Charges to the Companies for such
administrative services totaled $530,000 for the year ended December 31, 1994,
$520,000 for the year ended December 30, 1995 and $175,000 for the period
December 31, 1995 to September 17, 1996. In management's opinion, these charges
approximate the fair market value of such services.
9. COMMITMENTS:
Operating Leases
The Companies leased all of their retail store locations. These leases
typically had initial terms of up to 10 years. Certain leases provided for
contingent rentals based on store sales. Generally, the Companies were required
to pay taxes and normal expenses of operating the premises under retail store
leases. Total rental expense was approximately $15,013,000 for the year ended
December 31, 1994 and $15,038,000 for the year ended December 30, 1995. Total
rental expense for the period ended September 17, 1996 was approximately
$11,165,000.
F-59
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
DECEMBER 30, 1995 AND SEPTEMBER 17, 1996
The minimum rentals under operating leases subsequent to September 17, 1996
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
Remaining 1996................. $ 5,346,000
1997........................... 15,886,000
1998........................... 13,763,000
1999........................... 11,691,000
2000........................... 9,712,000
Thereafter..................... 20,190,000
----------
$76,588,000
==========
</TABLE>
Effective September 17, 1996, the Buyer assumed responsibility for all open
store leases but the Companies remain contingently liable under certain of these
leases. However, management is not aware of any actual or threatened claims
under these leases.
F-60
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of H & M Concepts Ltd. Co.:
We have audited the accompanying consolidated balance sheet of H & M
Concepts Ltd. Co. (an Idaho limited liability company) and subsidiaries as of
December 29, 1996, and the related consolidated statements of operations,
members' capital and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H & M Concepts Ltd. Co. and
subsidiaries as of December 29, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
June 13, 1997
F-61
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash....................................................................... $ 1,073 $ 558
Accounts receivable........................................................ 131 65
Inventories................................................................ 176 187
Prepaid expenses and other................................................. 51 6
-------- -------
Total current assets............................................. 1,431 816
-------- -------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements..................................................... 5,920 5,920
Equipment and fixtures..................................................... 3,306 3,333
------- -------
9,226 9,253
Less accumulated depreciation and amortization............................. (3,200) (3,787)
-------- -------
Net property and equipment....................................... 6,026 5,466
-------- -------
INTANGIBLES, net of accumulated amortization of $40 and $51,
respectively................................................................. 162 151
-------- -------
OTHER ASSETS 213 229
-------- -------
Total assets..................................................... $ 7,832 $ 6,662
======== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-62
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(dollars in thousands)
LIABILITIES AND MEMBERS' CAPITAL
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
---- ----
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable.............................................. $ 2,239 $ 2,290
Capitalized lease obligations................................................. 244 131
Accounts payable.............................................................. 416 345
Accrued interest.............................................................. 413 213
Accrued payroll............................................................... 395 343
Reserve for nonperforming stores.............................................. 306 306
Other accrued liabilities..................................................... 329 247
------- -------
Total current liabilities........................................... 4,342 3,875
NOTES PAYABLE, net of current portion.............................................. 164 45
CONVERTIBLE SUBORDINATED SERIES A NOTES............................................ 1,720 1,720
MINORITY INTEREST . 87 77
------- -------
Total liabilities................................................... 6,313 5,717
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 8 and 10)
MEMBERS' CAPITAL:
Members' capital contributions................................................ 4,494 4,494
Accumulated deficit........................................................... (2,976) (3,544)
Cumulative translation adjustment............................................. 1 (5)
------- -------
Total members' capital.............................................. 1,519 945
------- -------
Total liabilities and members' capital.............................. $ 7,832 $ 6,662
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-63
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Year Ended Ended Ended
December 29, June 30, June 29,
1996 1996 1997
---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES:
Net store sales.............................................. $ 18,092 $ 8,468 $ 8,152
Other........................................................ 94 8 18
- ------ -- --
18,186 8,476 8,170
------ ------ ------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs............................ 11,434 5,649 5,414
Food cost of sales........................................... 2,565 1,180 1,144
General and administrative................................... 2,133 979 1,073
Depreciation and amortization................................ 1,211 630 597
Provision for store closure costs............................ 306 160 --
------ ------ ------
Total operating costs and expenses................. 17,649 8,598 8,228
------ ------ ------
Income (loss) from operations...................... 537 (122) (58)
INTEREST EXPENSE (822) (473) (290)
OTHER EXPENSE (223) -- --
------ ------ ------
Loss before minority interest...................... (508) (595) (348)
MINORITY INTEREST (2) (1) --
------ ------ ------
Net loss........................................... $ (510) $ (596) $ (348)
====== ====== ======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-64
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
(dollars in thousands)
<TABLE>
<CAPTION>
Members' Cumulative
Capital Accumulated Translation
Contributions Deficit Adjustment Total
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995................................. $ (196) $ (2,291) $ (8) $(2,495)
Capital contributions................................. 4,690 -- -- 4,690
Member distributions.................................. -- (175) -- (175)
Foreign currency translation adjustment............... -- -- 9 9
Net loss.............................................. -- (510) -- (510)
------- -------- --- -----
BALANCE, December 29, 1996................................. 4,494 (2,976) 1 1,519
Member distributions (unaudited)...................... -- (220) -- (220)
Foreign currency translation adjustment (unaudited)... -- -- (6) (6)
Net loss (unaudited).................................. -- (348) -- (348)
------- -------- --- -----
BALANCE, June 29, 1997 (unaudited)......................... $ 4,494 $(3,544) $ (5) $ 945
======= ======== ==== =====
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-65
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Year Ended Ended Ended
December 29, June 30, June 29,
1996 1996 1997
---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $ (510) $ (596) $ (348)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization................................... 1,211 630 597
Minority interest............................................... 2 1 --
Loss on sale of assets.......................................... 223 -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (61) 18 66
Increase in inventories...................................... (19) (11) (11)
(Increase) decrease in prepaid expenses and other............ (51) (26) 45
Increase in other assets..................................... (20) (32) (7)
Increase (decrease) in accounts payable and accrued
liabilities................................................ 340 (158) (406)
- ----- ------ -----
Net cash provided by (used in) operating activities.......... 1,115 (174) (64)
- ----- ------ ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................................... (172) (118) (27)
Lease buyout (32) (32) --
Proceeds from the sale of assets....................................... 55 -- --
- ----- ------ --
Net cash used in investing activities........................ (149) (150) (27)
- ----- ------ ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and capitalized lease
obligations.......................................................... (1,078) (593) (431)
Proceeds from the issuance of notes payable............................ 613 500 250
Distributions to members............................................... (175) -- (220)
Net investments by minority interests.................................. 85 95 (10)
Equity earnings in excess of distributions of unconsolidated
investment........................................................... (5) (8) (8)
- ----- ----- ---
Net cash used in financing activities........................ (560) (6) (419)
- ----- ----- -----
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-66
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollars in thousands)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Year Ended Ended Ended
December 29, June 30, June 29,
1996 1996 1997
---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C>
EFFECT OF FOREIGN EXCHANGE RATES.................................. $ 9 $ 3 $ (5)
------ ----- ------
NET INCREASE (DECREASE) IN CASH................................... 415 (327) (515)
CASH AT BEGINNING OF THE PERIOD................................... 658 658 1,073
------ ----- ------
CASH AT END OF THE PERIOD......................................... $1,073 $ 331 $ 558
====== ===== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $773,000, $464,000 and $486,000 for the
year ended December 29, 1996 and for the 26 weeks ended June 30, 1996
and June 29, 1997, respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Certain note holders converted $4,690,000 of notes payable to ownership
interests effective April 1, 1996 (see Note 4).
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-67
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including notes related to unaudited periods)
1. ORGANIZATION AND NATURE OF OPERATIONS
H & M Concepts Ltd. Co. ("H&M") was formed as a limited liability company
under the laws of the State of Idaho on October 1, 1993. H&M has a wholly owned
subsidiary, H&M Concepts of Idaho, Inc., and a majority owned subsidiary,
LV-H&M, L.L.C. (collectively, the "Company"). The Company owns and operates
stores which engage in retail sales of pretzels, toppings and beverages under a
franchise agreement with Pretzel Time, Inc., a Pennsylvania corporation. The
Company has first right of refusal territorial franchise rights and agency
rights to Alaska, Arizona, California, Hawaii, Idaho, Illinois, Indiana, Iowa,
Michigan, Minnesota, Montana, Nebraska, Nevada, North Dakota, Oregon, South
Dakota, Utah, Washington and Wisconsin; the provinces of Alberta, British
Columbia, Manitoba, and Saskatchewan, Canada; and Mexico. Additionally, the
Company has limited franchise rights to Texas. Currently, the Company has stores
in Arizona, California, Idaho, Illinois, Indiana, Iowa, Michigan, Minnesota,
Nebraska, Nevada, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin, and
Alberta, Canada. As of December 29, 1996, H&M operated 85 stores.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company usually experiences its highest
revenues in the fourth calendar quarter. Because the Company's stores are
heavily concentrated in shopping malls, the Company's sales performance is
somewhat dependent on the performance of those malls.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Periods
The Company's fiscal year ends on the Sunday closest to December 31, which
results in a 52- or 53-week year.
Unaudited Information
The accompanying consolidated financial statements as of June 29, 1997 and
for the 26 weeks ended June 30, 1996 and June 29, 1997 are unaudited and have
been prepared on a substantially equivalent basis with that of the annual
financial statements. In the opinion of management, the unaudited information
contains all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the Company's financial position and results of operations as
of December 29, 1996 and for such periods.
Principles of Consolidation
The consolidated financial statements include the accounts of H&M, H&M
Concepts of Idaho, Inc., and LV-H&M, L.L.C. 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
three suppliers. Management believes that other suppliers could provide similar
products with comparable terms.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-68
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Including notes related to unaudited periods)
Concentration of Credit Risk
As of December 29, 1996 and June 29, 1997, the Company had demand deposits
totaling approximately $862,000 and $267,000 (unaudited), respectively, with one
bank. These balances exceed the $100,000 limit for insurance by the Federal
Deposit Insurance Corporation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consisted primarily of flour and beverages at December
29, 1996 and June 29, 1997.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment and fixtures are depreciated over four to seven years
using the straight-line method. Leasehold improvements are amortized over the
life of the lease term, or the estimated life of the improvements, whichever is
shorter, 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 included in the determination of net
income or loss.
Intangible Assets
Intangible assets consist primarily of developing agency rights purchased
from Pretzel Time, Inc. These rights are amortized using the straight-line
method over 15 years.
Accounting for the Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"("SFAS No.
121"). SFAS No. 121 requires that long-lived assets be reviewed for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of
future undiscounted net cash flows of the related asset over the remaining life
in measuring whether the assets are recoverable. As of December 29, 1996 and
June 29, 1997, the Company has reserved for any of its long-lived assets that
are considered to be impaired.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign subsidiary are
translated into U.S. dollars using the balance sheet date exchange rate, while
revenues and expenses are translated using the average exchange rate for the
period. The resulting translation gains or losses are recorded as a separate
component of members' equity.
F-69
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Including notes related to unaudited periods)
Revenue Recognition
Product sales are recognized as the product is delivered or shipped to the
customer.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair
value. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Income Taxes
The Company is treated as a partnership for federal and state income tax
purposes. Consequently, federal and state income taxes are not payable by, or
provided for by the Company. Members are taxed individually on their shares of
the Company's earnings. The Company's net income or loss is allocated among the
members in accordance with the operating agreement of the Company.
3. INVESTMENT
The Company owns a 30 percent investment in UVEST LLC ("UVEST"), a Utah
limited liability company, which operates two Pretzel Time, Inc. franchised
stores. NVEST Limited ("NVEST") holds the other 70 percent interest in UVEST.
The Company's investment is accounted for using the equity method. UVEST's
unaudited revenues for the year ended December 29, 1996 and the 26 weeks ended
June 29, 1997 were approximately $503,000 and $214,000, respectively. UVEST's
unaudited net income for the year ended December 29, 1996 and the 26 weeks ended
June 29, 1997 were approximately $116,000 and $38,000, respectively. The
carrying amount of this investment at December 29, 1996 and June 29, 1997 was
approximately $44,000 and $53,000 (unaudited), respectively, and is included in
other assets in the accompanying consolidated balance sheets. Additionally, the
Company was due approximately $20,000 (unaudited) from UVEST as of June 29,
1997.
Under the terms of the UVEST operating agreement, the Company acts as the
managing member and manages the two operating stores. The Company receives no
additional compensation for these services from UVEST or NVEST. The members
share all gains and losses in proportion to their ownership. However, NVEST is
guaranteed cash distributions of approximately $149,000 on an annual basis until
its initial investment of approximately $522,000 together with a 15 percent
return thereon is paid in full. The Company's 30 percent share of annual
distributions is subordinated to such minimum guaranteed payments. Any shortage
advanced from the Company's share of distributions to meet said minimum guaranty
will be repaid to the Company from future profits prior to excess distributions
being paid to NVEST. UVEST distributed approximately $149,000 and $29,000 to
NVEST and the Company, respectively, during the year ended December 29, 1996.
Additionally, UVEST made distributions of $67,000 (unaudited) and $2,000
(unaudited) to NVEST and the Company, respectively, during the 26 weeks ended
June 29, 1997. On a cumulative basis since inception (November 1, 1994), UVEST
has distributed $400,000 to NVEST.
F-70
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Including notes related to unaudited periods)
4. NOTES PAYABLE AND CONVERTIBLE SUBORDINATED SERIES A NOTES
Notes payable and convertible subordinated series A notes consist of the
following as of December 29, 1996 and June 29, 1997:
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
(unaudited)
<S> <C> <C>
Notes payable to various individuals, principal amounts due at various
dates ranging from on demand to May 1, 2000, interest at 15 percent
payable monthly, secured by assignment of certain store profits and
leases....................................................................... $ 1,372 $1,455
Note payable to a bank, payable in monthly installments of $25,000 plus
interest at prime plus 2.5 percent (10.75 percent at December 29, 1996),
secured by securities pledged by the majority member......................... 1,025 875
Note payable to a bank due in monthly installments of $300, plus interest at
7.9 percent, secured by a vehicle............................................ 6 5
Convertible subordinated series A notes (see terms below)....................... 1,720 1,720
------- -------
4,123 4,055
Less current portion............................................................ (2,239) (2,290)
------- -------
$ 1,884 $1,765
======= =======
</TABLE>
Three of the notes payable to individuals are to members of the Company.
The majority member has a $100,000 note that is due on demand. The managing
member has an $85,000 note due on demand and a $217,000 note due March 1, 1999.
Another member has a $50,000 note that is due upon 90-day written demand.
Additionally, the Company borrowed $100,000 from an officer of the Company which
is due within 30 days of its demand. All notes to members and officers bear
interest at 15 percent and include terms similar to all other notes payable to
individuals.
During 1994, the Company issued $4,130,000 of Convertible Subordinated
Series A Notes (the "Convertible Notes") pursuant to a private placement
memorandum dated October 4, 1993. The proceeds were used to fund the
construction of new stores. The Convertible Notes bear interest at an annual
rate of 7.5 percent and interest payments are payable quarterly on the fifteenth
day of the month following the end of each calendar quarter. The Convertible
Notes mature on December 31, 1998 and are unsecured general obligations of the
Company.
The Convertible Notes are convertible (i) up to 50 percent of value into
membership interest in the Company at the rate of $15,000 for each 1/10th of 1
percent interest, and 50 percent into 15 percent Nonconvertible Series A Notes
(the "Nonconvertible Notes") due December 31, 1998, or (ii) up to 100 percent
into Nonconvertible Notes, and collect additional interest of 7.5 percent on the
Convertible Notes from the date of issue. The Company has accrued the additional
7.5 percent of interest since the date of issue assuming such conversion would
take place. Additionally, the Convertible Notes are redeemable on at least 30
and not more than 60 days notice, at the option of the Company, as a whole or in
part, at any time after December 31, 1996.
As of December 29, 1996, no conversion rights had been exercised under the
terms of this arrangement. However, during the 26 weeks ended June 29, 1997,
$700,000 of the Convertible Notes were converted to Nonconvertible Notes.
Subsequent to June 29, 1997, $200,000 of the Convertible Notes were converted to
Nonconvertible Notes.
F-71
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Including notes related to unaudited periods)
Under the terms of a separate private placement memorandum dated March 24,
1996, the Company is offering 40 Units of 1.01 percent membership interest and
one percent profits interest in Company stores in the Company at a conversion
rate of $100,000 principal of face value Convertible Notes (accrued interest is
waived) per unit for an aggregate offering of $4,000,000. The purpose of this
offering (the "Secondary Offering"), which is limited to holders of the
previously issued Convertible Notes, is to convert outstanding debt to equity
and otherwise restructure the Company.
On April 1, 1996, $2,410,000 of the Convertible Notes were converted to
membership interests under the terms of the Secondary Offering. In addition, the
majority and managing members of the Company converted $2,280,000 of notes to
equity under essentially the same terms as specified in the Secondary Offering.
The aggregate amount of principal maturities of notes payable and
convertible subordinated notes at December 29, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending
1997....................... $2,239
1998....................... 1,860
1999....................... 24
------
$4,123
======
</TABLE>
5. ROYALTIES
Under the terms of the Franchise Agreement and the Developing Agent's
Agreement with Pretzel Time, Inc. ("PTI"), the Company is required to pay PTI a
continuing royalty of 8 percent of all gross revenues. PTI is required to return
to the Company, as a developing agent, a sum equal to two-sevenths (2/7) of the
franchise royalty, net of advertising fees, from all franchises operating within
the Company's franchise territory.
6. RESERVE FOR NONPERFORMING STORES
During the year ended December 29, 1996, the Company recorded a reserve
totaling $306,000 for the estimated costs to close or sell approximately 11
existing stores during 1997. During the year ended December 29, 1996, the
Company closed two stores. As of December 29, 1996 and June 29, 1997, the
reserve is $306,000 in the accompanying consolidated balance sheets. In
management's opinion, this reserve is adequate for the stores which have been
identified to be closed or sold.
The Company's management reviews the historic and projected operating
performance of its stores on an annual basis to identify nonperforming stores
for impairment of property investment and/or targeted closing. The Company's
policy is to write-off any net property investment for nonperforming stores
identified to have permanent impairment of investment. Additionally, when a
store is identified for targeted closing, the Company's policy is to provide for
the costs of closing the store, which are predominantly estimated lease
settlement costs.
7. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is the subject of certain legal actions, which it considers
routine to its business activities. As of June 29, 1997, management, after
consultation with legal counsel, believes that the potential liability to the
F-72
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Including notes related to unaudited periods)
Company under 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 cancelable and noncancelable operating lease agreements with
remaining terms of one to ten years. The future minimum lease payments due under
these operating leases as of December 29, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending
1997................................... $ 2,604
1998................................... 2,674
1999................................... 2,621
2000................................... 2,408
2001................................... 2,303
Thereafter............................. 5,079
-------
$17,689
=======
</TABLE>
Certain of the leases provide for contingent rentals based on gross
revenues. Total rental expense under the above operating leases for the year
ended December 29, 1996 and the 26 weeks ended June 30, 1996 and June 29, 1997
was approximately $2,454,000, $1,212,000 (unaudited) and $1,214,000 (unaudited),
respectively.
Capital Leases
Total obligations under capital leases at December 29, 1996 and June 29,
1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
---- ----
(unaudited)
<S> <C> <C>
Total net minimum lease payments........................................ $ 274 $ 147
Less amount representing interest....................................... (30) (16)
----- -----
Present value of net minimum lease payments (all current)............... $ 244 $ 131
===== =====
</TABLE>
The net book value of assets held under capital lease arrangements was
approximately $314,000 and $266,000 (unaudited) as of December 29, 1996 and June
29, 1997, respectively.
F-73
<PAGE>
H & M CONCEPTS LTD. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Including notes related to unaudited periods)
8. FRANCHISE RIGHTS
Under the terms of the franchise agreement with PTI, in order to maintain
the Company's franchise rights in its exclusive territories, the Company was
obligated to open the following minimum number of franchised stores from the
date of inception of the franchise agreement (June 7, 1993) through 1997:
<TABLE>
<CAPTION>
<S> <C>
Year Ending Units
----------- -----
1993...................... 26
1994...................... 30
1995...................... 30
1996...................... 30
1997...................... 28
-----
144
=====
</TABLE>
The Company did not meet the minimum requirements for store openings
through June 29, 1997. The Company is not in default of the franchise agreement
but has lost its rights to be the sole franchisee in the previously exclusive
territories. However, the Company has the first right of refusal on any location
within its once exclusive territory.
The term of the franchise agreement is 20 years with the option to renew
for unlimited additional terms of 20 years each at no cost to the Company.
9. RELATED-PARTY TRANSACTIONS
During the year ended December 29, 1996, the Company paid royalty fees
typically due PTI up to $23,000 per month directly to its majority member. The
majority member had previously loaned PTI a certain amount of funds, which PTI
was in default of the repayment terms. On November 12, 1994, the loan was
renegotiated and secured by PTI's royalty rights. In addition, PTI agreed that
the Company could pay up to $23,000 of monthly royalty fees directly to the
majority member until the obligation was paid in full. During the 26 weeks ended
June 29, 1997, PTI repaid the full amount of the remaining obligation to the
majority member.
During 1996, the managing member became a stockholder in another company
which owns a Pretzel Time store. The Company will manage this store in return
for 28 percent of the net profits.
10. SUBSEQUENT EVENT
On July 25, 1997, the Company sold substantially all of its assets and
certain liabilities to Mrs. Fields' Pretzel Concepts, Inc. for cash and seller
notes. The proceeds from the sale were used to repay notes payable and
convertible subordinated Series A notes, retire certain liabilities not included
in the sale and return members' capital. Once all remaining liabilities are
settled, it is the intent of the members to distribute any remaining cash to the
members and to dissolve the Company.
F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pretzel Time, Inc.:
We have audited the accompanying balance sheets of Pretzel Time, Inc. (a
Pennsylvania corporation) as of December 31, 1995 and December 29, 1996, and the
related statements of operations, stockholders' deficit and cash flows for the
years then ended (as restated, see Note 17). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pretzel Time, Inc. as of
December 31, 1995 and December 29, 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Baltimore, Maryland
June 20, 1997
F-75
<PAGE>
PRETZEL TIME, INC.
BALANCE SHEETS
(dollars in thousands, except redemption and par value amounts)
ASSETS
<TABLE>
<CAPTION>
December 31, December 29, June 15,
1995 1996 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................................. $ 90 $ 95 $ 141
Accounts receivable, net of allowance for doubtful accounts of
$83, $67 and $105, respectively............................... 260 370 120
Inventories...................................................... 190 37 10
Prepaid expenses and other....................................... 29 6 16
Current portion of notes receivable.............................. 109 87 121
Deferred tax asset............................................... -- 110 26
------- ------- -------
Total Current Assets................................... 678 705 434
PROPERTY AND EQUIPMENT, net........................................... 1,839 639 587
OTHER ASSETS, net . 378 212 173
NOTES RECEIVABLE, net of current portion.............................. 222 364 311
------- ------- -------
Total Assets........................................... $ 3,117 $ 1,920 $ 1,505
======= ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt.................................. $ 917 $ 1,206 $ 860
Current portion of capital lease obligations....................... 173 152 112
Accounts payable................................................... 924 273 275
Accrued expenses................................................... 517 263 216
Deferred revenue................................................... 22 94 179
------- ------ ------
Total Current Liabilities................................ 2,553 1,988 1,642
------- ------ ------
LONG-TERM DEBT, net of current portion.................................. 1,173 696 608
-------- ------ ------
CAPITAL LEASE OBLIGATIONS, net of current portion....................... 504 205 79
-------- ------ ------
MINORITY INTEREST . 43 -- --
-------- ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 9 and 14)
MANDATORILY REDEEMABLE PREFERRED STOCK
Preferred stock, $10,000 per share redemption value; 500 shares authorized,
144.5 shares issued and outstanding, as of December 29, 1996,
and June 15, 1997............................................... -- 382 666
-------- ------- ------
STOCKHOLDERS' DEFICIT:
Common stock, $10 par value; 1,000 shares authorized; 100 shares
issued and 94.75, 87 and 87 outstanding, respectively........... 1 1 1
Additional paid-in capital......................................... 230 128 128
Accumulated deficit................................................ (1,387) (1,480) (1,619)
-------- ------- -------
Total Stockholders' Deficit.............................. (1,156) (1,351) 1,490)
-------- ------- -------
Total Liabilities and Stockholders' Deficit.............. $ 3,117 $ 1,920 $ 1,505
======== ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-76
<PAGE>
PRETZEL TIME, INC.
STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Year Ended Ended Ended
December 31, December 29, June 16, June 15,
1995 1996 1996 1997
----- ----- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Royalty income....................................... $ 3,738 $ 4,172 $ 1,664 $ 1,773
Company store sales.................................. 2,968 990 791 196
------ ---- ---- ---
Total Revenues............................. 6,706 5,162 2,455 1,969
------ ------ ------ -----
COST OF REVENUES:
Company stores....................................... 1,298 779 641 145
Developing agent fees and other...................... 823 881 346 353
---- ---- ---- ---
Total Cost of Revenues..................... 2,121 1,660 987 498
------ ------ ---- ---
Gross Margin............................... 4,585 3,502 1,468 1,471
------ ------ ------ -----
OPERATING EXPENSES:
Salaries and payroll taxes........................... 796 1,043 399 452
Rent................................................. 1,043 390 233 121
Depreciation and amortization........................ 145 151 76 66
Other general and administrative..................... 1,687 818 401 408
------ ---- ---- ---
Total Operating Expenses................... 3,671 2,402 1,109 1,047
------ ------ ------ -----
Operating Income........................... 914 1,100 359 424
INTEREST EXPENSE (220) (130) (103) (65)
OTHER (EXPENSE) INCOME, net............................... (146) 29 (8) (102)
MINORITY INTEREST IN LOSS OF
SUBSIDIARIES 50 -- -- --
---- ---- ---- --
Income from Continuing Operations Before
Provision for Income Taxes........................ 598 999 248 257
PROVISION FOR INCOME TAXES................................ (225) (295) (93) (112)
----- ----- ---- -----
Income from Continuing Operations.................... 373 704 155 145
LOSS FROM DISCONTINUED OPERATIONS, net
of income tax benefit of $225, $208, $93 and $-0-,
respectively........................................... (1,177) (313) (216) --
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, net of income tax benefit of $197
in 1996................................................ -- (296) -- --
- --- ------ ---- --
Net (Loss) Income.......................... (804) 95 (61) 145
MANDATORILY REDEEMABLE PREFERRED
STOCK DIVIDENDS........................................ -- (48) -- (72)
- --- ----- --- ----
Net (Loss) Income Attributable to
Common Stockholders..................... $ (804) $ 47 $ (61) $ 73
====== ====- ===== ====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-77
<PAGE>
PRETZEL TIME, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Deficit
<S> <C> <C> <C> <C>
BALANCE, December 25, 1994..................................... $ 1 $-- $ (583) $ (582)
Stock issued at $76,666 per share......................... -- 230 -- 230
Net loss.................................................. -- -- (804) (804)
- ---- --- ----- -----
BALANCE, December 31, 1995..................................... 1 230 (1,387) (1,156)
Conversion of 14.75 shares of common stock into 144.5
shares of mandatorily redeemable preferred stock....... -- (195) -- (195)
Issuance of common stock for services, at the equivalent
of $13,214 per share................................... -- 93 -- 93
Accretion of mandatory redemption value of preferred
stock.................................................. -- -- (140) (140)
Mandatorily redeemable preferred stock dividends.......... -- -- (48) (48)
Net income................................................ -- -- 95 95
- ---- --- --- --
BALANCE, December 29, 1996..................................... 1 128 (1,480) (1,351)
Accretion of mandatory redemption value of preferred
stock (unaudited)...................................... -- -- (212) (212)
Mandatorily redeemable preferred stock dividends
(unaudited)............................................ -- -- (72) (72)
Net income (unaudited).................................... -- -- 145 145
- ---- --- ---- ---
BALANCE, June 15, 1997 (unaudited)............................. $ 1 $ 128 $ (1,619) $ (1,490)
=== =====- ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-78
<PAGE>
PRETZEL TIME, INC.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Year Ended Ended Ended
December 31, December 29, June 16, June 15,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................... $ (804) $ 95 $ (61) $ 145
Adjustments to reconcile net (loss) income to net
cash flows provided by operating activities, net
of effects of sales of net assets of subsidiaries:
Deferred income taxes........................... -- (110) -- 84
Issuance of common stock for services........... -- 93 -- --
Loss on disposal of discontinued operations..... -- 494 -- --
Minority interest in net loss of subsidiaries... (50) -- -- --
Loss on sale of assets.......................... 174 100 18 28
Depreciation and amortization (including $69,
$69, $47 and $-0-, respectively, related to
discontinued operations)..................... 274 220 133 66
Changes in assets and liabilities--
Decrease (increase) in accounts receivable...... 251 (41) (132) 250
Decrease in notes receivable.................... 13 101 187 19
(Increase) decrease in inventory................ (39) 138 60 27
Decrease (increase) in prepaid expenses and
other........................................ 209 105 (32) (10)
(Increase) decrease in other assets............. (42) 41 (15) 8
Increase (decrease) in accounts payable......... 471 (566) 82 6
Increase (decrease) in accrued expenses......... 303 30 (75) (28)
(Decrease) increase in deferred revenue......... (9) 72 28 85
--- --- --- --
Net Cash Provided by Operating
Activities.............................. 751 772 193 680
---- ---- ---- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (774) (208) (45) (12)
Proceeds from sale of assets......................... 448 27 -- --
Increase in other assets............................. (14) -- -- --
----- ---- ---- --
Net Cash Used in Investing Activities...... (340) (181) (45) (12)
----- ----- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............. 233 815 -- --
Principal repayments on long-term debt............... (637) (1,141) (99) (456)
Principal repayments on capital lease obligations.... (204) (260) (82) (166)
Issuance of treasury stock........................... 100 -- -- --
----- ---- ---- --
Net Cash Used in Financing Activities...... (508) (586) (181) (622)
----- ----- ----- -----
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-79
<PAGE>
PRETZEL TIME, INC.
STATEMENTS OF CASH FLOWS (continued)
(dollars in thousands)
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Year Ended Ended Ended
December 31, December 29, June 16, June 15,
1995 1996 1996 1997
(Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH............................ $ (97) $ 5 $ (33) $ 46
CASH, beginning of period.................................. 187 90 90 95
----- ---- ----- -----
CASH, end of period........................................ $ 90 $ 95 $ 57 $ 141
===== ==== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
AND NONCASH ACTIVITIES:
Cash Flow Information--
Interest paid--................................... $ 220 $ 194 $ 120 $ 65
</TABLE>
Noncash Investing and Financing Activities--
During January 1995, the Company issued three shares of treasury stock to
employees as compensation for services rendered. The aggregate value of these
services was $30,000. In July 1995, the Company issued on share of treasury
stock to an unrelated individual in payment of a 4100,000 loan commitment fee.
During the year ended December 31, 1995, the Company applied
approximately $295,000 of royalty income receivables against a note payable.
During the year ended December 31, 1995, the Company executed various
capital lease agreements totaling approximately $469,000 in the acquisition of
property and equipment.
During the year ended December 31, 1995, the Company financed the sale
of several stores by issuing notes receivable. These notes totaled
approximately $244,000.
During the year ended December 31, 1995, the Company converted
accounts payable relating to rent, insurance premiums and professional
services to notes payable of approximately $609,000.
During the year ended December 29, 1996, the Company acquired property
and equipment of approximately $109,000 in satisfaction of a note receivable.
During the year ended December 29, 1996, the Company converted
accounts payable relating to rent and professional services to notes
payable of approximately $307,000.
During the year ended December 29, 1996, the Company executed various
capital lease agreements totaling approximately $395,000 in the acquisition of
property and equipment.
During the 24 weeks ended June 16, 1996, the Company converted
accounts payable and accrued expenses relating to rent and professional
services to notes payable of approximately $338,000.
During the 24 weeks ended June 16, 1996, the Company received, from a
store that closed, certain equipment that was subsequently sold to a
subsidiary for approximately $53,000.
During the 24 weeks ended June 16, 1997, the Company converted
accounts payable and accrued expenses relating to rent to notes payable of
approximately $34,000.
The accompanying notes to financial
statements are an integral part of these statements.
F-80
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, DECEMBER 29,1996, JUNE 16, 1996, AND JUNE 15, 1997
(Including notes related to the unaudited periods)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
Pretzel Time, Inc. (the "Company") was incorporated on April 1, 1991, under
the laws and regulations of the Commonwealth of Pennsylvania. The Company
operates as a franchisor and operator of hand rolled soft pretzel outlets
located in North America. The outlets are primarily located in shopping malls.
The Company's primary sources of revenue are from franchise royalties,
advertising fees, franchise fees (20-year initial term of franchise license,
with 5-year extension options), sale of developing agent territory rights and
Company-owned store sales.
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 calendar quarter. Because the Company's stores are heavily
concentrated in shopping malls, the Company's sales performance is somewhat
dependent on the performance of those malls. The results for the 24-week periods
presented in the accompanying financial statements may not be indicative of
results that would have been achieved for an entire calendar year.
During the year ended December 29, 1996, the Company merged all of its
subsidiaries into Pretzel Time, Inc. The Company then sold its Texas and
Virginia stores for $420,000, the consideration for which was primarily in the
form of promissory notes issued to the Company.
As of December 29, 1996, the Company has an accumulated deficit of
approximately $1,480,000 with debt obligations due in 1997 of approximately
$1,206,000 and accounts payable of approximately $158,000 that are past due.
Management believes that operating cash flows for 1997 will be sufficient to
satisfy these obligations and meet the Company's short-term operating needs
through the end of 1997.
Accounting Periods
The Company uses a 52/53 week year for financial reporting purposes. Fiscal
year 1996 began on January 1, 1996, and ended on December 29, 1996, and included
52 weeks. Fiscal year 1995 began on December 26, 1994, and ended on December 31,
1995, and included 53 weeks. The 24 weeks ended June 15, 1997, began on December
30, 1996, and the 24 weeks ended June 16, 1996, began on January 1, 1996.
Escrow Cash
The Company receives cash from potential franchisees and holds these funds
in escrow until a location is confirmed. As of December 31, 1995, December 29,
1996, and June 15, 1997, the Company held in escrow approximately $-0-, $26,000
and $80,000, respectively.
Inventories
Inventories consist primarily of food and supplies and are stated at the
lower of cost or market value. Cost is determined using the first-in, first-out
(FIFO) method. At December 31, 1995, inventory also consisted of certain
equipment that was being held for resale.
F-81
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are recorded using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
<S> <C>
Life
Buildings........................ 20 years
Leasehold improvements........... 3-10 years
Machinery and equipment.......... 5-7 years
Furniture and fixtures........... 7-10 years
Vehicles......................... 5 years
</TABLE>
Other Assets
Other assets principally consist of intangible assets including prepaid
developing agent fees, organization costs and store start-up costs. Prepaid
developing agent fees were incurred by the Company to secure certain territory
rights that prohibit the collection of developing agent fees in these markets.
Prepaid developing agent fees, organization costs and store start-up costs are
being amortized over a five-year period.
Accounting for the Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS
No.121"). SFAS No. 121 requires that long-lived assets be reviewed for
impairment when events or changes in circumstances indicate that the book value
of an asset may not be recoverable. The Company evaluates, at each balance sheet
date, whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of
future undiscounted net cash flows of the related assets over the remaining life
in measuring whether the assets are recoverable. As of June 15, 1997, the
Company did not consider any of its long-lived assets that are considered to be
impaired.
Revenue Recognition
Revenue from the sale of individual franchises is recognized when
substantially all significant services to be provided by the Company have been
performed.
Royalty income principally includes royalty fees, advertising fees and
franchise fees. Royalties are recognized as revenue when such amounts are
earned, rather than when such amounts are received. Advertising fees are
recognized as earned and are used to offset advertising and promotional costs.
These amounts are shown at gross in the accompanying statements of operations.
The Company currently licenses exclusive rights to develop franchises in
specific geographic areas in North America. Developing agent fees are recognized
as revenue when contractual obligations have been satisfied. Developing agents
earn a 2% royalty on all net sales within their contracted area, exclusive of
Company-owned stores.
Advertising Costs
Advertising costs are expensed as incurred.
F-82
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses in the financial statements and in the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Interim Financial Statements
The financial statements as of and for the 24 weeks ended June 15, 1997,
and for the 24 weeks ended June 16, 1996, are unaudited, but in the opinion of
management, such financial statements have been presented on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for these periods.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 29, June 15,
1995 1996 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Buildings................................................. $ -- $ 190 $ 190
Leasehold improvements.................................... 802 174 173
Machinery and equipment................................... 1,100 365 337
Furniture and fixtures.................................... 47 37 38
Vehicles.................................................. 142 30 30
------- ----- -----
2,091 796 768
Less: Accumulated depreciation and amortization........... (252) (157) (181)
------- ----- -----
Property and equipment, net............................... $ 1,839 $ 639 $ 587
======= ===== =====
</TABLE>
Depreciation expense of approximately $133,000, $84,000, $42,000, and
$35,000 was recorded in cost of revenues and operating expenses for the years
ended December 31, 1995 and December 29, 1996, and for the 24 weeks ended June
16, 1996 (unaudited) and June 15, 1997 (unaudited), respectively. Additionally,
depreciation expense of approximately $69,000, $69,000, $47,000 and $-0- was
recorded in loss on discontinued operations for each of the years ended December
31, 1995 and December 29, 1996, and for the 24 weeks ended June 16, 1996
(unaudited) and June 15, 1997 (unaudited), respectively.
F-83
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
3. OTHER ASSETS:
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 29, June 15,
1995 1996 1997
----- ----- ----
(Unaudited)
<S> <C> <C> <C>
Deposits.................................................. $ 82 $ 49 $ 41
Organization costs........................................ 30 16 16
Store start-up costs...................................... 29 18 18
Goodwill.................................................. 49 -- --
Prepaid developing agent fees............................. 300 300 300
----- ----- -----
490 383 375
Less: Accumulated amortization (112) (171) (202)
----- ----- -----
Other assets, net......................................... $ 378 $ 212 $ 173
===== ===== =====
</TABLE>
During 1996, organization costs of approximately $15,000 were written off
in connection with the merger described in Note 1. Certain store start-up costs
of approximately $11,000 were also written off in 1996.
F-84
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
4. NOTES RECEIVABLE:
Notes receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 29, June 15,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Note receivable from a corporation, secured by a store location in Santa Fe, New
Mexico, requiring monthly interest payments of $158 through April 1997 and
six monthly principal and interest payments
from November 1997 through April 1998................................... $ 85 $ 6 $ 25
10% note receivable from an individual secured by leasehold
improvements and equipment requiring monthly installments of $800, including
principal and interest in 1997, monthly installments of $1,000, including
principal and interest in 1998 and monthly installments of $1,200, including
principal and interest in 1999, with
the remaining balance and accrued interest due in December 1999......... 91 101 101
12% note receivable from a corporation, secured by a store located in
Huntsville, Alabama, requiring weekly installments of $407 through
maturity in November 2001............................................... 89 78 73
10% unsecured note receivable from a corporation requiring monthly
installments of $2,167, including principal and interest through
maturity in January 2000................................................ -- 67 59
10% unsecured note receivable due from a university requiring
monthly installments of $483, including principal and interest, due
in August 1997.......................................................... -- 4 2
9.25% note receivable due from a corporation, secured by a store
located in The Woodlands, Texas, requiring monthly installments of $2,748,
including principal and interest through July 1998, with the
remaining balance and any accrued interest due in August 1998........... -- 51 36
10% note receivable due from a corporation, secured by all leasehold
improvements, personal property, equipment and inventory at the
stores, requiring monthly installments of $3,189, including principal
and interest through maturity in December 2001.......................... -- 144 136
7.5% note receivable from a stockholder of the Company, secured by
stores located in Colorado and Wyoming, requiring monthly
installments of $4,849, including principal and interest through
October 1997............................................................ 100 -- --
Unsecured note receivable from a corporation, with no stated interest,
matured January 1996.................................................... 6 -- --
Unsecured note receivable from a corporation, with no stated interest,
matured January 1996.................................................... 50 -- --
----- ----- -----
Total Notes Receivable............................................. 421 451 432
Less: Reserve for uncollectable amounts.................................... (90) -- --
----- ----- -----
Notes Receivable, net.............................................. 331 451 432
Less: Current portion (109) (87) (121)
----- ----- -----
Notes Receivable, net of current portion........................... $ 222 $ 364 $ 311
===== ===== =====
</TABLE>
F-85
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
Subsequent maturities of notes receivable are as follows at December 29,
1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Amount
---- ------
1997........................ $ 87
1998........................ 87
1999........................ 168
2000........................ 53
2001........................ 56
-----
Total............... $ 451
=====
</TABLE>
5. LONG-TERM DEBT:
The Company has several notes payable to both individuals and corporations
with varying interest rates and maturity dates. Certain of these notes are
secured by various assets and interests of the Company.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 29, June 15,
1995 1995 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Non-interest bearing notes payable to either individuals or
corporations, with and without stated repayment terms.................. $ 411 $ 312 $ 301
Notes payable to individuals or corporations with interest rates ranging
from 6.0% to 9.5%, due at various dates through 2012, requiring
monthly payments....................................................... 468 774 631
Notes payable to individuals and corporations with 10% interest rates,
due at various dates through 2001...................................... 509 432 334
Notes payable to individuals or corporations with interest rates ranging
from 11% to 15%, becoming due at various dates through 1998,
requiring monthly payments............................................. 702 384 202
------- ------ -----
2,090 1,902 1,468
Less: Current portion (917) (1,206) (860)
------- ------ -----
Long-term debt, net of current portion.............................. $ 1,173 $ 696 $ 608
======= ====== =====
</TABLE>
Subsequent maturities of long-term debt are as follows at December 29, 1996
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Amount
---- ------
1997............................ $1,206
1998............................ 368
1999............................ 124
2000............................ 61
2001............................ 16
Thereafter...................... 127
------
Total................. $1,902
======
</TABLE>
F-86
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
6. CAPITAL LEASE OBLIGATIONS:
The Company leases vehicles and a substantial portion of the equipment used
in the operation of its stores under capital leases. These leases have terms
ranging from two to four years.
As of December 29, 1996, future minimum lease payments related to capital
leases were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Amount
1997.................................................... $ 200
1998.................................................... 158
1999.................................................... 75
-----
433
Less: Amount representing interest...................... (76)
-----
Present value of future minimum lease payments.......... 357
Less: Current portion................................... (152)
-----
Capital lease obligations, net of current portion....... $ 205
=====
</TABLE>
7. MANDATORILY REDEEMABLE PREFERRED STOCK:
During the year ended December 29, 1996, holders of 14.75 shares of common
stock converted their common stock into 144.5 shares of newly authorized and
issued preferred stock.
The preferred stock is nonvoting and the preferred stockholders are
entitled to cumulative preferred dividends of 10% for three years, accrued and
payable upon redemption. The preferred stock must be redeemed at $10,000 per
share, plus unpaid and accumulated dividends, on September 1, 1999. The excess
of the redemption price over the carrying value is being accreted over the
period from issuance to September 1, 1999, using the effective interest method
and is being charged to accumulated deficit. In the event of a liquidation or
sale of the Company, the preferred stockholders are entitled to receive payment
of $10,000 per share, plus accumulated dividends.
8. STOCKHOLDERS' DEFICIT:
As of December 31, 1995, December 29, 1996 and June 15, 1997, the Company
holds approximately 5, 13 and 13 shares, respectively, of common stock in
treasury which are available for future issuance. All amounts attributable to
treasury stock have been recorded as a reduction to additional paid-in capital
in the accompanying balance sheets.
9. COMMITMENTS:
Operating Leases
The Company leases its corporate office space and approximately 174
franchised store operating facilities under the terms of operating leases
ranging from three to ten years. Generally, all leases for store operations
contain contingent rental fees based on sales volume and provide for common area
assessments for maintenance, taxes, utilities and security. The Company expenses
the leases on a straight-line basis over the terms of the leases.
F-87
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
Of the 174 store leases noted above, the Company has executed 170 sublease
agreements with the franchisee with terms substantially identical to those
contained in the primary lease.
During the years ended December 31, 1995 and December 29, 1996, net rental
expense of approximately $83,000 and $124,000, respectively, was recorded in
loss from discontinued operations.
Rent expense under noncancelable operating lease agreements was as follows
for the years ended December 31, 1995 and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Gross rent expense..................... $ 6,902 $ 6,965
Less: Sublease rent.................... (5,776) (6,451)
------- -------
Net rental expense..................... $ 1,126 $ 514
======= =======
</TABLE>
<TABLE>
<CAPTION>
Future minimum annual rentals and minimum annual sublease rentals under
operating lease arrangements at December 29, 1996, are as follows (in
thousands):
<S> <C> <C> <C>
Gross Net
Year Rentals Subleases Rentals
---- ------- --------- -------
1997........................ $ 6,553 $ 6,440 $ 113
1998........................ 6,515 6,441 74
1999........................ 6,139 6,111 28
2000........................ 5,206 5,206 --
2001........................ 4,815 4,815 --
Thereafter.................. 8,674 8,674 --
</TABLE>
10. RELATED-PARTY TRANSACTIONS:
A member of the Board of Directors of Pretzel Time, Inc. is also president
of a leasing company from which the Company leases equipment under capital lease
obligations. The outstanding balance on those capital lease obligations was
approximately $535,000 and $323,000, respectively, as of December 31, 1995 and
December 29, 1996, and the Company made payments of approximately $204,000 and
$253,000, respectively, under those capital lease obligations for the years then
ended.
F-88
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
11. INCOME TAXES:
The (benefit) provision for income taxes was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
24 Weeks
Ended
June 15,
Year Ended 1997
December 31, December 31,
1995 1996
---- ----
<S> <C> <C> <C>
Federal:
Current $-- $ -- $ 25
Deferred.............................................. -- (97) 74
State: Current -- -- 3
Deferred.............................................. -- (13) 10
---- ----- ----
(Benefit) provision for income taxes............. $-- $(110) $112
==== ====== ====
</TABLE>
The difference between the recorded income tax provision and the "expected"
tax provision based on the statutory federal income tax rate for the years ended
December 31, 1995 and December 29, 1996, and the 24 weeks ended June 16, 1996
(unaudited) and June 15, 1997 (unaudited), is as follows (in thousands):
<TABLE>
<CAPTION>
24 Weeks 24 Weeks
Year Ended Ended Ended
December 31, December 29, June 16, June 15,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Computed Federal tax (benefit) provision at statutory
rate................................................ $ (279) $ 32 $ (24) $ 87
State income taxes, net of Federal income tax effect... (32) 4 (2) 12
Valuation allowance adjustments........................ 137 (137) -- --
Nondeductible expenses................................. 44 21 18 13
Nondeductible loss on subsidiaries..................... 85 -- -- --
Other.................................................. 45 (30) 8 --
---- ----- --- ----
(Benefit) provision for income taxes.............. $ -- $(110) $-- $112
==== ====== ==== =====
</TABLE>
As of December 31, 1995, December 29, 1996, and June 15, 1997, the Company
had net operating loss carryforwards of approximately $356,000, $225,000 and
$-0-, respectively, for federal income tax purposes. These net operating loss
carryforwards begin to expire in 2008. The Company has recorded valuation
allowances against these operating loss carryforwards of approximately $137,000,
$-0- and $-0- to reflect management's estimate of the realizable portion of the
existing deferred tax assets for the years ended December 31, 1995 and December
29, 1996 and the 24 weeks ended June 15, 1997, respectively.
F-89
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
Total deferred tax assets and deferred tax liabilities as of December 31,
1995, December 29, 1996, and June 15, 1997, and the sources of the differences
between financial accounting and tax bases of the Company's assets and
liabilities which give rise to the deferred tax assets and deferred tax
liabilities and the tax effects of each are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Deferred Tax Assets:
Operating loss carryforwards............................... $137 $ 87 $ --
Accrued expenses and reserves.............................. 65 81 84
---- --- --
202 168 84
Less: Valuation allowance.................................. (137) -- --
----- ---- ---
Deferred tax asset.................................... 65 168 84
Deferred Tax Liability:
Depreciation............................................... 65 58 58
----- --- --
Deferred tax asset, net............................... $ -- $110 $26
===== ==== ===
</TABLE>
12. EMPLOYEE BENEFIT PLAN:
During fiscal year 1996, the Company adopted a Simplified Employee Pension
Plan with a Salary Reduction Offer Plan (the "Plan") to replace its existing
401(k) profit sharing plan. Under the Plan, employees may elect to defer up to
15% of their salary, subject to the limits provided for within the Internal
Revenue Code and Regulations. The Company may make a discretionary contribution
to the Plan. The Company did not contribute to the Plan for the years ended
December 31, 1995 and December 29, 1996.
13. CONCENTRATION OF CREDIT RISK:
As of December 29, 1996, 228 franchise and Company-owned locations were in
operation. One franchisee operates 85 of these locations. Failure of this
franchisee to meet its obligations to the Company could have a significant
adverse impact on its operations.
14. CONTINGENCIES:
The Company is party to several legal proceedings which are considered by
management to be routine and incidental to its business. In the opinion of
management, after consulting with legal counsel, the ultimate disposition of
these lawsuits will not have a material adverse effect on the Company's
financial position or results of operations.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the balance sheets for cash, accounts
payable and accrued expenses approximate fair value because of the short-term
maturity of those instruments.
Fair value of the Company's long-term debt is estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
F-90
<PAGE>
PRETZEL TIME, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995, DECEMBER 29, 1996, JUNE 16, 1996 AND JUNE 15, 1997
(Including notes related to the unaudited periods)
The aggregate carrying amounts and fair values of the Company's long-term
debt as of December 31, 1995 and December 29, 1996, were approximately
$2,100,000 and $1,900,000 and $2,130,000 and $1,700,000, respectively.
16. DISCONTINUATION OF THE MANUFACTURING OPERATIONS:
In September 1994, the Company created a new business segment to
manufacture frozen pretzel products. In November 1994, the Company signed a
lease on a manufacturing plant for frozen products which required payments of
$16,750 per month through December 29, 1996, with a commitment to purchase the
building at that time for approximately $1,600,000. Significant obligations were
also entered into during 1994 for the purchase of machinery and equipment and
leasehold improvements for approximately $1,100,000.
On March 1, 1996, the Company decided to cease its manufacturing operations
and dispose of the machinery and equipment. In connection with the disposal, the
Company negotiated various settlements with the respective lessors in
satisfaction of their future lease obligations. Assets which were owned were
sold to outside parties. During the year ended December 29, 1996, the
manufacturing operations and disposal thereof generated a loss of approximately
$609,000, net of income tax benefits of approximately $405,000. Based on the
measurement date, this total loss is reported as loss on disposal of
discontinued operations and loss from discontinued operations in the
accompanying statements of operations.
17. RESTATEMENT ADJUSTMENTS:
During 1996, certain adjustments were identified that affected the 1995
financial statement amounts previously reported on by other auditors. These
adjustments resulted in a decrease in net income of approximately $268,000 and
an increase in the accumulated deficit of approximately $225,000.
During 1997, the Company identified an error in the previously issued 1996
financial statements. Correction of this error resulted in a decrease in net
income for the year ended December 29, 1996, and an increase in the accumulated
deficit as of December 29, 1996, of approximately $32,000. Income from
continuing operations before provision for income taxes was reported as
approximately $1,051,000 versus $999,000, as restated. Income from continuing
operations was reported as approximately $736,000 versus $704,000, as restated.
18. SUBSEQUENT EVENT:
Subsequent to year-end, the Company entered into discussions with another
multi-unit retailer to sell approximately 56.0% of its outstanding common stock.
Negotiations are continuing, with an expected closing no later than September
30, 1997.
F-91
<PAGE>
No dealer, sales representative, or other person has been $100,000,000
authorized to give any information or to make any
representations other than those contained in this
Prospectus and, if given or made, such information or
representations must not be relied upon as having been
authorized by the Company or the Initial Purchasers. This
Prospectus does not constitute an offer to sell or a MRS. FIELDS'
solicitation of an offer to buy any securities other than ORIGINAL COOKIES,
the securities to which it relates, nor does it constitute INC.
an offer to sell or the solicitation of an offer to buy such
securities in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so,
or to any person to whom it is unlawful to make such an 10 1/8% Series B
offer or solicitation. Neither the delivery of this Senior Notes Due
Prospectus nor any sale made hereunder shall, under any 2004
circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof
or that information contained herein is correct as of any
time subsequent to its date.
----------------
TABLE OF CONTENTS
Page _______________________
Available Information...............................5
Prospectus Summary..................................6
Summary Historical and Pro Forma PROSPECTUS
Financial Data.....................................16 _______________________
Risk Factors.......................................19
The Transactions...................................27
Use of Proceeds....................................29
Capitalization.....................................30
The Exchange Offer.................................31
Selected Historical Financial Data.................37
Management's Discussion and Analysis of Financial
Condition and Results of Operations................40
Business...........................................51
Management.........................................62
Ownership of Capital Stock.........................66
Certain Relationships and Related Transactions.....67 April 24, 1998
Description of Senior Notes .......................69
Plan of Distribution...............................92
Certain United States Federal Tax Considerations...93
Legal Matters......................................93
Experts............................................93
Unaudited Pro Forma Condensed Consolidated Statement of
Operations.....................................P-1
Index to Historical Financial Statements..........F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE CORPORATION.
As authorized by Section 145 of the General Corporation Law of the State of
Delaware, each director and officer of the Company may be indemnified by the
Company against expenses (including attorney's fees, judgments, fines and
amounts paid in settlement) actually and reasonably incurred in connection with
the defense or settlement of any threatened, pending or completed legal
proceedings in which he is involved by reason of the fact that he is or was a
director or officer of the Company if he acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of the Company, the director or
officer may not be indemnified in respect of any claim, issue or matter as to
which he shall have been adjudged to be liable for negligence or misconduct in
the performance of his duty to the Company unless a court determines otherwise.
The Company's by-laws authorize the Company to indemnify its present and
former directors and officers and to pay or reimburse expenses for 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
1.1 Purchase Agreement, dated as of November 20, among Mrs. Fields' Original
Cookies, Inc., The Mrs. Fields Brand, Inc., Jefferies & Company, Inc. and
BT Alex. Brown Incorporated
2.1 Agreement and Plan of Merger, dated as of November 26, 1997, by and between
Mrs. Fields' Original Cookies, Inc. and Mrs. Fields' Pretzel Concepts, Inc.
2.2 Capital Contribution and Assumption Agreement, dated as of November 26,
1997, by and between Mrs. Fields' Holding Company, Inc. and Mrs. Fields'
Original Cookies, Inc.
2.3 Capital Contribution Agreement, dated as of November 26, 1997, by and
between Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields' Brand,
Inc.
2.4 Capital Contribution Agreement, dated as of November 26, 1997, by and
between Mrs. Fields' Holding Company, Inc. and The Mrs. Fields' Brand, Inc.
2.5 Capital Contribution Agreement, dated as of November 26, 1997, by and
between Mrs. Fields' Holding Company, Inc. and Mrs. Fields' Original
Cookies, Inc.
3.1 Restated Certificate of Incorporation of Mrs. Fields' Original Cookies,
Inc.
3.2 Restated Certificate of Incorporation of The Mrs. Fields' Brand, Inc.
3.3 Certificate of Designations of the Mrs. Fields' Brand, Inc., dated as of
September 18, 1996
3.4 By-Laws of Mrs. Fields' Original Cookies, Inc.
3.5 By-Laws of The Mrs. Fields' Brand, Inc.
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
4.2 Form of Certificate of Senior Note (included as Exhibit A to Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of November 26, among Mrs. Fields'
Original Cookies, Inc., The Mrs. Fields Brand, Inc., Jefferies & Company,
Inc. and BT Alex. Brown Incorporated
5.1 Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP to as to
- --------------------------------------------------------------------------------
legality of the New Senior Notes to be issued by Mrs. Fields' Original
---------------------------------------------------------------------------
Cookies, Inc. and the New Guarantee to be issued by The Mrs. Fields' Brand,
---------------------------------------------------------------------------
Inc.
----
10.1 Asset Purchase Agreement, dated as of August 7, 1996, among Mrs. Fields
Development Corporation, The Mrs. Fields' Brand, Inc. and Capricorn II,
L.P.
10.6 The Escrow Agreement, dated as of September 18, 1996, among The Bank of New
York (Trustee), The Mrs. Fields' Brand, Inc., The Prudential Insurance
Company of America, Principal Mutual Life Insurance Company, Pruco Life
Insurance Company and Contrarian Capital Advisors, L.L.C. (as agent)
<PAGE>
EXHIBIT (cont.)
10.7 Senior Note Agreement, dated as of September 18, 1996, among The Mrs.
Fields' Brand, Inc., The Prudential Insurance Company of America, Principal
Mutual Life Insurance Company, Pruco Life Insurance Company and Contrarian
Capital Advisors, L.L.C. (as agent)
10.10License Agreement, dated as of September 18, 1996, between The Mrs.
Fields' Brand, Inc., and Mrs. Fields' Original Cookies, Inc.
10.11Asset Purchase Agreement, dated as of August 7, 1996, among Mrs. Fields,
Inc., Mrs. Fields' Original Cookies, Inc., and Capricorn Investors II, L.P.
10.13Copyright Security Agreement, dated as of September 18, 1996, among Mrs.
Fields' Original Cookies, Inc., Mrs. Fields Cookies Australia, Fairfield
Cookies, Inc., and The Bank of New York (collateral agent)
10.14Escrow Agreement, dated as of September 18, 1996, among Chocamerican,
Inc., The Prudential Insurance Company of America, Principal Mutual Life
Insurance Company, Pruco Life Insurance Company, Contrarian Capital
Advisors (as agent), Mrs. Fields, Inc., Mrs. Fields' Original Cookies,
Inc., and The Bank of New York
10.15Security Agreement, dated as of September 18, 1996, among Mrs. Fields'
Original Cookies, Inc. and The Bank of New York (collateral agent)
10.16Stockholders' Agreement, dated as of August 7, 1996, among Mrs. Fields'
Original Cookies, Inc., Mrs. Fields' Holding Company, Inc., and
Chocamerican, Inc.
10.17Trademark Security Agreement, dated as of September 18, 1996, among Mrs.
Fields' Original Cookies, Inc. Mrs. Fields Cookies Australia, Fairfield
Foods, Inc., and The Bank of New York (collateral agent)
10.18Amendment to Collateral Security Agreement, dated as of January 31, 1997,
among Mrs. Fields' Original Cookies, Inc., Mrs. Fields' Other Names, Inc.
and The Bank of New York (collateral agent) 10.19 Amendment to Copyright
Security Agreement, dated as of January 31, 1997, among Mrs. Fields'
Original Cookies, Inc., Mrs. Fields Cookies Australia, Fairfield Cookies,
Inc., and The Bank of New York (collateral agent)
10.20First Amendment to Loan Agreement, dated as of January 31, 1997, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank (lender)
10.21$3,000,000 Revolving Note, dated as of January 31, 1997, between Mrs.
Fields' Original Cookies, Inc. and LaSalle National Bank
10.22Amendment to Stock Pledge Agreement, dated as of January 31, 1997, between
Mrs. Fields' Original Cookies, Inc., and The Bank of New York
10.23Subordination and Intercreditor Agreement, dated as of January 31, 1997,
among LaSalle National Bank, Chocamerican, Inc., The Prudential Insurance
Company of America, Principal Mutual Life Insurance Company, Pruco Life
Insurance Company, Contrarian Capital Advisors, Mrs. Fields, Inc., and Mrs.
Fields' Holding Company, Inc.
10.24Amendment to Trademark Security Agreement, dated as of January 31, 1997,
among Mrs. Fields' Original Cookies, Inc., Mrs. Fields Cookies Australia,
Fairfield Cookies, Inc., Mrs. Fields' Other Names, Inc., and The Bank of
New York
10.25Amendment and Restated Collateral Agency Agreement, dated as of January
31, 1997, among Chocamerican, Inc., The Prudential Insurance Company of
America, Principal Mutual Life Insurance Company, Pruco Life Insurance
Company, Contrarian Capital Advisors, L.L.C., Mrs. Fields, Inc. Mrs.
Fields' Holding Company, Inc., LaSalle National Bank and Mrs. Fields'
Original Cookies, Inc.
10.26Supply Distribution Agreement, dated as of September 26, 1996, between
Blueline Distributing, a division of Little Caesar Enterprises, Inc. and
Mrs. Fields, Inc.
10.27Amended and Restated Marketing Agreement, dated as of January 9, 1997,
between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA Fountain
10.28Employment Agreement, dated as of October 1, 1997, between Michael R. Ward
and Mrs. Fields' Original Cookies, Inc.
10.29Employment Agreement, dated as of October 1, 1997, between Pat Knotts and
Mrs. Fields' Original Cookies, Inc.
10.30Employment Agreement, dated as of October 1, 1997, between L. Time Pierce
and Mrs. Fields' Original Cookies, Inc.
10.31Employment Agreement, dated as of July 1, 1996, between Lawrence Hodges
and Mrs. Fields' Original Cookies, Inc.
<PAGE>
EXHIBIT (cont.)
10.32Lease Agreement, dated as of February 23, 1993, between The Equitable Life
Assurance Society of the United States and Mrs. Fields Cookies
10.33Lease Agreement, dated as of October 10, 1995, between The Equitable Life
Assurance Society of the United States and Mrs. Fields Cookies
10.34Letter of Agreement, dated as of October 1, 1992, between United Airlines,
Inc. and Mrs. Fields Development Corporation
10.35Lease Agreement, dated as of January 18, 1998, between 2855 E. Cottonwood
Parkway, L.C. and Mrs. Fields' Original Cookies, Inc.
10.37Amendment to Supply Agreement, dated as of June 19, 1995 between Van Den
Bergh Foods Company and Mrs. Fields, Inc.
10.38Stockholders' Agreement, dated as of September 19, 1997, among The Mrs.
Fields' Brand, Inc., and its stockholders
10.39Stock Acquisition Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc., Pretzel Time, Inc. and Martin E. Lisiewski
10.40License Agreement, dated as of March 1, 1992, between Mrs. Fields
Development Corporation and Marriott Corporation
10.41License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp.
10.43Stock Acquisition Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc. Pretzel Time, Inc., and Martin E. Lisiewski
10.44Franchise Agreement Addendum 2 and Area Development Agreement Addendum 2,
dated as of September 2, 1997, between Pretzel Time, Inc. and Mrs. Fields'
Original Cookies, Inc.
10.45Management Agreement, dated as of September 2, 1997, between Mrs. Fields'
Original Cookies, Inc. and Pretzel Time, Inc.
10.46Stock Purchase Agreement, dated as of September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski
10.47Shareholder Agreement, dated as of September 2, 1997, among Mrs. Fields'
Holding Company, Inc., Martin E. Lisiewski and Pretzel Time, Inc.
10.48Employment Agreement, dated as of September 2, 1997, between Pretzel Time,
Inc. and Martin E. Lisiewski
10.49Area Development Agreement, dated as of September 2, 1997, between Pretzel
Time, Inc. and Mrs. Fields' Original Cookies, Inc.
10.50$500,000 Promissory Note, dated as of September 2, 1997, between martin E.
Lisiewski and Mrs. Fields' Holding Company, Inc.
10.51Exchange Agreement, dated September 2, 1997, between Mrs. Fields' Holding
Company, Inc. and Martin E. Lisiewski
10.52Registration Rights Agreement, dated September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski
10.53Franchise Development Agreement, dated September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc.
10.54Asset Purchase Agreement, dated July 23, 1997, among Mrs. Fields' Pretzel
Concepts, Inc., H&M Concepts, Inc., and The Managing Members of H&M
Concepts Ltd., Co.
10.55Exhibit A to the Developing Agent Agreement, dated September 2, 1997,
between Pretzel Time, Inc. and Mrs. Fields' Original Cookies, Inc.
10.56 Uniform Franchise Offering Circular of Pretzel Time, Inc.
10.57Exhibit B to the Developing Agent Agreement, dated September 2, 1997,
between Pretzel Time, Inc., and Mrs. Fields' Original Cookies, Inc.
10.62Assignment of Assets and Assumption of Liabilities Agreement, dated July
25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields' Pretzel
Concepts, Inc.
<PAGE>
EXHIBIT (cont.)
10.64First Amendment to Operating Agreement for UVEST, LLC, dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST Limited
10.65First Amendment to Operating Agreement for LV-H&M, L.L.C., Dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean Jensen
10.69Lease Agreement, dated March 2, 1995, between Price Development Company,
Limited Partnership and Mrs. Fields Cookies
10.70Consulting Agreement, dated November 26, 1996, between Debra J. Fields and
Mrs. Fields' Original Cookies, Inc.
10.71Employment Agreement, dated May 7, 1997, between Julie Byerlein and Mrs.
Fields' Original Cookies, Inc.
10.72Stock Pledge Agreement, dated as of September 18, 1996, between Mrs.
Fields' Original Cookies, Inc. and The Bank of New York (collateral agent)
10.73Amended and Restated Loan Agreement, dated as of February 28, 1998, bewteen
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank
11.1 Statement re computation of per share earnings
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.
21.2 Subsidiaries of The Mrs. Fields' Brand, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit
- --------------------------------------------------------------------------------
5.1)
----
24.1 Power of Attorney of certain officers and directors of the Company
24.2 Power of Attorney of certain officers and directors of the Guarantor
25.1 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee
under the Indenture
25.2 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee
under the Guarantees
27.1 Financial Data Schedule (for SEC use only)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Schedule II - Valuation and Qualifying Accounts
99.4 Guidelines for certification of taxpayer identification number on
substitute Form W-9
99.6 Letter to Brokers
99.7 Letter to Clients
--------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake:
---------------------------------------------
(1) To file any period in which offers to sale are being made, a
post-effective amendment to this registration statement; (i) To include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To
reflect in the propsectus any facts or events arising after the effective date
of the registration statement (or most recent post-effective amendment therof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; (iii) to include any material information with repsect to the plan of
distribution previously disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the purpose of determining any liabilities under the
Securities Act of 1993, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therin, and the
offering of such securities at that time shall be deemed to be the intial bona
fide offering therof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
<PAGE>
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired or involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned hereby undertakes that:
(1) For purposes of determining liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrants pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securuties Act shall be demmed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purpose of determining liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be demmed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offerinf thereof.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, Mrs.
Fields' Original Cookies, Inc. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-4 and has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Salt Lake City, State of Utah, on the
23 day of April, 1998.
Mrs. Fields' Original Cookies, Inc.
By:/s/ *
Larry A. Hodges
President/CEO
By:/s/L. Tim Pierce
L. Tim Pierce
Attorney-in-fact
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Mrs. Fields' Original
Cookies, Inc. and each of us, do hereby constitute and appoint Michael R. Ward
or L. Tim Pierce, our true and lawful attorney and agent, with power of
substitution, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated above, which said attorney and
agent may deem necessary or advisable to enable said corporation to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with this Registration Statement on Form S-4, and any and all
amendments to said Registration Statement and all instruments necessary or
incidental in connection therewith, including specifically, but without
limitation, power and authority to sign for us or any of us in our names, in the
capacities indicated below, any and all amendments hereto, and to file the same
with the Commission. Said attorney shall have full power and authority to do and
perform in the name and on behalf of each of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises as fully and to all intents and purposes as each of the undersigned
might or could do in person, hereby ratifying and approving the acts of said
attorneys and each of them.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ * President, Chief Executive Officer April 23, 1998
(Larry A. Hodges) and Director (Chief Executive Officer)
/s/ * Senior Vice President, Chief Financial April 23, 1998
(L. Tim Pierce) Officer and Secretary
(Chief Financial officer)
/s/ * Vice President and Controller April 23, 1998
(Mark Ostler) (Principal Accounting Officer)
/s/ * Chairman of the Board of Directors April 23, 1998
(Herbert S. Winokur)
/s/ * Director April 23, 1998
(Richard M. Ferry)
/s/ * Director April 23, 1998
(Debbi Fields)
/s/ * Director April 23, 1998
(Nathaniel A. Gregory)
/s/ * Director April 23, 1998
(Walker Lewis)
/s/ * Director April 23, 1998
(Peter W. Mullin)
/s/ * Director April 23, 1998
(Gilbert C. Osnos)
* By/s/L. Tim Pierce
L. Tim Pierce
Attorney-in-fact
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, The Mrs.
Fields' Brand, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-4 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Salt Lake City, State of Utah, on the 23 day of April, 1998.
The Mrs. Fields' Brand, Inc.
By:/s/Larry A. Hodges
Larry A. Hodges
President/CEO
By:/s/L. Tim Pierce
L. Tim Pierce
Attorney-in-fact
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Mrs. Fields' Brand, Inc.
and each of us, do hereby constitute and appoint Michael R. Ward or L. Tim
Pierce, our true and lawful attorney and agent, with power of substitution, to
do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated above, which said attorney and agent may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission (the "Commission"), in connection with this
Registration Statement on Form S-4, and any and all amendments to said
Registration Statement and all instruments necessary or incidental in connection
therewith, including specifically, but without limitation, power and authority
to sign for us or any of us in our names, in the capacities indicated below, any
and all amendments hereto, and to file the same with the Commission. Said
attorney shall have full power and authority to do and perform in the name and
on behalf of each of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises as fully and to all
intents and purposes as each of the undersigned might or could do in person,
hereby ratifying and approving the acts of said attorneys and each of them.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ * President, Chief Executive Officer April 23, 1998
(Larry A. Hodges) and Director, Secretary & Treasurer
(Chief Executive/Financial Officer)
/s/ * Vice President and Controller April 23, 1998
(Mark Ostler) (Principal Accounting Officer)
/s/ * Chairman of the Board of Directors April 23, 1998
(Herbert S. Winokur)
/s/ * Director April 23, 1998
(Walker Lewis
* By/s/L. Tim Pierce
L. Tim Pierce
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
EXHIBIT
1.1 Purchase Agreement, dated as of November 20, among Mrs. Fields' Original
Cookies, Inc., The Mrs. Fields Brand, Inc., Jefferies & Company, Inc. and
BT Alex. Brown Incorporated
2.1 Agreement and Plan of Merger, dated as of November 26, 1997, by and between
Mrs. Fields' Original Cookies, Inc. and Mrs. Fields' Pretzel Concepts, Inc.
2.2 Capital Contribution and Assumption Agreement, dated as of November 26,
1997, by and between Mrs. Fields' Holding Company, Inc. and Mrs. Fields'
Original Cookies, Inc.
2.3 Capital Contribution Agreement, dated as of November 26, 1997, by and
between Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields' Brand,
Inc.
2.4 Capital Contribution Agreement, dated as of November 26, 1997, by and
between Mrs. Fields' Holding Company, Inc. and The Mrs. Fields' Brand, Inc.
2.5 Capital Contribution Agreement, dated as of November 26, 1997, by and
between Mrs. Fields' Holding Company, Inc. and Mrs. Fields' Original
Cookies, Inc.
3.1 Restated Certificate of Incorporation of Mrs. Fields' Original Cookies,
Inc.
3.2 Restated Certificate of Incorporation of The Mrs. Fields' Brand, Inc.
3.3 Certificate of Designations of the Mrs. Fields' Brand, Inc., dated as of
September 18, 1996
3.4 By-Laws of Mrs. Fields' Original Cookies, Inc.
3.5 By-Laws of The Mrs. Fields' Brand, Inc.
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
4.2 Form of Certificate of Senior Note (included as Exhibit A to Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of November 26, among Mrs. Fields'
Original Cookies, Inc., The Mrs. Fields Brand, Inc., Jefferies & Company,
Inc. and BT Alex. Brown Incorporated
5.1 Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP to as to
- --------------------------------------------------------------------------------
legality of the New Senior Notes to be issued by Mrs. Fields' Original
---------------------------------------------------------------------------
Cookies, Inc. and the New Guarantee to be issued by The Mrs. Fields' Brand,
---------------------------------------------------------------------------
Inc.
----
10.1 Asset Purchase Agreement, dated as of August 7, 1996, among Mrs. Fields
Development Corporation, The Mrs. Fields' Brand, Inc. and Capricorn II,
L.P.
10.6 The Escrow Agreement, dated as of September 18, 1996, among The Bank of New
York (Trustee), The Mrs. Fields' Brand, Inc., The Prudential Insurance
Company of America, Principal Mutual Life Insurance Company, Pruco Life
Insurance Company and Contrarian Capital Advisors, L.L.C. (as agent)
10.7 Senior Note Agreement, dated as of September 18, 1996, among The Mrs.
Fields' Brand, Inc., The Prudential Insurance Company of America, Principal
Mutual Life Insurance Company, Pruco Life Insurance Company and Contrarian
Capital Advisors, L.L.C. (as agent)
10.10License Agreement, dated as of September 18, 1996, between The Mrs.
Fields' Brand, Inc., and Mrs. Fields' Original Cookies, Inc.
10.11Asset Purchase Agreement, dated as of August 7, 1996, among Mrs. Fields,
Inc., Mrs. Fields' Original Cookies, Inc., and Capricorn Investors II, L.P.
10.13Copyright Security Agreement, dated as of September 18, 1996, among Mrs.
Fields' Original Cookies, Inc., Mrs. Fields Cookies Australia, Fairfield
Cookies, Inc., and The Bank of New York (collateral agent)
10.14Escrow Agreement, dated as of September 18, 1996, among Chocamerican,
Inc., The Prudential Insurance Company of America, Principal Mutual Life
Insurance Company, Pruco Life Insurance Company, Contrarian Capital
Advisors (as agent), Mrs. Fields, Inc., Mrs. Fields' Original Cookies,
Inc., and The Bank of New York
10.15Security Agreement, dated as of September 18, 1996, among Mrs. Fields'
Original Cookies, Inc. and The Bank of New York (collateral agent)
10.16Stockholders' Agreement, dated as of August 7, 1996, among Mrs. Fields'
Original Cookies, Inc., Mrs. Fields' Holding Company, Inc., and
Chocamerican, Inc.
10.17Trademark Security Agreement, dated as of September 18, 1996, among Mrs.
Fields' Original Cookies, Inc. Mrs. Fields Cookies Australia, Fairfield
Foods, Inc., and The Bank of New York (collateral agent)
10.18Amendment to Collateral Security Agreement, dated as of January 31, 1997,
among Mrs. Fields' Original Cookies, Inc., Mrs. Fields' Other Names, Inc.
and The Bank of New York (collateral agent)
10.19Amendment to Copyright Security Agreement, dated as of January 31, 1997,
among Mrs. Fields' Original Cookies, Inc., Mrs. Fields Cookies Australia,
Fairfield Cookies, Inc., and The Bank of New York (collateral agent)
10.20First Amendment to Loan Agreement, dated as of January 31, 1997, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank (lender)
10.21$3,000,000 Revolving Note, dated as of January 31, 1997, between Mrs.
Fields' Original Cookies, Inc. and LaSalle National Bank
<PAGE>
EXHIBIT (cont.)
10.22Amendment to Stock Pledge Agreement, dated as of January 31, 1997, between
Mrs. Fields' Original Cookies, Inc., and The Bank of New York
10.23Subordination and Intercreditor Agreement, dated as of January 31, 1997,
among LaSalle National Bank, Chocamerican, Inc., The Prudential Insurance
Company of America, Principal Mutual Life Insurance Company, Pruco Life
Insurance Company, Contrarian Capital Advisors, Mrs. Fields, Inc., and Mrs.
Fields' Holding Company, Inc.
10.24Amendment to Trademark Security Agreement, dated as of January 31, 1997,
among Mrs. Fields' Original Cookies, Inc., Mrs. Fields Cookies Australia,
Fairfield Cookies, Inc., Mrs. Fields' Other Names, Inc., and The Bank of
New York
10.25Amendment and Restated Collateral Agency Agreement, dated as of January 31,
1997, among Chocamerican, Inc., The Prudential Insurance Company of
America, Principal Mutual Life Insurance Company, Pruco Life Insurance
Company, Contrarian Capital Advisors, L.L.C., Mrs. Fields, Inc. Mrs.
Fields' Holding Company, Inc., LaSalle National Bank and Mrs. Fields'
Original Cookies, Inc.
10.26Supply Distribution Agreement, dated as of September 26, 1996, between
Blueline Distributing, a division of Little Caesar Enterprises, Inc. and
Mrs. Fields, Inc.
10.27Amended and Restated Marketing Agreement, dated as of January 9, 1997,
between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA Fountain
10.28Employment Agreement, dated as of October 1, 1997, between Michael R. Ward
and Mrs. Fields' Original Cookies, Inc.
10.29Employment Agreement, dated as of October 1, 1997, between Pat Knotts and
Mrs. Fields' Original Cookies, Inc.
10.30Employment Agreement, dated as of October 1, 1997, between L. Time Pierce
and Mrs. Fields' Original Cookies, Inc.
10.31Employment Agreement, dated as of July 1, 1996, between Lawrence Hodges
and Mrs. Fields' Original Cookies, Inc.
10.32Lease Agreement, dated as of February 23, 1993, between The Equitable Life
Assurance Society of the United States and Mrs. Fields Cookies
10.33Lease Agreement, dated as of October 10, 1995, between The Equitable Life
Assurance Society of the United States and Mrs. Fields Cookies
10.34Letter of Agreement, dated as of October 1, 1992, between United Airlines,
Inc. and Mrs. Fields Development Corporation
10.35Lease Agreement, dated as of January 18, 1998, between 2855 E. Cottonwood
Parkway, L.C. and Mrs. Fields' Original Cookies, Inc.
10.37Amendment to Supply Agreement, dated as of June 19, 1995 between Van Den
Bergh Foods Company and Mrs. Fields, Inc.
10.38Stockholders' Agreement, dated as of September 19, 1997, among The Mrs.
Fields' Brand, Inc., and its stockholders
10.39Stock Acquisition Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc., Pretzel Time, Inc. and Martin E. Lisiewski
10.40 License
Agreement, dated as of March 1, 1992, between Mrs. Fields Development
Corporation and Marriott Corporation
10.41License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp.
10.43Stock Acquisition Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc. Pretzel Time, Inc., and Martin E. Lisiewski
10.44Franchise Agreement Addendum 2 and Area Development Agreement Addendum 2,
dated as of September 2, 1997, between Pretzel Time, Inc. and Mrs. Fields'
Original Cookies, Inc.
10.45Management Agreement, dated as of September 2, 1997, between Mrs. Fields'
Original Cookies, Inc. and Pretzel Time, Inc.
10.46Stock Purchase Agreement, dated as of September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski
10.47Shareholder Agreement, dated as of September 2, 1997, among Mrs. Fields'
Holding Company, Inc., Martin E. Lisiewski and Pretzel Time, Inc.
10.48Employment Agreement, dated as of September 2, 1997, between Pretzel Time,
Inc. and Martin E. Lisiewski
10.49Area Development Agreement, dated as of September 2, 1997, between Pretzel
Time, Inc. and Mrs. Fields' Original Cookies, Inc.
10.50$500,000 Promissory Note, dated as of September 2, 1997, between martin E.
Lisiewski and Mrs. Fields' Holding Company, Inc.
10.51Exchange Agreement, dated September 2, 1997, between Mrs. Fields' Holding
Company, Inc. and Martin E. Lisiewski
<PAGE>
EXHIBIT (cont.)
10.52Registration Rights Agreement, dated September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski
10.53Franchise Development Agreement, dated September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc.
10.54Asset Purchase Agreement, dated July 23, 1997, among Mrs. Fields' Pretzel
Concepts, Inc., H&M Concepts, Inc., and The Managing Members of H&M
Concepts Ltd., Co.
10.55Exhibit A to the Developing Agent Agreement, dated September 2, 1997,
between Pretzel Time, Inc. and Mrs. Fields' Original Cookies, Inc.
10.56 Uniform Franchise Offering Circular of Pretzel Time, Inc.
10.57Exhibit B to the Developing Agent Agreement, dated September 2, 1997,
between Pretzel Time, Inc., and Mrs. Fields' Original Cookies, Inc.
10.62Assignment of Assets and Assumption of Liabilities Agreement, dated July
25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields' Pretzel
Concepts, Inc.
10.64First Amendment to Operating Agreement for UVEST, LLC, dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST Limited
10.65First Amendment to Operating Agreement for LV-H&M, L.L.C., Dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean Jensen
10.69Lease Agreement, dated March 2, 1995, between Price Development Company,
Limited Partnership and Mrs. Fields Cookies
10.70Consulting Agreement, dated November 26, 1996, between Debra J. Fields and
Mrs. Fields' Original Cookies, Inc.
10.71Employment Agreement, dated May 7, 1997, between Julie Byerlein and Mrs.
Fields' Original Cookies, Inc.
10.72Stock Pledge Agreement, dated as of September 18, 1996, between Mrs.
Fields' Original Cookies, Inc. and The Bank of New York (collateral agent)
10.73Amended and Restated Loan Agreement, dated as of February 28, 1998, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank
11.1 Statement re computation of per share earnings
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.
21.2 Subsidiaries of The Mrs. Fields' Brand, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit
- --------------------------------------------------------------------------------
5.1)
----
24.1 Power of Attorney of certain officers and directors of the Company
24.2 Power of Attorney of certain officers and directors of the Guarantor
25.1 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee
under the Indenture
25.2 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee
under the Guarantees
27.1 Financial Data Schedule (for SEC use only)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Schedule II - Valuation and Qualifying Accounts
99.4 Guidelines for certification of taxpayer identification number on
substitute Form W-9
99.6 Letter to Brokers
99.7 Letter to Clients
- --------
* To be filed by amendment.
[Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]
April 24, 1998
Mrs. Fields' Original Cookies, Inc.
The Mrs. Fields' Brand, Inc
462 West Bearcat Drive
Salt Lake City, Utah 84115
Re: Exchange Offer for $100,000,000
10 1/8% Old Senior Notes due 2004
Mrs. Fields' Original Cookies, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as special counsel to Mrs. Fields' Original
Cookies, Inc., a Delaware corporation (the "Company"), in connection with the
public offering of $100,000,000 aggregate principal amount of the Company's 10
1/8% Series B Senior Notes Due 2004 (the "New Senior Notes"), which are to be
guaranteed pursuant to a guarantee (the "Guarantee" and, together with the New
Notes, the "Securities") by The Mrs. Fields Brand, Inc., a Delaware corporation
(the "Guarantor"). The New Senior Notes are to be issued pursuant to an exchange
offer (the "Exchange Offer") in exchange for a like principal amount of the
issued and outstanding 10 1/8% Series A Senior Notes Due 2004 of the Company
(the "Old Senior Notes"), and are to be governed by an Indenture dated as of
November 26, 1997 (the "Indenture"), by and among the Company, the Guarantor and
The Bank of New York, as Trustee (the "Trustee").
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Act").
<PAGE>
In connection with this opinion, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of (i) the Registration Statement
on Form S-4 (File No. 333-45179) relating to the Exchange Offer as filed with
the Securities and Exchange Commission (the "Commission") on January 29, 1998
under the Act, Amendment No.1 thereto, filed with the Commission on March 23,
1998, Amendment No. 2 thereto, filed with the commission on April 7, 1998,
Amendment No. 3, thereto, filed with the commission on April 21, 1998 and
Amendment No. 4, thereto, filed with the cmmission on the date hereof (such
Registration Statement, as so amended, being hereinafter referred to as the
"Registration Statement"), (ii) an executed copy of the Registration Rights
Agreement dated November 26, 1997 (the "Registration Rights Agreement"), by and
among the Company, the Guarantor and Jefferies & Companies, Inc. and BT
Alex.Brown Incorporated, (iii) an executed copy of the Indenture, (iv) the
Restated Certificates of Incorporation of the Company and the Guarantor, as
amended to date, (v) the By-Laws of the Company and the Guarantor, as amended to
date, (vi) certain resolutions adopted by the Board of Directors of the Company
(dated October 30, 1997), relating to, among other things, the Exchange Offer,
the issuance of the Old Senior Notes and the New Senior Notes, the Indenture and
related matters, (vii) certain resolutions adopted by the Board of Directors of
the Guarantor (dated November 26, 1997) relating to, among other things, the
issuance of the Guarantee by the Guarantor, (viii) the Form T-1 of the Trustee
filed as an exhibit to the Registration Statement, and (ix) the form of the New
Senior Notes (including the form of the Guarantees) included as exhibits to the
Indenture. We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of such records of the Company and the Guarantor
and such agreements, certificates of public officials, certificates of officers
or other representatives of the Company, the Guarantor and others, and such
other documents, certificates and records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein.
<PAGE>
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company and the Guarantor, we have assumed that such parties had or will have
the power, corporate or other, to enter into and perform all obligations
thereunder and have also assumed the due authorization by all requisite action,
corporate or other, and execution and delivery by such parties of such documents
and the validity and binding effect thereof on such parties. As to any facts
material to the opinions expressed herein which we did not independently
establish or verify, we have relied upon oral or written statements and
representations of officers, trustees and other representatives of the Company,
the Guarantor and others.
Members of our firm are admitted to the bar in the State of
New York, and we do not express any opinion as to the laws of any other
jurisdiction other than the General Corporation Law of the State of Delaware.
<PAGE>
Based upon and subject to the foregoing and limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that when (i) the Registration Statement becomes effective and the
Indenture has been qualified under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), and (ii) the New Senior Notes have been duly
executed by the Company and authenticated by the Trustee in accordance with the
provisions of the Indenture and have been delivered upon consummation of the
Exchange Offer against receipt of Old Senior Notes surrendered in exchange
thereof in accordance with the terms of the Exchange Offer, the New Senior Notes
will be valid and binding obligations of the Company, entitled to the benefits
of the Indenture and enforceable against the Company in accordance with their
terms, and the Guarantee will constitute a valid and binding obligation of the
Guarantor entitled to the benefits of the Indenture, enforceable against the
Guarantor, in each case, except to the extent that enforcement thereof may be
limited by (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect relating to
creditors' rights generally and (2) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity).
In rendering the foregoing, we have assumed that the execution
and delivery by the Company and the Guarantor of the Securities and the
Indenture and the performance by the Company and the Guarantor of their
respective obligations thereunder do not and will not violate or constitute a
default under (i) any agreement or instrument to which the Company, the
Guarantor or any of their properties is subject (except that we do not make the
assumptions set forth in this clause (i) with respect to the Restated
Certificates of Incorporation or By-Laws of each of the Company and the
Guarantor), (ii) any law, rule or regulation to which the Company and the
Guarantor are subject (except that we do not make the assumption set forth in
this clause (ii) with respect to the General Corporation Law of the State of
Delaware and those laws, rules and regulations (other than securities and
antifraud laws) of the State of New York that, in our experience, are normally
applicable to transactions of the type provided for by the Indenture and the
Securities (it being understood that we have made no special investigation with
respect to any other laws, rules or regulations), (iii) any judicial or
regulatory order or decree of any governmental authority, or (iv) any consent,
approval, license, authorization or validation of, or filing, recording or
registration with any governmental authority.
<PAGE>
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are included
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
