<PAGE>
As filed with the Securities and Exchange Commission on November 4, 1999
Registration No. 333-67393
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
To
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
MRS. FIELDS' HOLDING COMPANY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 6749 87-0563475
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(801) 736-5600
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Michael Ward, Esq.
Mrs. Fields' Holding Company, Inc.
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(801) 736-5600
(Name, address, including zip code, and telephone number, including area code,
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 Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is prohibited. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
MRS. FIELDS' HOLDING COMPANY, INC.
PROSPECTUS (Subject to completion)
, 1999
Exchange Offer for
$55,000,000
14% Senior Secured Discount Notes Due 2005
Terms of the Exchange Offer
. Expires 12:00 midnight, . The notes will increase
New York City time, in principal amount at a
, 1999, unless rate of 14%, compounded
extended. semi-annually, to a total
principal amount of $55.0
. Not subject to any million at December 1,
condition other than that 2002.
the exchange offer not
violate applicable law or . The notes will mature on
any interpretation of the December 1, 2005, and pay
staff of the Securities interest on June 1 and
and Exchange Commission. December 1 of each year,
beginning on June 1,
. We can amend or terminate 2003.
the exchange offer.
. We will not receive any
. We will exchange all proceeds from the
outstanding notes that exchange offer.
are validly tendered and
not validly withdrawn. . The exchange of notes
will not be a taxable
. You may withdraw tendered exchange for U.S. income
outstanding notes any tax purposes.
time before the
expiration of the . The terms of the notes to
exchange offer. be issued are identical
to those of the
. The notes are senior debt outstanding notes, except
issued at a discount, for transfer restrictions
secured by a pledge of and registration rights.
all the outstanding
capital stock of Mrs.
Fields' Original Cookies,
Inc., and consequently,
will be effectively
subordinated to any
indebtedness of Mrs.
Fields' Original Cookies,
Inc.
For a discussion of specific risks that you should consider before tendering
your outstanding notes in the exchange offer, see "Risk Factors" beginning on
page 13.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Summary Historical and Pro Forma Financial and Store Data................ 10
Risk Factors............................................................. 13
Forward-Looking Information.............................................. 23
The Transactions......................................................... 24
Use of Proceeds.......................................................... 26
Capitalization........................................................... 27
The Exchange Offer....................................................... 28
Selected Historical Financial Data....................................... 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
Where You Can Find More Information...................................... 62
Business................................................................. 63
Management............................................................... 76
Beneficial Ownership of Capital Stock.................................... 81
Relationships and Related Transactions................................... 82
Description of Notes..................................................... 85
Description of Indebtedness.............................................. 116
Warrants................................................................. 116
Plan of Distribution..................................................... 116
United States Federal Income Tax Considerations.......................... 117
Legal Matters............................................................ 117
Experts.................................................................. 118
Unaudited Pro Forma Condensed Combined Financial Statements.............. P-1
Index to Historical Financial Statements................................. F-1
</TABLE>
----------------
The registrant's principal executive offices are located at 2855 East
Cottonwood Parkway, Suite 400, Salt Lake City, Utah 84121, and its telephone
number is (801) 736-5600.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus or incorporated by reference in this prospectus.
We are not making offers to exchange notes in the exchange offer or soliciting
offers to exchange outstanding notes in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make an offer or solicitation.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus contains specific terms of the notes we are offering, as well as
information regarding our business and detailed financial data. We encourage
you to read this prospectus in its entirety.
The Exchange Offer
Registration Rights
Agreement.............. Holders of outstanding notes are entitled to exchange
their notes for registered notes with substantially
identical terms. The exchange offer is intended to
satisfy these rights. After the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to your
notes.
The Exchange Offer...... We are offering to exchange $1,000 principal amount
of 14% Series B Senior Secured Discount Notes due
2005 of Mrs. Fields' Holding Company, Inc., which
have been registered under the Securities Act, for
each $1,000 principal amount of outstanding 14%
Series A Senior Secured Discount Notes due 2005 which
were issued in August 1998 in a private offering. The
registered notes will be secured by the same
collateral that currently secures the outstanding
notes. All outstanding notes that are validly
tendered and not validly withdrawn will be exchanged.
As of this date there is $55,000,000 in principal
amount at maturity of notes outstanding.
We will issue registered notes on or promptly after
the expiration of the exchange offer. Each of your
notes was originally issued as part of a unit
consisting of one note and a warrant to purchase
3.14411 shares of our common stock. The warrants
became separately transferable on February 20, 1999,
and we are not offering to exchange them.
Resales................. We believe that you can offer for resale, resell and
otherwise transfer the notes issued in the exchange
offer without complying with the registration and
prospectus delivery requirements of the Securities
Act if:
. you acquire the notes issued in the exchange offer
in the ordinary course of your business;
. you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the notes issued to you in the
exchange offer; and
. you are not an "affiliate" of ours, as defined in
Rule 405 of the Securities Act.
If any of these conditions is not satisfied and you
transfer any note issued to you in the exchange offer
without delivering a proper prospectus or without
qualifying for a registration exemption, you may
incur liability under the Securities Act. We do not
assume or indemnify you against this liability.
4
<PAGE>
Each broker-dealer acquiring notes in the exchange
offer for its own account in exchange for outstanding
notes, which it acquired through market-making or
other trading activities, must acknowledge that it
will deliver a proper prospectus when any notes
issued in the exchange offer are transferred. A
broker-dealer may use this prospectus for an offer to
resell, a resale or other retransfer of the notes
issued to it in the exchange offer.
Expiration Date......... The exchange offer will expire at 12:00 midnight, New
York City time, on , 1999, unless we decide to
extend the expiration date.
Conditions to the
Exchange Offer......... The exchange offer is subject to customary
conditions, some of which we may waive.
Procedures for
Tendering Outstanding
Notes Held in the Form
of Book-Entry
Interests.............. Most of the outstanding notes were issued as global
securities and were deposited upon issuance with The
Bank of New York. The Bank of New York issued
certificateless depositary interests in those notes,
which represents a 100% interest in those notes, to
The Depository Trust Company. Beneficial interests in
the outstanding notes, which are held by direct or
indirect participants in The Depository Trust Company
through the certificateless depositary interests, are
shown on, and transfers of these outstanding notes
can be made only through, records maintained in book-
entry form by The Depository Trust Company.
You may tender your outstanding notes:
. through a computer-generated message transmitted
by The Depository Trust Company's Automated Tender
Offer Program system and received by the exchange
agent and forming a part of a confirmation of
book-entry transfer in which you acknowledge and
agree to be bound by the terms of the letter of
transmittal; or
. by sending a properly completed and signed letter
of transmittal, which accompanies this prospectus,
and other documents required by the letter of
transmittal, or a facsimile of the letter of
transmittal and other required documents, to the
exchange agent at the address on the cover page of
the letter of transmittal;
and either:
. a timely confirmation of book-entry transfer of
your outstanding notes into the exchange agent's
account at The Depository Trust Company, under the
procedure for book-entry transfers described in
this prospectus under the heading "The Exchange
Offer--Book Entry Transfers" must be received by
the exchange agent on or before the expiration
date; or
. the documents necessary for compliance with the
guaranteed delivery procedures described in "The
Exchange Offer--Guaranteed Delivery Procedures"
must be received by the exchange agent.
5
<PAGE>
Procedures for
Tendering Outstanding
Notes Held in the Form
of Registered Notes.... If you hold registered notes, you must tender your
registered outstanding notes by sending a properly
completed and signed letter of transmittal, together
with other documents required by it, and your
certificates, to the exchange agent, in accordance
with the procedures described in this prospectus
under the heading "The Exchange Offer--Procedures for
Tendering Notes."
Withdrawal Rights....... You may withdraw your tender of outstanding notes at
any time prior to 12:00 midnight, , 1999.
United States Federal
Income Tax
Considerations......... The exchange offer should not result in any income,
gain or loss to the holders or Mrs. Fields' Holding
for United States federal income tax purposes. See
"United States Federal Income Tax Considerations."
Use of Proceeds......... We will not receive any proceeds from the issuance of
notes in the exchange offer.
The proceeds from the offering of notes in August
1998 were used to finance a capital contribution to
Mrs. Fields, which used the capital contribution,
along with proceeds from its own issuance of notes,
to finance the acquisition of Great American Cookie
Company, Inc., other acquisitions, and a tender offer
for outstanding Great American notes.
Exchange Agent.......... The Bank of New York is serving as the exchange agent
for the exchange offer.
Shelf Registration
Statement.............. In limited circumstances, holders of notes may
require us to register their notes under a shelf
registration statement.
6
<PAGE>
The Company
Overview
Mrs. Fields' Holding Company, Inc. is the parent company of Mrs. Fields'
Original Cookies, Inc. Mrs. Fields' Holding is a holding company and does not
have any material operations other than ownership of all of the capital stock
of Mrs. Fields.
Mrs. Fields is one of the largest retailers in the premium snack-food
industry, with cookies and pretzels as its major product lines. Based on
numbers of units, Mrs. Fields is the largest retailer of baked on-premises
cookies and the second largest retailer of baked on-premises pretzels in the
United States. Mrs. Fields is one of the most widely recognized and respected
brand names in the premium cookie industry. Mrs. Fields has recently developed
a significant presence in the rapidly growing, health-oriented pretzel market.
Mrs. Fields operates and franchises stores located predominantly in shopping
malls, and also licenses kiosks and carts at airports, universities, stadiums,
hospitals and office building lobbies.
How We Have Done
For the 52 weeks ended January 2, 1999, Mrs. Fields' Holding generated pro
forma net revenue and EBITDA of $191.2 million and $20.1 million, respectively.
Actual net revenue and EBITDA for the 53 weeks ended January 3, 1998 was $134.4
million and $18.6 million, respectively. Mrs. Fields' Holding generated pro
forma net revenue and EBITDA of $92.6 million and $10.2 million, respectively,
during the 26 weeks ended July 4, 1998 and actual net revenue and EBITDA of
$84.2 million and $10.2 million, respectively, during the 26 weeks ended July
3, 1999. EBITDA consists of earnings before depreciation, amortization,
interest, income taxes, minority interest, preferred stock accretion and
dividends of subsidiaries and other income or expense.
Pro Forma Information
Pro forma information is not indicative of actual results and may not be
indicative of future results. We have presented pro forma information
throughout this prospectus, however, because we believe that the changes to our
business since 1996 make the pro forma information more meaningful to you.
Our pro forma condensed combined statements of operations data in this
prospectus give effect to:
1. our offering of notes and warrants in August 1998,
2. offerings of notes by Mrs. Fields in August 1998 and the application
of net proceeds from those offerings, and
3. the acquisitions of Great American Cookie Company, Inc., the capital
stock and stores of some Great American franchisees, the capital
stock of Pretzelmaker Holdings, Inc., and Cookie Conglomerate, Inc.
as if all of these transactions had occurred on January 4, 1998.
Our Strategy
Our objective is to increase sales and profitability by focusing on
continuing company-owned stores in prime locations.
An additional objective is to increase sales and profitability at both our
continuing company-owned and franchised stores by implementing the key elements
of our long-term business strategy. The key elements of our business strategy
are as follows:
. Enhance Quality of Company-Owned Store Base.
. Improve Productivity of Continuing Company-Owned Stores.
. Capitalize on the Strong "Mrs. Fields" Brand Name.
. Develop the Great American Brand Name.
. Capitalize on the Strong "Pretzel Time" Brand Name.
. Develop New Company-Owned and Franchised Stores, including
Internationally.
. Realize Purchasing and Overhead Cost Savings As a Result of Recent
Acquisitions.
. Pursue Further Strategic Acquisitions of Related Businesses.
7
<PAGE>
SUMMARY DESCRIPTION OF THE NOTES
The form and terms of the notes to be issued in the exchange offer are the
same as the form and terms of the outstanding notes except that the notes to be
issued in the exchange offer have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not
contain the registration rights and liquidated damages provisions contained in
the outstanding notes. The notes issued in the exchange offer will evidence the
same debt as the outstanding notes and both the outstanding notes and the notes
to be issued in the exchange offer are governed by the same indenture.
Aggregate Amount........ $55,000,000 in principal amount at maturity of 14%
Series B Senior Secured Discount Notes due 2005 of
Mrs. Fields' Holding Company, Inc.
Maturity Date........... December 1, 2005.
Accretion............... The principal amount of the notes issued in the
exchange offer will increase in principal amount at a
rate of 14%, compounded semi-annually to a total
principal amount of $55,000,000 at December 1, 2005.
Interest Rate and
Interest Payment Interest on the notes will be payable in cash at a
Dates.................. rate of 14% per year, on June 1 and December 1 of
each year, beginning June 1, 2003.
Security................ The notes issued in the exchange offer will be
secured by a pledge of all of the outstanding capital
stock of our wholly owned subsidiary, Mrs. Fields,
and by intercompany notes, if any, issued by our
subsidiaries to us. For more information, you should
read "Description of Notes--Security."
Ranking................. The notes being issued in the exchange offer:
. are general obligations of Mrs. Fields' Holding
. rank senior in right of payment to all existing
and future subordinated indebtedness of Mrs.
Fields' Holding
. rank equal in right of payment with all existing
and future senior indebtedness of Mrs. Fields'
Holding
As of July 3, 1999, we had no indebtedness that
ranked equal in right of payment with the notes that
we will issue in the exchange offer. The notes that
we will issue will be effectively subordinated to
debt of Mrs. Fields because Mrs. Fields will be
required to make payments on its debt before it can
make dividend or other payments to Mrs. Fields
Holding. Mrs. Fields and its subsidiaries currently
have $151 million of debt that effectively ranks
senior to the notes to be issued in the exchange
offer.
Optional Redemption..... At our option, we may redeem the notes issued in the
exchange offer at any time on or after December 1,
2002. The notes were initially sold to investors as
part of units at a price of $561.17 per $1,000 in
face amount. Because the notes were sold at a
substantial discount from their principal amount at
maturity, they will increase in principal amount
daily at an annual rate of 14%, which is compounded
semi-annually, to reach a total principal amount of
$55.0 million on December 1, 2002. The value in
principal amount for each $1,000 in face amount at
any time is the sum
8
<PAGE>
of the initial price of $561.17 plus the increase in
principal amount at that time, calculated as just
described. In addition, at any time before December
1, 2002, we may redeem all, but not less than all, of
the notes at a redemption price equal to 114% of the
principal amount of the notes, as determined at the
date of redemption.
Change of Control....... Upon the occurrence of a change of control of
ownership of the stock or assets of Mrs. Fields'
Holding, you have the right to require us to
repurchase your notes at a purchase price equal to
101% of their then principal amount if the date of
repurchase is before December 1, 2002, or 101% of the
principal amount at maturity of the notes, plus
accrued interest to the date of repurchase, if the
date of repurchase is after December 1, 2002. For
more information, see "Description of Notes--
Repurchase at the Option of Holders--Change of
Control."
Covenants.......... The indenture under which the outstanding notes have
been issued and will be issued in the exchange offer,
contains covenants that, among other things and
subject to exceptions, restrict our ability to:
. pay dividends
. redeem capital stock
. make restricted payments or investments
. incur additional indebtedness
. issue preferred equity interests
. merge, consolidate or sell all or substantially
all of our assets
. create liens on assets
. sell assets
. enter into transactions with affiliates or related
persons
All of these limitations and prohibitions are subject
to a number of important qualifications and
exceptions. For more information, see "Description of
Notes--Covenants."
Form of Notes Issued in
the Exchange Offer..... The notes issued in the exchange offer with respect
to notes currently represented by global securities
will be represented by one or more permanent global
securities in bearer form deposited with The Bank of
New York, as book-entry depositary, for the benefit
of The Depository Trust Company. Notes that are
issued in the exchange offer that have been exchanged
for notes in the form of registered definitive
certificates will be issued in the form of registered
definitive certificates until holders direct
otherwise. For more information, see "Description of
the Notes--Book-Entry, Delivery and Form."
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND STORE DATA
The following table presents:
(1) summary combined historical financial and store data for Mrs. Fields'
Holding and its predecessors; namely, Mrs. Fields Inc. and subsidiaries,
The Original Cookie Company, Incorporated and the Carved-out Portion
(pretzel business) of Hot Sam Company, Inc., as of December 28, 1996 and
for the 52 weeks then ended,
(2) summary consolidated historical financial and store data for Mrs. Fields'
Holding as of January 3, 1998 and January 2, 1999, and for the 53 weeks
ended January 3, 1998 and for the 52 weeks ended January 2, 1999 and for
the 26 weeks ended July 4, 1998 and July 3, 1999; and
(3) summary combined pro forma financial and store data for Mrs. Fields'
Holding, Great American, Deblan, Chocolate Chip, the eight Great American
stores purchased from a Great American franchisee, Cookie Conglomerate and
Pretzelmaker for the 52 weeks ended January 2, 1999 as if each of the
following had occurred as of January 4, 1998:
. the Mrs. Fields' Holding offering and the Mrs. Fields' offering in
August 1998,
. the acquisition of Great American,
. the acquisition of the stock of two Great American franchisees,
. the acquisitions of eight Great American stores,
. the tender offer for outstanding Great American notes, and
. the acquisitions of Cookie Conglomerate and Pretzelmaker
The summary combined pro forma data do not purport to represent what Mrs.
Fields' Holding's results actually would have been had the above mentioned
transactions occurred as of January 4, 1998 nor do such data purport to
project the results of Mrs. Fields' Holding 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
Combined Financial Statements," "Selected Historical Financial Data," and
the historical financial statements and related notes, contained elsewhere
in this Registration Statement. The following information will also assist
you in understanding the Mrs. Fields' Holding and predecessors historical
combined financial and store data:
. On September 17, 1996, Mrs. Fields' Holding completed the
acquisitions of substantially all of the assets and assumed some of
the liabilities of the predecessors.
. The historical combined data for the 52 weeks ended December 28, 1996
reflects the combined results of the predecessors (for the period
December 31, 1995 through September 17, 1996) and Mrs. Fields'
Holding (for the period September 18, 1996 through December 28,
1996). Information for these periods for the predecessors and Mrs.
Fields' Holding 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.
. In order for the data to be comparable for the periods presented,
some of the statements of operations data for the predecessors has
been reclassified to be consistent with the Mrs. Fields' Holding
historical financial statement presentation.
10
<PAGE>
<TABLE>
<CAPTION>
Mrs. Fields'
Holding and
Predecessors Mrs. Fields' Holding
------------ -------------------------------------------------------------
Historical Historical Historical ProForma Historical Historical
Combined Consolidated Consolidated Combined Consolidated Consolidated
------------ ------------ ------------ -------- ------------ ------------
52 Weeks 53 Weeks
Ended Ended 52 Weeks Ended 26 Weeks Ended
------------ ------------ --------------------- -------------------------
December 28, January January January
1996 3, 1998 2, 1999 2, 1999 July 4, 1998 July 3, 1999
------------ ------------ ------------ -------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net store and food
sales................. $126,330 $127,845 $140,235 $171,689 $ 58,687 $ 71,915
Net store contribution
(1)................... 19,308 25,044 20,166 21,015 6,915 8,686
Franchising and
licensing, net........ 5,103 6,563 14,001 19,557 2,971 11,562
General and
administrative
expenses.............. 20,611 16,436 19,583 27,054 8,673 10,950
Store closure
provision............. -- 538 7,303 7,303 -- --
Income (loss) from
operations............ 1,069 8,124 (6,002) (5,522) (1,645) (1,045)
Net loss............... (5,825) (624) (21,505) (28,087) (7,406) (12,877)
Basic and diluted net
loss per common share
(2)................... N/A (0.88) (6.55) (8.55) (2.25) (3.92)
Other Data:
Cash flows from
operating activities.. 6,786 923 8,714 8,252 (3,495) 2,894
Cash flows from
investing activities.. (22,716) (17,070) (40,894) (41,260) (4,270) (2,704)
Cash flows from
financing activities.. 18,793 25,929 20,446 19,370 (180) (274)
Interest expense....... 4,712 7,527 14,946 22,126 5,626 11,364
Total depreciation and
amortization.......... 9,204 10,450 19,867 25,629 6,220 11,286
Capital expenditures... 3,892 4,678 8,235 NA 3,342 2,604
EBITDA (3)............. 10,273 18,574 13,865 20,107 4,575 10,241
Negative store
contribution for
stores in the process
of being closed or
franchised (1)........ $ (1,933) $ (1,798) $ (2,054) (2,284) $ (1,605) $ (863)
Ratio of earnings to
fixed charges (4)..... -- 1.00x -- -- -- --
Store Data:
Percentage change in
comparable store sales
(5)................... (1.2)% 0.6% (1.6)% NA (1.5)% (0.4)%
Total company-owned
stores open at end of
period................ 482 481 566 566 470 492
Total franchised or
licensed stores open
at end of period...... 418 553 972 972 554 1,001
</TABLE>
<TABLE>
<CAPTION>
Mrs. Fields'
Holding
Historical
Consolidated
July 3,
1999
------------
(dollars in
Balance Sheet Data: thousands)
<S> <C>
Cash and cash equivalents....................................... $ 4,675
Total assets.................................................... 221,509
Mandatorily redeemable cumulative preferred stock of subsidi-
ary............................................................. 1,440
Total line of credit, debt and capital lease obligations, in-
cluding current portion......................................... 183,144
Total stockholders' equity...................................... 2,584
</TABLE>
<TABLE>
<CAPTION>
Mrs. Fields'
Holding
and Predecessors Mrs. Fields' Holding
---------------- ---------------------------------------------------------------
Historical Historical Historical Pro Forma Historical Historical
Combined Consolidated Consolidated Combined Consolidated Consolidated
---------------- -------------- ------------ --------- ------------ ------------
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended 26 Weeks Ended
---------------- -------------- ---------------------- -------------------------
December January January January July 4, July 3,
28, 1996 3, 1998 2, 1999 2, 1999 1998 1999
---------------- -------------- ------------ --------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
EBITDA Data:
Income (loss) from
operations............. $ 1,069 $ 8,124 $(6,002) $(5,522) $(1,645) $(1,045)
ADD:
Depreciation and
amortization.......... 9,204 10,450 19,867 25,629 6,220 11,286
------- ------- ------- ------- ------- -------
EBITDA................ $10,273 $18,574 $13,865 $20,107 $ 4,575 $10,241
======= ======= ======= ======= ======= =======
</TABLE>
See footnotes on following page.
11
<PAGE>
- --------
(1) Store contribution is determined by subtracting all store operating
expenses including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. Store contribution for stores in the process of being closed or
franchised as a separate caption is not in accordance with generally
accepted accounting principles. Store contribution may not be comparable to
other similarly titled measures.
(2) Basic and diluted net loss per common share consists of net loss applicable
to common shares divided by the weighted average number of common shares
outstanding during the applicable period. The historical net loss
applicable to common shares for the 53 weeks ended January 3, 1998 and for
the 52 weeks ended January 2, 1999 includes cumulative redeemable Series A
preferred stock dividends of $2,173,000 and $0, respectively.
(3) 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 (loss) as an indicator of operating performance or to cash flows as
a measure of liquidity. EBITDA has been included in this prospectus because
it is one of the indicators by which Mrs. Fields' Holding assesses its
financial performance and its capacity to service its debt.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued
and net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For fiscal year 1996, earnings were insufficient to
cover fixed charges by $3,822,000. For the 53 weeks ended January 3, 1998,
earnings were sufficient to cover fixed charges by $31,000. For the 52
weeks ended January 2, 1999, earnings were insufficient to cover fixed
charges by $21,189,000. For the 26 weeks ended July 4, 1998 and July 3,
1999, earnings were insufficient to cover fixed charges by $7,392,000 and
$12,667,000, respectively. For the year ended January 2, 1999, pro forma
earnings were insufficient to cover pro forma fixed charges by $28,181,000.
(5) Mrs. Fields' Holding 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.
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<PAGE>
RISK FACTORS
You should consider carefully all of the information in this prospectus,
including the following risk factors and warnings, before deciding whether to
exchange your outstanding notes for the notes to be issued in the exchange
offer. Except for the first three risk factors described below, the risk
factors generally apply to the outstanding notes as well as to the notes to be
issued.
You may have difficulty selling the notes which you do not exchange, since
outstanding notes will continue to have restrictions on transfer and cannot be
sold without registration under securities laws or exemptions from registration
If a large number of outstanding notes are exchanged for the notes to be
issued, it may be difficult for holders of outstanding notes that are not
exchanged in the exchange offer to sell such notes, since those notes may not
be offered or sold unless they are registered or there are exemptions from
registration requirements under the Securities Act or state laws that apply to
them. See: "The Exchange Offer--Consequences of Failure to Exchange Outstanding
Notes." In addition, if there are only a small number of notes outstanding,
there may not be a very liquid market in those old notes. There may be few
investors that will purchase unregistered securities in which there is not a
liquid market. See "The Exchange Offer--Consequences of Failure to Exchange
Notes."
In addition, if you do not tender your outstanding notes or if we do not
accept some outstanding notes, those notes will continue to be subject to the
transfer and exchange provisions of the indenture, the existing transfer
restrictions of the outstanding notes that are described in the legend on such
notes and in the offering circular relating to the outstanding notes.
If you do not exchange your outstanding notes in the exchange offer, you will
no longer be entitled to an increase in interest payments on outstanding notes
that the indenture provides for if we fail to complete the exchange offer
Once the exchange offer has been completed, holders of outstanding notes will
not be entitled to any increase in the interest rate on their notes, which the
indenture provides for if we fail to complete the exchange offer. Holders of
outstanding notes will not have any further rights to have their outstanding
notes registered, except under limited circumstances, once the exchange offer
is completed.
If you exchange your outstanding notes, you may not be able to resell the notes
you receive in the exchange offer without registering them and delivering a
prospectus
You may not be able to resell notes you receive in the exchange offer without
registering those notes or delivering a prospectus. Based on interpretations by
the Commission in no-action letters, we believe, with respect to notes issued
in the exchange offer, that
. holders who are not "affiliates" of Mrs. Fields' Holding within the
meaning of Rule 405 of the Securities Act,
. holders who acquire their notes in the ordinary course of business, and
. holders who do not engage in, intend to engage in, or have arrangements
to participate in a distribution (within the meaning of the Securities
Act) of the notes
do not have to comply with the registration and prospectus delivery
requirements of the Securities Act.
Holders described in the preceding sentence must tell us in writing at our
request that they meet these criteria. Holders that do not meet these criteria
could not rely on interpretations of the Commission in no-action letters, and
would have to register the notes they receive in the exchange offer and deliver
a prospectus for them. In addition, holders that are broker-dealers may be
deemed "underwriters" within the meaning of the Securities Act in connection
with any resale of notes acquired in the exchange offer. Holders that are
broker-dealers must acknowledge that they acquired their outstanding notes in
market-making activities or other
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<PAGE>
trading activities and must deliver a prospectus when they resell the notes
they acquire in the exchange offer in order not to be deemed an underwriter.
You should review the more detailed discussion in "The Exchange Offer--
Procedures for Tendering Notes" and "--Consequences of Exchanging Outstanding
Notes."
We have substantial debt, which could prevent us from fulfilling our debt
obligations, including those under the notes, and could hinder our growth by
preventing us from obtaining other financing and limiting the amount of funds
we have available for purposes other than servicing debt
We incurred a substantial amount of debt in connection with Mrs. Fields'
purchase of Great American and the other companies and assets it acquired. We
continue to have a substantial amount of debt.
Our substantial indebtedness could have important consequences to you. For
example:
. We may not be able to satisfy our obligations with respect to the notes;
. a substantial portion of our cash flows from operations will be required
to be dedicated to debt service and will not be available for other
purposes;
. our ability to obtain additional financing in the future could be
limited;
. the indenture contains financial and restrictive covenants that limit
our ability to, among other things, borrow additional funds, dispose of
assets or pay cash dividends. If we do not comply with such covenants,
there could be an event of default, which, if not cured or waived, could
result in an acceleration of the notes; and
. the amount of debt that we have could prevent us from repurchasing all
the notes tendered to us upon the occurrence of a change of control of
our stock or assets.
See "Description of Notes--Repurchase at the Option of Holders--Change of
Control."
The following chart shows important credit statistics:
<TABLE>
<CAPTION>
At July 3, 1999
---------------
<S> <C>
Total indebtedness of Mrs. Fields' Holding and
subsidiaries............................................. $183.1 million
</TABLE>
Of this debt, $151 million is senior in ranking to the notes.
The number includes liabilities for leases of $1.7 million and preferred
stock required to be repurchased at a future date of $1.4 million outstanding,
together representing 1.6% of our liabilities and equity. All of our
subsidiaries' debt is effectively senior to the notes.
<TABLE>
<S> <C>
Stockholders' equity.......................................... $ 2.6 million
Debt to equity ratio.......................................... 70.9:1
Moreover, in recent periods our earnings have not been sufficient to cover
our fixed charges.
<CAPTION>
26 Weeks
Ended
July 3, 1999
-------------
<S> <C>
Approximate deficiency in earnings to fixed charges........... $12.7 million
</TABLE>
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<PAGE>
Additional borrowings available--despite current indebtedness levels, we and
our subsidiaries may still be able to incur substantially more debt; this could
further exacerbate the risks described above
Although the Mrs. Fields' Holding's indenture and the Mrs. Fields' indenture
and credit agreement with LaSalle National Bank limits our ability and that of
our subsidiaries to incur additional debt and issue preferred stock, we are
permitted to incur additional debt and issue preferred stock, including secured
debt, under limited circumstances which effectively ranks senior to the notes
with respect to the assets securing debt. See "Unaudited Pro Forma Condensed
Combined Financial Statements," and "Description of Notes--Covenants." Our
subsidiary, Mrs. Fields, plans to incur additional debt for working capital
purposes, which will be effectively senior to the notes.
We may not be able to pay principal and interest on our existing debt, if our
business does not generate enough revenue; if we fail to service our debt, we
could have a default on the notes and on our credit agreement and may be unable
to obtain refinancing
Our ability to make scheduled payments of principal, or to pay interest on,
or to refinance our debt (including the notes) depends on our future
performance. In turn, our future performance depends partly on general
economic, financial, competitive, legislative, regulatory and other factors
beyond our control. These include possible legislation and regulations
affecting franchise businesses or retail food businesses and minimum wage
legislation that affects businesses like ours that rely heavily on minimum-wage
employees; demographic or economic trends that could affect mall traffic that
our business depends on, and food retailing trends, which could include
declining interest in products that are perceived as less healthful. We cannot
be sure that our business will generate enough cash flows from operations or
that future borrowings will be available in an amount that will allow us to pay
principal and interest on our debt, including the notes, or to make necessary
capital expenditures, or to allow us to obtain refinancing on commercially
reasonable terms or at all. In particular, the fact that we have incurred
substantial debt in recent years, coupled with the highly seasonal nature of
our business creates a particular risk that large interest payments will come
due at a time when the cash flow from our business will not cover them. As a
result of our holding company structure, we depend on our subsidiaries,
especially Great American, Pretzel Time and Pretzelmaker, to contribute
substantially to our revenues. Our ability to service our debt depends in part
on the revenues of these subsidiaries. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Upon any liquidation of our subsidiaries, prior claims by creditors of our
subsidiaries could reduce assets available to us
Any right we may have to participate in any distribution of assets of our
subsidiaries upon their liquidation, reorganization or insolvency, and the
right of holders of the notes to participate in the distribution of those
assets, will be subject to the prior claims of the respective subsidiary's
creditors. Mrs. Fields has pledged substantially all of its assets, including
the capital stock of Pretzel Time, Mrs. Fields' Brand, Great American and
Pretzelmaker, to secure its obligations under its credit agreement with LaSalle
National Bank, dated as of February 28, 1998, and Mrs. Fields' Brand, Great
American, Pretzel Time and Pretzelmaker are guarantors of Mrs. Fields'
obligations under its notes and its credit agreement.
We may not be able to obtain funds from our subsidiaries to pay our obligations
under the notes
Our cash flow, and consequently our ability to pay dividends and service
debt, including our obligations under the notes, depends upon the cash flow of
our subsidiaries and the payment of funds by those subsidiaries to us in the
form of loans, dividends or otherwise. Our subsidiaries have no obligation to
pay any amounts due under the notes or to make any funds available for those
payments. In addition, Mrs. Fields' credit agreement and its indenture
restrict, and agreements entered into in the future may restrict, Mrs. Fields
and its subsidiaries from paying dividends or making loans to us. Accordingly,
repayment of the notes may depend upon our ability to offer our capital stock
or to refinance the notes.
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<PAGE>
Mrs. Fields may not be able to renew its credit agreement; because Mrs. Fields'
business and cash flow is highly seasonal, if it does not have a working
capital facility, it may not have enough cash to meet its working capital needs
at all times during the fiscal year, which could reduce profits or increase
losses
Mrs. Fields' credit agreement with LaSalle National Bank, which is designed
to provide seasonal working capital to Mrs. Fields, will expire on March 31,
2001. We cannot be sure that the credit agreement will be extended or renewed
or that Mrs. Fields can obtain alternative financing to meet its seasonal
working capital needs when the credit agreement expires. If Mrs. Fields does
not have a revolving credit facility in place, it may not be able to satisfy
its seasonal working capital needs, which could prevent us from purchasing
supplies and manufacturing our products at crucial times during our annual
sales cycles, which could reduce profits or increase losses.
The notes are secured by the outstanding capital stock of Mrs. Fields; the
stock may fluctuate in value and may not satisfy amounts due on the notes
The notes are secured by a pledge of all of the outstanding common stock of
our wholly owned subsidiary, Mrs. Fields. There can be no assurance as to the
value of the collateral at any time or that the proceeds from the sale or sales
of all of such collateral would be sufficient to satisfy the amounts due on the
notes, whether at maturity or otherwise. In addition, the ability of the
trustee or you to realize the collateral may be subject to limitations.
Foreclosure on the pledged Mrs. Fields' stock could result in a change of
control of Mrs. Fields and a default under the Mrs. Fields' indenture; if Mrs.
Fields does not have the ability to raise the funds necessary to finance the
change of control offer required by the indenture, no assets of Mrs. Fields
would be available to holders of our notes and the value of the stock we have
pledged would be diminished
If we default on our obligations under the notes, there could be a
foreclosure on the Mrs. Fields' stock that we have pledged, and the foreclosure
would constitute a change of control of Mrs. Fields. A change of control is an
event of default permitting acceleration under Mrs. Fields' credit agreement
and indenture. A change of control would also permit the holders of the Mrs.
Fields' notes to require Mrs. Fields to repurchase any or all of the notes held
by them. If Mrs. Fields does not have enough resources in this event to repay
in full borrowings under its credit agreement and its notes and to repurchase
all of the notes required to be repurchased, no assets of Mrs. Fields would be
available to the holders of the notes. In this event, the value of the shares
of Mrs. Fields' stock that we have pledged to secure the notes would be
substantially diminished or eliminated.
We have incurred net losses during the past several years; we may continue to
have losses if our business strategies do not succeed
We and our predecessors have incurred net losses during the past several
years. Although we have put into place new business strategies aimed at
enhancing revenues and operating results and Mrs. Fields' Holding has recorded
positive EBITDA since its formation in September 1996, our operations generally
are subject to economic, financial, competitive, legal and other factors, many
of which are beyond our control, and which have resulted in net losses. We
cannot be sure that we will be able to put into place our 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."
Our growth strategy is based on acquisitions, which may not provide the desired
economic benefits if we are unable to integrate our businesses so as to achieve
efficiencies from increased volumes of production
We have achieved growth through acquisitions such as the acquisition of Great
American and some of its franchisees and their stores, the acquisitions of
Pretzel Time and Pretzelmaker, and the business of H&M and Cookie Conglomerate
and intend to continue doing so. While we believe there are significant
opportunities for cost savings and volume efficiencies as a result of
acquisitions, we cannot be sure that these acquisitions will provide
significant opportunities and economic benefits. Many factors beyond our
control, such as general economic conditions, increased operating costs, our
response to customers or competitors, and regulatory
16
<PAGE>
developments, can affect our ability to realize the economic benefits from
prior acquisitions and any future acquisitions as well as our ability to
integrate successfully our businesses with any acquired businesses.
Consequently, we cannot be sure that our acquisitions will result in the
economic benefits that management expects on a timely basis or at all. See
"Business--Business Strategy."
We may not be able to obtain leases in the future; if we do not obtain leases
in high quality shopping malls at reasonable rents, we may not be able to
conduct our business at a profit
Our success depends in part on our ability to secure leases in high quality
shopping malls at rents we believe to be reasonable. Approximately half of the
leases for such stores expire during the next 5 years and generally do not
provide for renewal options in our favor. In addition, we currently plan to
open approximately 375 new company-owned and franchised stores over the next 5
years. We believe that the market for the type of locations historically leased
by us is highly competitive and, as a result, we cannot be sure that we will
succeed in obtaining leases in the future at rents that we believe to be
reasonable or at all.
We have continuing obligations under real estate leases; if we close an
unprofitable store but must still make lease payments on it, we will lose money
We lease locations for all the stores we own, and for most of our franchised
stores, have leased and sublet these locations to our franchisees. Accordingly,
we are the primary obligor for payments under the leases. If locations should
prove to be unprofitable, we would remain obligated for lease payments if we
determined to withdraw from those locations. Although we cannot know how many
stores we may close but on which we will continue to have to make lease
payments, we will lose money on those leases. If we have a large number of
stores like this, there will be an adverse effect on our results of operations.
See "Business--Properties."
A decline in mall traffic could decrease the revenues from our business, which
depends to a large extent on purchases by pedestrians in malls
We believe that the amount and proximity of pedestrian traffic near our
stores strongly influence sales of our products, which we believe are
frequently impulse purchases. In recent years, visits to major shopping malls,
where a large percentage of our stores are located, have declined from 3.7
visits per month in 1989 to 3.0 visits per month in 1996. This trend has had a
negative impact on our revenues. We cannot be sure that this trend will not
continue or that this trend can be offset by increased sales per customer. A
continued decline in mall traffic could adversely affect our financial
condition and results of operations.
Volatility in cost of ingredients utilized by us may increase our costs, which
we may not be able to compensate for by raising prices
The cost of butter, eggs, sugar, flour, chocolate and other ingredients can
fluctuate due to changes in economic conditions, weather, demand and other
factors, many of which are beyond our control. Although we believe that there
are alternative suppliers of these ingredients, we have no control over
fluctuations in the price of commodities and cannot be sure that we will be
able to pass on any price increases in our product ingredients to our
customers.
The cost of integrating our information systems, which is currently underway,
could exceed what we have budgeted, which would decrease profits or increase
losses; if we do not successfully integrate our information systems, we may not
achieve anticipated cost savings
We have made a substantial investment in developing a customized,
sophisticated point-of-sale management information system. We are upgrading our
back-office system to a Windows NT environment and are currently upgrading all
Mrs. Fields stores to Pentium computers, and we plan to install our upgraded
back-office system, along with the point-of-sale registers and Pentium
computers, in our continuing company-owned Original Cookie stores, Hot Sam
stores, Pretzelmaker stores, Pretzel Time stores and many of our Great American
stores by November 1999. We cannot be sure that we will successfully integrate
the point-of-sale system or that we will achieve a fully integrated system
within budget. Therefore, we cannot be sure that our
17
<PAGE>
attempts to integrate the point-of-sale system will not decrease profits or
increase losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Failures in Year 2000 compliance could disrupt our ability to make our
products, as a result of delays in shipments, or disrupt the telecommunications
and utilities that we need to run our business
We have assessed Year 2000 issues with respect to our significant vendors and
financial institutions as to their compliance plans and whether any Year 2000
issues will impede the ability of those vendors to continue providing goods and
services to us. Failure of our key suppliers to remedy their own Year 2000
issues could delay shipments of essential products, disrupting our ability to
make our product as a result. Furthermore, we rely on various service
providers, such as utility and telecommunication service companies, which are
beyond our control, to keep our business running. Based on the results of the
assessment, management is not aware of any Year 2000 issues relating to our
significant vendors, financial institutions or our non-information technology
systems.
We do not have a contingency plan in place to address untimely or incomplete
remediation of Year 2000 issues. We are currently developing contingency plans.
These contingency plans are expected to address issues related to significant
vendors and financial institutions. Because we believe that we will be
compliant with Year 2000 issues, we believe that any Year 2000 risks are those
that could occur due to non-compliance by companies with which we do business.
The minimum wage increase may increase our costs, with the result of decreasing
our profits or increasing our losses
As of July 3, 1999, 851 of our 4,086 employees that work at stores owned by
us earned the federal hourly minimum wage. As a result of an increase in the
minimum wage from $4.75 to $5.15 on September 1, 1997, we have experienced an
increase of wages of approximately $354,000 annually. These increased labor
costs could increase our costs, with the result of decreasing our profits or
increasing our losses. We cannot be sure that we can fully absorb the increased
labor costs through our efforts to increase efficiencies in other areas of our
operations.
We depend upon key franchisees and licensees for revenue; there is no assurance
that franchise and license agreements will not be terminated, decreasing our
revenues as a result
We depended upon 11 franchisees for 19.7% of our franchise revenues for the
52 weeks ended January 2, 1999. For the same period, franchise revenues made up
8.1% of our total net revenues. We cannot be sure that these franchise
agreements will not be terminated or that our relations with franchisees will
not change, or that our franchisees will continue to perform as they have in
the past. The termination of these key franchise agreements or poor performance
by our franchisees may have an adverse affect on our financial condition and
results of operations. In addition, three licensees accounted for 68% of our
licensing revenue for the 52 weeks ended January 2, 1999. For the same period,
licensing revenue was 1% of our total net revenues. We cannot be sure that our
licenses will not be terminated or that our relations with licensees will not
change, or that our licensees will continue to perform as they have in the
past. The termination of key license agreements or poor performance by our
licensees may decrease our revenues.
If our trademarks are challenged, our revenues could be reduced because of the
cost of defending against claims or because we are prevented from using our
trademarks, which we need to market our products
We believe that our trademarks have significant value and are important to
the marketing of our retail outlets and products. Although our trademarks are
registered in all 50 states and registered or pending in many foreign
countries, we cannot be sure that our trademarks cannot be circumvented, or
that our trademarks do not or will not violate the proprietary rights of
others, or would be upheld if challenged or that we would not be prevented from
using our trademarks. Any challenge against us for our use of our trademarks
could reduce our
18
<PAGE>
revenues, through either a negative ruling with regards to our use, validity or
enforceability of our trademarks, or through the time consumed and the legal
costs of defending against a claim. In addition, we cannot be sure that we will
have the financial resources necessary to enforce or defend our trademarks.
If we lose key management personnel, we may have difficulty in implementing the
business strategy that current management has developed, and may fail to
achieve expected profits as a result
Our success depends on the continued services of our senior management,
particularly Larry A. Hodges, our President and Chief Executive Officer. In
addition, our continued growth depends, in part, on attracting and retaining
skilled managers and employees as well as management's ability to effectively
utilize our key personnel in light of recent and future acquisitions. If Mr.
Hodges or other senior management left us, we may have difficulty in
implementing the business strategy they have developed, and may fail to achieve
expected profits as a result. We cannot be sure that management's efforts to
integrate, utilize, attract and retain personnel will be successful. See
"Management." We have entered into employment agreements with all of our senior
managers.
Competition with other specialty food retailers and changes in demographic
trends and consumer preferences could decrease our profits by reducing our
market share or forcing price reductions; increased costs of production and
delays in introducing new products could decrease our profits
We compete with other cookie and pretzel retailers, as well as other
confectionery, sweet snack and specialty food retailers, many of which have
greater resources than us. The specialty retail food and snack industry is
highly competitive with respect to price, service, location and food quality.
Consequently, we cannot be sure that we will compete successfully with these
other specialty food retailers. In addition to the risks from current
competitors, we cannot be sure that we can successfully compete with any new
entrants into the specialty foods or snack foods industry who may have new and
successful products or marketing. Inability to compete adequately would result
in price reductions, reduced margins and losses of market share for us.
Changes in consumer preferences, tastes and eating habits, local, regional
and national economic conditions, demographic trends and mall traffic patterns
also affect the specialty or snack foods industry. Factors including increased
food, labor and benefits costs, the availability of experienced management and
hourly employees and difficulties or delays in developing and introducing new
products to suit consumer preferences may adversely affect the specialty retail
industry in general and our outlets in particular. Consequently, our success
will depend on our ability to recognize and react to these trends adequately.
Any changes in these factors could decrease our profitability. In addition, the
failure of customers to respond favorably to our marketing or new products,
could decrease our profitability. See "Business--Competition."
Adverse publicity, particularly about health concerns, could reduce our sales
and decrease profits
Our ability to compete depends in part on maintaining our reputation with the
consumer. 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 can adversely affect multi-unit specialty retail food and snack chains
such as us. In addition, Mrs. Fields uses ingredients, such as nuts, to which
some people may have allergies, and butter, which is high in fat, and there may
be adverse publicity about the health risks relating to these ingredients. We
cannot be sure that adverse publicity about these factors will not reduce sales
of our products and decrease profits.
Government regulation of our business could increase our costs
Numerous governmental authorities have issued regulations that apply to us
and our stores, 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 Food and Drug
19
<PAGE>
Administration administers regulations that apply to our products. If we fail
to obtain or retain the required food licenses or to comply with applicable
governmental regulations, or if there is any increase in the minimum wage rate,
employee benefit costs or other costs associated with employees, our costs
could increase as we attempt to comply with regulations, or our revenues could
decrease if we are unable to manufacture or sell products in locations in which
we do not have required licenses. Even if we obtain regulatory approval, a
marketed product, its manufacturer and its manufacturing facilities are subject
to periodic inspection, and discovery of problems may reduce our profits
because of costs of compliance or inability to manufacture or sell products for
failure to comply with regulations.
In addition, the sale of franchises is regulated by various state laws as
well as by the Federal Trade Commission. The Federal Trade Commission requires
that franchisors make extensive disclosure in a Uniform Franchise Offering
Circular to prospective franchisees but does not require registration. However,
a number of states require registration of the Uniform Franchise Offering
Circular 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 we believe that we are in compliance with
existing regulations, we cannot predict the effect of any future legislation or
regulation on our business operations or financial condition. Additionally,
bills have occasionally been introduced in Congress which would provide for
federal regulation of aspects of franchisor-franchisee relationships.
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 similar
proposals could have a material adverse impact on our results of operations and
financial condition in particular and the specialty retail industry as a whole.
Litigation, including product liability litigation, could reduce our profits or
increase our losses because of the cost of paying on successful claims, and we
may not be able to continue to obtain adequate insurance
We are involved in routine litigation in the ordinary course of business,
including franchise disputes. Although we have not been significantly adversely
affected in the past by litigation, there can be no assurance as to the effect
of any future disputes.
Although we are not currently subject to any product liability litigation,
there can be no assurance that product liability litigation will not occur in
the future involving our products. Our quality control program is designed to
maintain high standards for the food and materials and food preparation
procedures used by stores owned or franchised by us. Products are periodically
inspected by our personnel at both the point-of-sale locations and the
manufacturing facilities to ensure that they conform to our standards. In
addition to insurance held by our suppliers, we maintain insurance relating to
personal injury and product liability in amounts that we consider adequate for
the retail food industry. While we have been able to obtain insurance in the
past, there can be no assurance that we will be able to maintain these
insurance policies in the future. Consequently, any successful claim against
us, in an amount materially exceeding our coverage, could reduce our profits or
increase our losses.
Our controlling stockholder may take actions that may be contrary to your
interests
Capricorn Investors II, L.P. holds a controlling interest in our capital
stock. As a result, Capricorn is in a position to elect all of our directors
who, in turn, elect all of our executive officers. In addition, Capricorn is in
a position to amend our certificate of incorporation and by-laws, effect
corporate transactions such as mergers and asset sales and otherwise control
our management and policies without the approval of any other security holder,
subject to the provisions of the indenture. Accordingly, Capricorn will be able
to, directly or indirectly, control all of our affairs in a manner that may be
contrary to your interests. See "Beneficial Ownership of Capital Stock."
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We may not continue to have increased sales in the fourth quarter; without
these anticipated sales we may suffer reduced profits or increased losses
Our operating results are subject to seasonal fluctuations. Historically, we
have realized our highest level of sales in the fourth quarter due to increased
mall traffic during the Christmas holiday season. However, we cannot be sure
that this seasonal trend will continue or that we can continue to rely on
increased sales during the fourth quarter. If this seasonal trend changes, we
may suffer reduced profits or increased losses. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Seasonality."
Fraudulent conveyance risks; federal and state statutes allow courts, under
specific circumstances, to void payments under the notes and require
noteholders to return payments received
Fraudulent transfer laws of both the federal bankruptcy law and state laws,
permit creditors or a trustee in bankruptcy to set aside or recover a
"fraudulent transfer." Because we have incurred a substantial amount of debt in
connection with the acquisition of Great American and the other assets and
capital stock of companies we have recently acquired and because we cannot be
sure that our business will generate enough cash flows from operations or that
future borrowings will be available in an amount that will allow us to pay
principal and interest on our debt, including the notes, we cannot be sure that
a court would not set aside payments to holders of the notes as a fraudulent
transfer.
A fraudulent transfer is a payment or obligation that a borrower makes in
exchange for less than reasonably equivalent value, if the borrower, when it
makes the payment or incurs the obligation:
.is insolvent or is rendered insolvent by the payment or the incurring
of the obligation, or
. is engaged or is about to engage in a business or transaction for
which its assets constitute unreasonably small capital, or
.intends to incur, or believes that it will incur, debts beyond its
ability to repay as they mature.
For these purposes, a borrower is generally considered insolvent:
. if the sum of its debts, including contingent liabilities, were
greater than all of its assets at a fair valuation,
. if it had unreasonably small capital to conduct its business, or
. if the present fair saleable value of its assets were less than the
amount that would be required to pay the probable liability on its
existing debts, including contingent liabilities, as they come due.
A payment or obligation that the borrower made with actual intent to hinder,
delay, or defraud any of its creditors is also a fraudulent transfer.
A court may hold any obligation incurred by the borrower in these situations
void or unenforceable, may subordinate the obligation to the claims of other
creditors, or may require the holders of the obligations or the recipients of
any of these payments to return any payments received. If we met any of the
fraudulent transfer law's financial condition tests described above when we
issued the notes or when we were called upon to make a payment on the notes,
and did not receive reasonably equivalent value in exchange, a court could
conclude that the issuance of the notes or the payment or both should be set
aside or returned.
We believe:
. that we were not insolvent when, or as a result of, the issuance of
the notes,
. that we will not engage in a business or transaction for which our
remaining assets would constitute unreasonably small capital, and
. that we did not and do not intend to incur or believe that we will
incur debts beyond our ability to pay these debts as they mature.
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<PAGE>
We have incurred, however, a substantial amount of debt in connection with
the purchase of Great American and the other assets and capital stock of
companies we acquired. Mrs. Fields' Holding and its subsidiaries' total
indebtedness represents 98.1% of its total liabilities and equity. Our cash
flows, and consequently our ability to pay dividends and service debt,
including our obligations under the notes, depends upon the cash flows of our
subsidiaries. We cannot be sure that our subsidiaries' businesses will generate
enough cash flows from operations or that future borrowings will be available
in an amount that will allow us to pay principal and interest on our debt
including the notes. In addition, Mrs. Fields, our wholly owned subsidiary, and
the direct sole owner of Mrs. Fields' Brand and Great American, and its
predecessors have incurred net losses during the past several years and in
recent periods we have not had earnings sufficient to cover our fixed charges.
In any future fraudulent transfer litigation concerning the notes and the
payments made to the holders of the notes, a court may rely on these facts in
determining our solvency, the adequacy of our capital and our ability to pay
our debts as they become due.
If we caused a subsidiary to pay a dividend when the subsidiary met any of
the fraudulent transfer law's financial condition tests described above, in
order to enable us to make a payment in respect of the notes, a court could
conclude that the dividend as well as the payment is a fraudulent transfer and
that the holders should be required to return the payment, because in the
absence of other facts, courts generally conclude that a subsidiary that pays a
dividend does not receive reasonably equivalent value in exchange.
In addition, subject to defenses, the holders may have to return payments
made by us on the notes within 90 days before the commencement of a bankruptcy
case by or against it, if, among other things, we were insolvent at the time
the payments were made. We would be presumed insolvent on and during the 90
days immediately preceding the date of the filing of our bankruptcy petition.
In any of the preceding cases, there could be no assurance that the holders
would ultimately recover the amounts owing under the notes.
There is no public market for the notes to be issued; transfers of the
outstanding notes are restricted
The notes to be issued are being offered only to the holders of the
outstanding notes. There is no public market for the notes to be issued. If
such a market were to develop, the notes could trade at prices that may be
higher or lower than the initial offering price of the outstanding notes. The
placement agents for the outstanding notes currently make a market in the
outstanding notes. The placement agents have informed us that they currently
intend to make a market in the notes to be issued. The liquidity of the trading
market in these notes, and the market price quoted for these notes, may be
adversely affected by changes in the overall market for similar securities,
existing interest rates, and by our operating results. As a result, you cannot
be sure that an active market will develop for these notes.
The outstanding notes were issued on August 24, 1998 to institutional
investors and accredited investors, and are eligible for trading in the Private
Offering, Resale and Trading Through Automated Linkages 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 outstanding notes are tendered and accepted in the exchange offer, the
trading market for the remaining untendered outstanding notes could be
adversely affected.
22
<PAGE>
FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, based on the information currently available to us. These
forward-looking statements relate to future events or our future performance,
including financial performance, growth in net sales and earnings, cash flows
from operations, capital expenditures, the ability to refinance indebtedness,
and the sale of assets. The forward-looking statements also include, among
other things, our expectations and estimates about our business operations
following the acquisitions of Great American and some of its franchisees and
their stores, our offering and our capital contribution to Mrs. Fields, Mrs.
Fields' offering of notes, and other recent transactions, including the
integration of the businesses of Great American with Mrs. Fields and our
ability to achieve cost savings and other synergies related to these
transactions. The forward-looking statements are principally contained in the
sections "Summary," "The Transactions," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business." In some
cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "expects," "plans," "contemplates," "anticipates,"
"believes," "estimates," "projected," "predicts," "potential," or "continue" or
the negative of these terms or similar terms. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
in the "Risk Factors" section above. These factors may cause our actual results
to differ materially from any forward-looking statement. Other factors, such as
the general state of the economy, could also cause actual results to differ
materially from the future results covered in the forward-looking statements.
These statements are only predictions, the forward-looking events discussed
in this prospectus may not occur and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about us. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
23
<PAGE>
THE TRANSACTIONS
On August 24, 1998, we completed the offering of units consisting of notes
and warrants to purchase our common stock. We also made a capital contribution
to Mrs. Fields of the net proceeds of $29.1 million from the offering of units.
Mrs. Fields made a simultaneous offering of notes and completed the acquisition
of Great American and the acquisition of the stock of two of its franchisees.
In addition, Mrs. Fields purchased the approximately $38.9 million of
Great American notes that had been tendered in its tender offer for them at
that time. Mrs. Fields used the net proceeds of its offering, the capital
contribution from us, and available cash of Mrs. Fields and Great American, to
complete these transactions, to pay for the remaining Great American notes that
were tendered after this date, and to pay related expenses. Mrs. Fields used
the remaining proceeds to finance other acquisitions that had not yet been
completed as of the date of the offering, including the purchase of eight
stores from a Great American franchisee.
The Great American Transactions
The Great American Acquisition and the Great American Tender Offer
Under a securities purchase agreement, dated as of August 23, 1998, among
Cookies USA, the sellers of Cookies USA securities and Mrs. Fields, Mrs. Fields
acquired all of the outstanding capital stock and subordinated debt of Cookies
USA for a total purchase price of approximately $18.4 million. Concurrently,
Mrs. Fields completed the merger of Cookies USA into Mrs. Fields and the
mergers of Deblan and Chocolate Chip, two of Great American's franchisees, into
Great American. Great American became a wholly owned subsidiary of Mrs. Fields.
As of the expiration of the tender offer for Great American notes at midnight
on September 14, 1998, all of the notes had been tendered. Mrs. Fields accepted
and paid the entire $40.0 million in principal amount of those notes, and none
remain outstanding.
The Acquisition of Great American Franchisees
When Mrs. Fields agreed to purchase Cookies USA, it also entered into
agreements with the stockholders of Deblan and Chocolate Chip, two of Great
American's franchisees, to purchase a total of 29 Great American franchises for
total consideration of approximately $15.0 million. The price included the
repayment of approximately $0.6 million of debt. Mrs. Fields acquired the
franchises by acquiring 100% of the capital stock of the two corporations
through which the 29 franchises were held. In connection with these
transactions, debt on the balance sheet of one corporation was retired with
cash on hand, and debt on the balance sheet of the second corporation was
retired with funds from the franchisee that controlled the corporation.
Agreements with Franchisees of Great American
Mrs. Fields entered into settlement agreements and waivers with the two
franchisees that sold their 29 Great American franchises and with several other
Great American franchisees. In addition to these franchisees, at least 80% in
total of the Great American franchisees have executed settlement agreements and
waivers. These agreements provide that the Great American franchisees that are
parties to the agreements released, subject to exceptions, all of their claims
against Mrs. Fields, Great American, Capricorn and other parties, including
claims that Great American franchisees brought in 1997 to prevent a sale of
Great American to Mrs. Fields. On August 24, 1998, a motion was filed
dismissing with prejudice the claims brought in the 1997 litigation.
The settlement agreements and waivers give "tag-along" rights to the Great
American franchisees that hold at least five Great American franchises. The
tag-along rights provide that, in the event that
(1) either Mrs. Fields or Mrs. Fields' Holding proposes to sell to an
unaffiliated party substantially all of its rights as owner of the
Great American brand or as the franchisor of Great American,
24
<PAGE>
(2) either Mrs. Fields or Mrs. Fields' Holding proposes to make an
initial public offering of its common stock, or
(3) either Mrs. Fields or Mrs. Fields' Holding sells a controlling
interest to an unaffiliated party,
we will purchase all of the franchises of these Great American franchisees,
provided that their franchises have had positive cash flow in the most recent
12-month fiscal period and sales not more than 20 percent below the fiscal
period immediately preceding such period (or the number of months it has been
operating, if fewer than 12).
The purchase price for the franchises will be 5 times their most recent 12-
month EBITDA or, if the franchises have operated for fewer than 12 months, the
greater of 5 times their most recent EBITDA and documented development costs
for the stores. Great American franchisees that hold fewer than 5
Great American franchises do not have tag-along rights but will have the right,
upon completion of Mrs. Fields' sale of its rights as owner of the Great
American brand or as the franchisor of Great American, the initial public
offering or the change of control, and provided they are in compliance with
their franchise agreements, to receive in cash the greater of $3,500 or $2,000
per store owned by the franchisee. In the case of an initial public offering,
the franchisees could receive shares of common stock with an equivalent value.
The form of payment will be at our election.
Under the settlement agreements and waivers, we have also undertaken, among
other things,
(1) to maintain the profit margin over our cost on batter sold to Great
American franchisees,
(2) to extend franchise agreements, and
(3) to permit the Great American franchisees to convert their stores to
Mrs. Fields brand stores at their sole expense in areas where there
is no overlap with existing Mrs. Fields brand franchise stores.
Maintaining the gross profit margin percentage on batter sold to Great
American franchisees only affects the gross profit per case of batter sold.
Total profits earned on batter sales will fluctuate with the number of cases of
batter actually sold to franchisees.
The Mrs. Fields Offering
Simultaneously with our offering of units, Mrs. Fields completed its offering
of $40.0 million in total principal amount of notes.
The Mrs. Fields' Holding Units
We completed our offering of units consisting of the notes and warrants to
purchase shares of our common stock on August 24, 1998 and received net
proceeds of $29.1 million. The notes which are part of the units are senior
obligations of Mrs. Fields' Holding and are secured by all of the issued and
outstanding capital stock of Mrs. Fields.
The Prior Transactions
We acquired substantially all of the assets of H&M on July 25, 1997 for a
total purchase price of $13.8 million, excluding the assumption of certain
liabilities. We acquired 56.0% of the shares of common stock of Pretzel Time on
September 2, 1997 for a total purchase price of $4.2 million and extended a
$500,000 loan to the founder and minority stockholder of Pretzel Time. At the
time of Mrs. Fields' previous offering of notes on November 26, 1997:
(1) Mrs. Fields received the business of H&M and 56.0% of the shares of
common stock of Pretzel Time from us,
(2) Mrs. Fields received all of the common stock of Mrs. Fields' Brand
from us,
(3) various debt of Mrs. Fields, Mrs. Fields' Brand and Mrs. Fields'
Holding was refinanced, and
(4) Mrs. Fields paid a dividend of $1,065,000 and repaid an advance of
$1,500,000 to us.
On January 2, 1998, Mrs. Fields purchased an additional 4.0% of the shares of
the common stock of Pretzel Time.
25
<PAGE>
Maintaining the gross profit margin percentage on batter sold to Great
American franchisees only affects the gross profit per case of batter sold.
Total profits earned on batter sales will fluctuate with the number of cases of
batter actually sold to franchisees.
Increase in Pretzel Time Ownership
On June 12, 1998, Mrs. Fields purchased an additional 10.0% of the common
stock of Pretzel Time for a purchase price of $875,000, increasing its equity
interest in Pretzel Time to 70.0% at that time.
Other Recent Transactions
In June 1998, Mrs. Fields acquired 5 additional Pretzel Time stores from a
franchisee for a purchase price of $657,000. Mrs. Fields acquired one
additional Pretzel Time store from a franchisee and two cookie stores operating
under other brand names, which we converted into Mrs. Fields brand stores at
purchase prices aggregating $750,000. Mrs. Fields has remodeled the two cookie
stores, at a total cost of $156,600. Mrs. Fields purchased 8 Great American
stores from a Great American franchisee for a total purchase price of
$1.75 million on September 9, 1998. The franchisee was a holder of some of the
securities of Cookies USA that were sold under the agreement to purchase Great
American and was a party to that agreement.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and
related business and operations of eleven Great American stores for a total
purchase price of $2,800,000 under an asset purchase agreement dated as of
October 5, 1998, among The Cookie Conglomerate, Inc., The Cookie Conglomerate,
LLP and two individuals who were the partners of Cookie Conglomerate, LLP and
the shareholders of Cookie Conglomerate, Inc. The sellers were franchisees of
Great American. The sellers' rights under franchise agreements and subleases
with Great American were terminated upon closing of the transaction. The
acquisition was funded with financing provided by T&W Financial Services
Company, L.L.C.
On November 19, 1998, Mrs. Fields purchased all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. under an agreement among Mrs. Fields,
Pretzelmaker, and the holders of its capital stock. Pretzelmaker is the holding
company for a pretzel retail company. The purchase price was approximately
$5.7 million and Mrs. Fields assumed indebtedness, including severance
payments, totaling approximately $1.6 million.
On December 9, 1998, Mrs. Fields purchased three shares of Pretzel Time, Inc.
common stock for $500,000 in cash. On December 30, 1998, Mrs. Fields completed
the acquisition of the remaining outstanding common stock of Pretzel Time, Inc.
under a stock purchase agreement dated December 30, 1998, for a purchase price
of approximately $4.7 million, $2.5 million of which was paid in cash on
January 5, 1999, $2 million was assumed by Mrs. Fields' Holding as discussed
below and the remaining $200,000 is payable on or before December 30, 1999.
USE OF PROCEEDS
We will not receive any cash proceeds under the exchange offer. In
consideration for issuing the notes as contemplated in this prospectus, we will
receive an equal principal amount of outstanding notes.
The net proceeds received by us from the sale of the units, after deducting
the underwriting discounts and commissions and estimated expenses, along with
cash from other sources, including the notes of Mrs. Fields issued on the same
date, were approximately $86.9 million. Of this amount, we used approximately
$18.4 million for the acquisition of Great American, $41.6 million to pay for
the Great American notes tendered, including the tender offer premium of $1.6
million, $15.0 million to pay for the acquisitions of Deblan and Chocolate
Chip, including the repayment of approximately $0.6 million of debt, $0.9
million to pay accrued interest on debt being retired, $1.4 million for
severance and related expenses, approximately $2.8 million to pay for other
recent acquisitions and approximately $6.8 million of fees and expenses related
to the offering of units and some of the other acquisitions described in this
prospectus.
26
<PAGE>
CAPITALIZATION
The following shows the cash and cash equivalents and capitalization of Mrs.
Fields' Holding Company, Inc. and subsidiaries at July 3, 1999. 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 Combined
Statement of Operations."
<TABLE>
<CAPTION>
Mrs. Fields'
Holding at
July 3, 1999
----------------------
(dollars in thousands)
<S> <C>
Cash and Cash Equivalents............................... $ 4,675
========
Debt and Capital Lease Obligations, including current
portions:
Credit Facility(1).................................... $ 7,000
Mrs. Fields' Holding Senior Secured Discount Notes due
2005(2).............................................. 55,000
Mrs. Fields 10 1/8% Series A, B and C Senior Notes due
2004(3).............................................. 140,000
Original issue discount on Senior Secured Discount
Notes and Discount Related to Warrant Allocations.... (22,882)
Discount on Mrs. Fields' 10 1/8% Series C Senior Notes
due 2004............................................. (558)
Pretzel Time Debt..................................... 206
Mrs. Fields Capital Lease Obligations and Other Debt.. 4,202
Pretzelmaker Debt and Capital Lease Obligations....... 176
--------
Total Debt and Capital Lease Obligations, including
current portion.................................... 183,144
--------
Mandatorily Redeemable Preferred Stock of Pretzel
Time(4)................................................ 1,440
--------
Stockholders' Equity:
Common Stock.......................................... 33
Warrants to Purchase Common Stock..................... 2,895
Additional Paid-in Capital............................ 35,627
Deferred Compensation Expense......................... (243)
Accumulated Deficit................................... (35,728)
--------
Total Stockholders' Equity.......................... 2,584
--------
Total Capitalization................................ $187,168
========
</TABLE>
- --------
(1) Under its indenture, Mrs. Fields is permitted to have one or more credit
facilities to borrow up to a maximum total principal amount of $15.0
million on a secured basis. Mrs. Fields' Amended and Restated Loan
Agreement, dated as of February 28, 1998, with LaSalle National Bank
provides for a maximum commitment of up to $15.0 million secured by
essentially all of the assets of Mrs. Fields. As of July 3, 1999, Mrs.
Fields had approximately $276,000 of available borrowings under its credit
facility. See "Description of Indebtedness--Credit Agreement."
(2) Consists of $55.0 million of Mrs. Fields' Holding notes prior to
considering an original estimated discount of approximately $20.3 million,
and additional discount due to allocating, for accounting purposes of
$2.6 million of the net proceeds to the warrants.
(3) Includes $100.0 million of Series A and Series B 10 1/8% Senior Notes and
$40.0 million of Series C 10 1/8% Senior Notes of Mrs. Fields prior to
considering the original unamortized discount of approximately $0.6
million.
(4) Liquidation preference as of July 3, 1999 was approximately $1.5 million.
Date of redemption is January 15, 2000.
27
<PAGE>
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Outstanding Notes
On August 24, 1998, Mrs. Fields' Holding sold notes to Jefferies & Company,
Inc. and BT Alex. Brown. When we sold the notes, we entered into a registration
rights agreement with Jefferies and BT Alex. Brown. The registration rights
agreement requires that we register new notes with the Commission and offer to
exchange the new registered notes for the outstanding notes.
We will accept any validly tendered notes that you do not withdraw before
12:00 midnight, New York City time, on the expiration date. We will issue
$1,000 of principal amount of new notes in exchange for each $1,000 principal
amount of your outstanding notes. You may tender some or all of your notes in
the exchange offer.
The form and terms of the new notes are the same as the form and terms of the
outstanding notes except that:
(1) the notes being issued in the exchange offer will be registered under
the Securities Act and will not have legends restricting their
transfer,
(2) the notes being issued in the exchange offer will not contain the
registration rights and liquidated damages provisions contained in the
outstanding notes, and
(3) interest on the new notes will accrue from the last interest date on
which interest was paid on your notes.
Outstanding notes that we accept for exchange will not accrue interest after
we complete the exchange offer.
The exchange offer will expire at 12:00 midnight, New York City time, on
, 1999, unless we extend it. If we extend the exchange offer, we will
issue a notice by press release or other public announcement before 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
(1) to extend the exchange offer,
(2) to delay accepting your notes,
(3) to terminate the exchange offer and not accept any notes for exchange
if any of the conditions have not been satisfied, or
(4) to amend the exchange offer in any manner.
We will promptly give oral or written notice of any extension, delay, non-
acceptance, termination or amendment. We will also file a post-effective
amendment with the Commission if we amend the terms of the exchange offer.
If we extend the exchange offer, notes that you have previously tendered will
still be subject to the exchange offer and we may accept them. We will promptly
return your notes if we do not accept them for exchange for any reason without
expense to you after the exchange offer expires or terminates.
Procedures for Tendering Notes
Only you may tender your notes in the exchange offer.
To tender in the exchange offer, you must:
(1) complete, sign and date the enclosed letter of transmittal, or a copy
of it,
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<PAGE>
(2) have the signature on the letter of transmittal guaranteed if required
by the letter of transmittal, and
(3) mail, fax or otherwise deliver the letter of transmittal or copy to the
exchange agent
OR
if you tender your notes under The Depository Trust Company's book-entry
transfer procedures, transmit an agent's message to the exchange agent
on or before the expiration date.
In addition, either:
(1) the exchange agent must receive certificates for outstanding notes and
the letter of transmittal, or
(2) the exchange agent must receive a timely confirmation of a book-entry
transfer of your notes into the exchange agent's account at The
Depository Trust Company, along with the agent's message, or
(3) you must comply with the guaranteed delivery procedures described
below.
An agent's message is a computer-generated message transmitted by The
Depository Trust Company through its Automated Tender Offer Program to the
exchange agent.
To tender your notes effectively, you must make sure that the exchange agent
receives a letter of transmittal and other required documents before the
expiration date.
When you tender your outstanding notes and we accept them, the tender will be
a binding agreement between you and us in accordance with the terms and
conditions in this prospectus and in the letter of transmittal.
The method of delivery of outstanding notes, letters of transmittal and all
other required documents to the exchange agent is at your election and risk. We
recommend that you use an overnight or hand delivery service instead of mail.
If you do deliver by mail, we recommend that you use registered mail, properly
insured, with return receipt requested. In all cases, you should allow enough
time to make sure your documents reach the exchange agent before the expiration
date. Do not send a letter of transmittal or notes directly to us. You may
request your brokers, dealers, commercial banks, trust companies, or nominees
to make the exchange on your behalf.
Unless you are a registered holder who requests that the new notes to be
mailed to you and issued in your name, or unless you are an eligible
institution, you must have your signature guaranteed on a letter of transmittal
or a notice of withdrawal by an eligible institution. An eligible institution
is a firm which is a financial institution that is a member of a registered
national securities exchange or a member of the participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchanges Medallion Program.
If the person who signs the letter of transmittal and tenders the notes is
not the registered holder of the notes, the registered holders must endorse the
notes or sign a written instrument of transfer or exchange that is included
with the notes, with the registered holder's signature guaranteed by an
eligible institution. We will decide whether the endorsement or transfer
instrument is satisfactory.
We will decide all questions about the validity, form, eligibility,
acceptance and withdrawal of tendered notes, and our determination will be
final and binding on you. We reserve the absolute right to:
(1) reject any and all tenders of any particular note not properly
tendered,
(2) refuse to accept any note if, in our judgment or the judgment of our
counsel, the acceptance would be unlawful, and
(3) waive any defects or irregularities or conditions of the exchange offer
as to any particular note either before or after the expiration date.
This includes the right to waive the ineligibility of any holder who
seeks to tender notes in the exchange offer.
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<PAGE>
Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. You must cure any defects or irregularities in
connection with tenders of notes as we will determine. Neither we, the exchange
agent nor any other person will incur any liability for failure to notify you
of any defect or irregularity with respect to your tender of notes.
If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of outstanding notes, the outstanding 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
outstanding notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any notes or power of attorney on
your behalf, those persons must indicate their capacity when signing, and
submit satisfactory evidence to us with the letter of transmittal demonstrating
their authority to act on your behalf.
To participate in the exchange offer, we require that you represent to us
that:
(1) you or any other person acquiring notes for your outstanding notes in
the exchange offer is acquiring them in the ordinary course of
business,
(2) neither you nor any other person acquiring notes in exchange for your
outstanding notes is engaging in or intends to engage in a distribution
of the notes issued in the exchange offer,
(3) neither you nor any other person acquiring notes in exchange for your
outstanding notes has an arrangement or understanding with any person
to participate in the distribution of notes issued in the exchange
offer,
(4) neither you nor any other person acquiring notes in exchange for your
outstanding notes is our "affiliate" as defined under Rule 405 of the
Securities Act, and
(5) if you or another person acquiring notes for your outstanding notes is
a broker-dealer, you will receive new notes for your own account, you
acquired new notes as a result of market-making activities or other
trading activities, and you acknowledge that you will deliver a
prospectus in connection with any resale of your notes.
If you are our "affiliate," as defined under Rule 405 of the Securities Act,
you are a broker-dealer who acquired your outstanding notes in the initial
offering and not as a result of market-making or trading activities, or if you
are engaged in or intend to engage in or have an arrangement or understanding
with any person to participate in a distribution of notes acquired in the
exchange offer, you or that person:
(1) may not rely on the applicable interpretations of the staff of the
Commission, and
(2) must comply with the registration and prospectus delivery requirements
of the Securities Act when reselling the notes.
Broker-dealers who cannot make the representations in item (5) of the paragraph
above cannot use this exchange offer prospectus in connection with resales of
the notes issued in the exchange offer.
Acceptance of Outstanding Notes for Exchange; Delivery of Notes Issued in the
Exchange Offer
We will accept validly tendered notes when the conditions to the exchange
offer have been satisfied or we have waived them. We will have accepted your
validly tendered notes when we have given oral or written notice to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purpose of receiving the new notes from us. If we do not accept any
tendered notes for exchange because of an invalid tender or other valid reason,
the exchange agent will return the certificates, without expense, to the
tendering holder. If a holder has tendered notes by book-entry transfer, we
will credit the notes to an account maintained with The Depository Trust
Company. We will return certificates or credit the account at The Depository
Trust Company as promptly as practicable after the exchange offer terminates or
expires.
30
<PAGE>
Book-Entry Transfers
The exchange agent will make a request to establish an account at The
Depository Trust Company 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 Depository Trust Company's systems must make book-entry
delivery of outstanding notes by causing The Depository Trust Company to
transfer those outstanding notes into the exchange agent's account at The
Depository Trust Company in accordance with The Depository Trust Company's
Automated Tender Offer Procedures. The participant should transmit its
acceptance to The Depository Trust Company on or prior to the expiration date
or comply with the guaranteed delivery procedures described below. The
Depository Trust Company will verify acceptance, execute a book-entry transfer
of the tendered outstanding notes into the exchange agent's account at The
Depository Trust Company and then send to the exchange agent confirmation of
the book-entry transfer. The confirmation of the book-entry transfer will
include an agent's message confirming that The Depository Trust Company has
received an express acknowledgment from the participant that the participant
has received and agrees to be bound by the letter of transmittal and that we
may enforce the letter of transmittal against the participant. Delivery of
notes issued in the exchange offer may be effected through book-entry transfer
at The Depository Trust Company. However, the letter of transmittal or
facsimile of it or an agent's message, with any required signature guarantees
and any other required documents, must:
(1) be transmitted to and received by the exchange agent at the address set
forth below under "Exchange Agent" on or before the expiration date, or
(2) the guaranteed delivery procedures described below must be complied
with.
Guaranteed Delivery Procedures
If you are a registered holder of outstanding notes who desires to tender
notes but your notes are not immediately available, or time will not permit
your 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, you may effect a tender if:
(1) you tender the notes through an eligible institution,
(2) prior to the expiration date, the exchange agent received from the
eligible institution a notice of guaranteed delivery in the form we
have provided. The notice of guaranteed delivery will state the name
and address of the holder of the notes being tendered and the amount of
notes being tendered, that the tender is being made and guarantee that
within five New York Stock Exchange trading days after the notice of
guaranteed delivery is signed, the certificates for all physically
tendered notes, in proper form for transfer, or a book-entry
confirmation, together with a properly completed and signed letter of
transmittal 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
(3) the certificates for all physically tendered outstanding notes, in
proper form for transfer, or a book-entry confirmation, together with a
properly completed and signed letter of transmittal with any required
signature guarantees and all other documents required by the letter of
transmittal, are received by the exchange agent within five New York
Stock Exchange trading days after the date of execution of the notice
of guaranteed delivery.
Withdrawal Rights
You may withdraw your tender of outstanding notes at any time before 12:00
midnight, New York City time, on the expiration date.
For a withdrawal to be effective, you must make sure that, before 12:00
midnight on the expiration date, the exchange agent receives a written notice
of withdrawal at one of the addresses below or, if you are a participant of The
Depository Trust Company, an electronic message using The Depository Trust
Company's Automated Tender Offer Program.
31
<PAGE>
Any notice of withdrawal must:
(1) specify the name of the person that tendered the notes to be withdrawn,
(2) identify the notes to be withdrawn, including the principal amount of
the notes,
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the notes were tendered or be
accompanied by documents of transfer, and
(4) if you have transmitted certificates for outstanding notes, specify the
name in which the notes are registered, if different from that of the
withdrawing holder, and identify the serial numbers of the
certificates.
If you have tendered notes under the book-entry transfer procedure, your
notice of withdrawal must also specify the name and number of an account at The
Depository Trust Company to which your withdrawn notes can be credited.
We will decide all questions as to the validity, form and eligibility of the
notices and our determination will be final and binding on all parties. Any
tendered notes that you withdraw will not be considered to have been validly
tendered. We will return any outstanding notes that have been tendered but not
exchanged, or credit them to The Depository Trust Company account, as soon as
practicable after withdrawal, rejection of tender, or termination of the
exchange offer. You may retender properly withdrawn notes by following one of
the procedures described above before the expiration date.
Conditions to the Exchange Offer
We are not required to accept for exchange, or to issue notes in exchange
for, any outstanding notes. We may terminate or amend the exchange offer, if at
any time before the acceptance of such outstanding notes:
(1) any federal law, statute, rule or regulation has been adopted or
enacted which, in our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer,
(2) if any stop order is threatened or in effect with respect to the
registration statement or the qualification of the indenture under the
Trust Indenture Act of 1939, or
(3) there is a change in the current interpretation by the staff of the
Commission which permits holders who have made the required
representations to us to resell, offer for resale, or otherwise
transfer notes issued in the exchange offer without registration of the
notes and delivery of a prospectus, as discussed above.
These conditions are for our sole benefit and we may assert or waive them at
any time and for any reason. However, the exchange offer will remain open for
at least five business days following any waiver of the preceding conditions.
Our failure to exercise any of the foregoing rights will not be a waiver of our
rights.
32
<PAGE>
Exchange Agent
You should direct all signed letters of transmittal to the exchange agent,
The Bank of New York. You should direct questions, requests for assistance, and
requests for additional copies of this prospectus, the letter of transmittal
and the notice of guaranteed delivery 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 7 East
New York, New York 10286 Confirm by telephone:
Attention: Odell Romeo (212) 815-6337
Delivery or fax of the letter of transmittal to an address or number other
than those above is not a valid delivery of the letter of transmittal.
Fees and Expenses
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer except for reimbursement of mailing expenses.
We will pay the estimated cash expenses connected with the exchange offer. We
estimate that these expenses will be approximately $500,000.
Transfer Taxes
If you tender outstanding notes for exchange you will not be obligated to pay
any transfer taxes. However, if you instruct us to register new notes in the
name of, or request that your notes not tendered or not accepted in the
exchange offer be returned to, a person other than you, you will be responsible
for paying any transfer tax owed.
You May Suffer Adverse Consequences if You Fail to Exchange Outstanding Notes
If you do not tender your outstanding notes, you will not have any further
registration rights, except for the rights described in the registration rights
agreements and described above, and your notes will continue to be subject to
restrictions on transfer when we complete the exchange offer. Accordingly, if
you do not tender your notes in the exchange offer, your ability to sell your
notes could be adversely affected. Once we have completed the exchange offer,
holders who have not tendered notes will continue to be entitled to any
increase in interest rate that the indenture provides for if we do not complete
the exchange offer.
Holders of the notes issued in the exchange offer and notes that are not
tendered in the exchange offer will vote together as a single class under the
indenture.
Consequences of Exchanging Outstanding Notes
If you make the representations that we discuss above, we believe that you
may offer, sell or otherwise transfer the new notes to another party without
registration of your notes or delivery of a prospectus.
We base our belief on interpretations by the staff of the Commission in no-
action letters issued to third parties. If you cannot make these
representations, you cannot rely on this interpretation by the commission's
staff and you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a resale of the notes. A
broker-dealer that receives new notes for its own account in exchange
33
<PAGE>
for its outstanding notes must acknowledge that it acquired as a result of
market-making activities or other trading activities and that it will deliver a
prospectus in connection with any resale of the new notes. Broker-dealers who
can make these representations may use this exchange offer prospectus, as
supplemented or amended, in connection with resales of notes issued in the
exchange offer.
However, because the Commission has not issued a no-action letter in
connection with this exchange offer, we cannot be sure that the staff of the
Commission would make a similar determination regarding the exchange offer as
it has made in similar circumstances.
Shelf Registration
The registration rights agreement also requires that we file a shelf
registration statement if:
(1) we cannot file a registration statement for the exchange offer because
the exchange offer is not permitted by law,
(2) law or Commission policy prohibits a holder from participating in the
exchange offer,
(3) a holder cannot resell the notes it acquires in the exchange offer
without delivering a prospectus and this prospectus is not appropriate
or available for resales by the holder, or
(4) a holder is a broker-dealer and holds notes acquired directly from us
or one of our affiliates.
We will also register the notes under the securities laws of jurisdictions
that holders may request before offering or selling notes in a public offering.
We do not intend to register notes in any jurisdiction unless a holder requests
that we do so.
Notes will be subject to restrictions on transfer until:
(1) a person other than a broker-dealer has exchanged notes in the exchange
offer,
(2) a broker-dealer has exchanged notes in the exchange offer and sells
them to a purchaser that receives a prospectus from the broker-dealer
on or before the sale,
(3) the notes are sold under an effective shelf registration statement that
we have filed, or
(4) the notes are sold to the public under Rule 144 of the Securities Act.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents historical financial data for Mrs. Fields'
Holding Company, Inc. and subsidiaries and its predecessors; namely, Mrs.
Fields Inc. and subsidiaries, The Original Cookie Company, Incorporated and the
Carved-out Portion (pretzel business) of Hot Sam Company, Inc., 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.
The selected historical financial data has been derived from the audited
financial statements of Mrs. Fields' Holding and its predecessors. Due to the
acquisitions of the net assets of Mrs. Fields Inc., Original Cookie and Hot Sam
on September 17, 1996, the financial data is not comparable for all periods.
However, in order for the presentations to be meaningful for the periods
presented, some of the statement of operations information for the predecessors
has been reclassified to be consistent with the Mrs. Fields' Holding historical
financial statement presentation. Mrs. Fields' Holding and its predecessors
operate using a 52/53-week year ending near December 31. 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 related notes, contained elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Predecessors
--------------------------------------------------------------------------
The Original Cookie Company,
Incorporated and the Carved-
Out Portion of Hot
Mrs. Fields Inc. and Subsidiaries Sam Company, Inc. (Combined)
------------------------------------- ----------------------------------
December December
52 Weeks Ended 31, 1995 52 Weeks Ended 31, 1995
----------------------- Through --------------------- Through
December December September December December September
31, 1994 30, 1995 17, 1996 31, 1994 30, 1995 17, 1996
---------- ---------- ----------- --------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net store and food
sales................. $ 87,863 $ 59,956 $29,674 $ 89,648 $ 85,581 $ 54,366
Net store
contribution(1)....... 8,083 6,591 3,797 13,912 13,063 5,854
Franchising and
licensing, net ....... 7,241 5,993 3,786 -- -- --
General and
administrative
expenses.............. 16,379 15,612 8,984 12,546 9,216 7,538
Income (loss) from
operations............ (1,691) (3,526) (1,742) (750) 2,435 (2,772)
Net loss............... (5,320) (2,368) (2,304) (5,355) (2,096) (5,645)
Other Data:
Cash flows from
operating activities.. 1,728 (4,478) (447) 3,699 4,451 (378)
Cash flows from
investing activities.. (2,030) 2,526 (385) (3,779) (568) (1,200)
Cash flows from
financing activities.. (732) (185) (58) 3,134 (4,599) (1,380)
Interest expense....... 2,155 51 80 4,381 4,356 2,895
Total depreciation and
amortization.......... 4,415 3,525 1,911 7,423 6,902 4,937
Capital expenditures... 4,895 4,146 1,054 3,779 568 1,200
EBITDA(2).............. 2,724 (1) 169 6,673 9,337 2,165
Store contribution for
stores in the process
of being closed or
franchised(1)......... $ 319 $ (802) $ (695) $ (542) $ (1,542) $ (1,751)
Ratio of earnings to
fixed charges(3)...... -- -- -- -- -- --
Balance Sheet Data:
Working capital
(deficit)............. $ (1,067) $ (3,114) $ (21,704) $ (46) $ 128 $ (3,640)
Total assets........... 30,128 23,033 19,144 74,490 66,282 59,024
Debt and capital lease
obligations including
current portion....... 22,850 21,226 21,224 36,956 32,357 30,977
Total stockholders'
equity (deficit)...... (25,419) (28,017) (30,318) 24,684 22,588 16,943
</TABLE>
See footnotes on page 37
35
<PAGE>
<TABLE>
<CAPTION>
Mrs. Fields' Holding
------------------------------------------------------
September 18, 53 Weeks 52 Weeks 26 Weeks Ended
1996 Through Ended Ended ------------------
December 28, January 3, January 2, July 4, July 3,
1996 1998 1999 1998 1999
------------- ---------- ---------- -------- --------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net store and food
sales................ $ 40,849 $127,845 $140,235 $ 58,687 $ 71,915
Net store
contribution(1)...... 9,707 25,044 20,166 6,915 8,686
Franchising and
licensing, net....... 1,267 6,563 14,001 2,971 11,562
General and
administrative
expenses............. 4,089 16,436 19,583 8,673 10,950
Store closure
provision............ -- 538 7,303 -- --
Income (loss) from
operations........... 5,583 8,124 (6,002) (1,645) (1,045)
Net income (loss)..... 2,124 (624) (21,505) (7,406) (12,877)
Basic and diluted net
income (loss) per
common share(4)...... 0.48 (0.88) (6.55) (2.25) (3.92)
Other Data:
Cash flows from
operating
activities........... 7,611 923 8,714 (3,495) 2,894
Cash flows from
investing
activities........... (21,131) (17,070) (40,894) (4,270) (2,704)
Cash flows from
financing
activities........... 20,231 25,929 20,446 (180) (274)
Interest expense...... 1,737 7,527 14,946 5,626 11,364
Total depreciation and
amortization......... 2,356 10,450 19,867 6,220 11,286
Capital expenditures.. 1,638 4,678 8,235 3,342 2,604
EBITDA(2)............. 7,939 18,574 13,865 4,575 10,241
Store contribution for
stores in the process
of being closed or
franchised(1)........ $ 513 $ (1,798) $ (2,054) $ (1,605) $ (863)
Ratio of earnings to
fixed charges(3)..... 3.26x 1.00x -- -- --
Balance Sheet Data:
Working capital
(deficit)............ $ (2,827) $ 12,790 $(12,548) $ 6,006 $(13,493)
Total assets.......... 110,705 150,635 234,400 138,423 221,509
Cumulative redeemable
Series A preferred
stock................ 23,785 -- -- -- --
Mandatorily redeemable
cumulative preferred
stock of
subsidiaries......... -- 902 1,261 1,081 1,440
Line of credit, debt
and capital lease
obligations,
including current
portion.............. 62,920 101,081 180,633 100,815 183,144
Total stockholders'
equity............... 1,482 31,062 13,528 24,007 2,584
</TABLE>
<TABLE>
<CAPTION>
Predecessors
---------------------------------------------------------------------------
The Original Cookie Company,
Incorporated and the Carved-
Out Portion of Hot
Mrs. Fields Inc. and Subsidiaries Sam Company, Inc. (Combined)
--------------------------------------- ---------------------------------
December December
52 Weeks Ended 31, 1995 52 Weeks Ended 31, 1995
------------------------- Through --------------------- Through
December December September December December September
31, 1994 30, 1995 17, 1996 31, 1994 30, 1995 17, 1996
----------- ----------- ----------- --------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
EBITDA Data:
Income (loss) from
operations........... $ (1,691) $ (3,526) $ (1,742) $ (750) $ 2,435 $ (2,772)
ADD:
Depreciation and
amortization......... 4,415 3,525 1,911 7,423 6,902 4,937
----------- ----------- ----------- --------- --------- ----------
EBITDA................ $ 2,724 $ (1) $ 169 $ 6,673 $ 9,337 $ 2,165
=========== =========== =========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Mrs. Fields' Holding
----------------------------------------------------
September 18, 53 Weeks 52 Weeks 26 Weeks Ended
1996 Through Ended Ended ----------------
December 28, January 3, January 2, July 4, July 3,
1996 1998 1999 1998 1999
------------- ---------- ---------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
EBITDA Data:
Income (loss) from
operations........... $5,583 $ 8,124 $(6,002) $(1,645) $(1,045)
ADD:
Depreciation and
amortization......... 2,356 10,450 19,867 6,220 11,286
------ ------- ------- ------- -------
EBITDA................ $7,939 $18,574 $13,865 $ 4,575 $10,241
====== ======= ======= ======= =======
</TABLE>
36
<PAGE>
- --------
(1) Store contribution is determined by subtracting all store operating
expenses including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. Store contribution for stores in the process of being closed or
franchised as a separate caption is not in accordance with generally
accepted accounting principles. Store contribution may not be comparable to
other similarly titled measures.
(2) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, minority interest, preferred stock accretion and dividends of
subsidiaries and other income or 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 (loss) as an indicator of operating performance or to cash flows as
a measure of liquidity. EBITDA has been included in this prospectus because
it is one of the indicators upon which Mrs. Fields' Holding assesses its
financial performance and its capacity to service its debt (see footnote
3). EBITDA may not be comparable to similarly titled measures reported by
other companies.
(3) 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, Original Cookie and Hot Sam (combined) earnings were
insufficient to cover fixed charges by $120,000, $5,131,000, $1,833,000 and
$5,645,000, respectively. For the 52 weeks ended January 2, 1999, Mrs.
Fields' Holding's earnings were insufficient to cover fixed charges by
$21,189,000. For the 26 weeks ended July 4, 1998 and July 3, 1999, Mrs.
Fields' Holding's earnings were insufficient to cover fixed charges by
$7,392,000 and $12,667,000, respectively.
(4) Basic and diluted net income (loss) per common share consists of net income
(loss) less cumulative redeemable Series A preferred stock dividends
divided by the weighted average number of common shares outstanding during
the applicable period.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF
OPERATIONS
Overview
In 1996, an investor group led by Capricorn Investors II, L.P. formed Mrs.
Fields' Original Cookies, Inc. and The Mrs. Fields' Brand, Inc. as subsidiaries
of Mrs. Fields' Holding Company, Inc.
On September 17, 1996, Mrs. Fields initiated operations when it purchased
substantially all of the assets and assumed liabilities of Mrs. Fields Inc. and
subsidiaries, The Original Cookie Company, Incorporated and the pretzel
business of Hot Sam Company, Inc.
Mrs. Fields set out to increase 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 selected 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. In some of our tables we
refer to stores not planned to be franchised or closed as "core" stores,
meaning continuing company-owned stores. Continuing company-owned stores will
be operated by Mrs. Fields into the foreseeable future. As a result of
converting selected stores to franchises, royalty revenues are expected to
increase and net store sales and overhead expenses associated with operating
those stores are expected to be reduced.
As Mrs. Fields exits stores it has identified for closure through closing or
franchising, results from operations are expected to improve on both a short-
term and long-term basis. With respect to these specific stores both ongoing
operating losses and negative cash flows are expected to cease.
Cash payments to landlords for early lease termination costs negatively
impact our immediate liquidity position. However, our overall financial
position is expected to be strengthened over time as cash flows from operating
activities increase. As cash is used to fund the store closure plans,
corresponding store closure reserves are reduced which has a neutral impact on
working capital and financial position. Should Mrs. Fields' cost estimates for
exiting the remaining stores not prove sufficient, it would have a negative
impact on both liquidity and results of operations.
Mrs. Fields believes that it has sufficient liquidity to complete its store
closure plans. A complete analysis of Mrs. Fields' store closure plans is
included in Note 5 to the January 2, 1999 Consolidated Financial Statements and
Note 4 to the Unaudited Condensed Consolidated Financial Statements as of July
3, 1999.
Mrs. Fields is pursuing growth in both its cookie and pretzel businesses
through strategic acquisitions. Management expects that significant operating
synergies, expense leveraging and geographic market share can be achieved
through targeted acquisitions. On July 25, 1997, a subsidiary of Mrs. Fields'
Holding, Mrs. Fields' Pretzel Concepts, Inc., acquired substantially all of the
assets and assumed liabilities of H&M Concepts Ltd. Co., the largest franchisee
of Pretzel Time, Inc. On September 2, 1997, Mrs. Fields' Holding acquired 56%
of the common stock of Pretzel Time, the franchisor of the Pretzel Time
concept.
On November 26, 1997, Mrs. Fields received as a contribution from Mrs.
Fields' Holding all of the common stock of The Mrs. Fields' Brand, Inc., the
business of Mrs. Fields' Pretzel Concepts and 56% of the shares of common stock
of Pretzel Time. On January 2, 1998 and June 12, 1998, Mrs. Fields acquired an
additional 4% and 10%, respectively, of Pretzel Time common stock, bringing its
total ownership to 70%. On December 9, 1998, Mrs. Fields purchased three
percent of Pretzel Time common stock for $0.5 million in cash and on December
30, 1998 Mrs. Fields completed the acquisition of the remaining outstanding
common stock of Pretzel Time under a stock purchase agreement, for a purchase
price of approximately $4.7 million.
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital stock
and subordinated indebtedness of Cookies USA, the parent company of Great
American Cookie Company, Inc., for a total purchase price of $18.4 million.
Mrs. Fields also retired approximately $38.9 million of outstanding Great
American notes. Concurrently, Cookies USA was merged with and into Mrs. Fields,
at which time Great American became a wholly owned subsidiary of Mrs. Fields.
At the same time Mrs. Fields also purchased the
38
<PAGE>
stock of two Great American franchisees, Deblan Corporation and Chocolate Chip
Cookies of Texas, Inc., together owning and operating 29 Great American
franchised stores, for total consideration of $14.4 million. Deblan and
Chocolate Chip were merged with and into Great American at that time. On
September 9, 1998, Mrs. Fields acquired eight Great American franchise stores
("Karp") from a Great American franchisee, for a purchase price of $1.9
million.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and
related business and operations of eleven Great American franchise stores
("Cookie Conglomerate") from a Great American franchisee for a total purchase
price of $2.8 million.
On November 19, 1998, Mrs. Fields, under a stock purchase agreement among
Pretzelmaker Holdings, Inc., holders of all outstanding capital stock of
Pretzelmaker, and Mrs. Fields, acquired all of the outstanding capital stock of
Pretzelmaker for $5.7 million, including $5.4 related to outstanding capital
stock and $320,000 related to severance payments, in lieu of outstanding stock
options, and assumed liabilities of $1.3 million.
Mrs. Fields' Holding utilized $2,704,000 of cash in investing activities
during the 26 weeks ended July 3, 1999, primarily for capital expenditures
relating to store remodels and renovations.
Mrs. Fields' Holding utilized $274,000 of cash in financing activities during
the 26 weeks ended July 3, 1999, primarily for the payment of debt related to
the Pretzel Time acquisition.
The specialty cookie and pretzel businesses do not require the maintenance of
significant receivables or inventories; however, Mrs. Fields' Holding
continually invests in its business by upgrading and remodeling stores and
adding new stores, carts, and kiosks as opportunities arise. Investments in
these long-term assets, which are key to generating current sales, reduce Mrs.
Fields' Holding's working capital. During the 26 weeks ended July 3, 1999 and
July 4, 1998, Mrs. Fields' Holding expended $2,604,000 and $3,342,000,
respectively, for capital assets and expects to expend a total of approximately
$7,000,000 in 1999. Management anticipates that these expenditures will be
funded with cash generated from operations and short-term borrowings under its
credit facility as needed.
Year 2000
Management has assessed the Year 2000 issue and has determined that all
internal information technology systems including financial software, corporate
networks, the AS400 system and all other systems are Year 2000 compliant with
the expectation of systems used for collecting and communicating sales data
from retail locations. This assessment was based primarily on independent,
third-party verification from Mrs. Fields' Holding's vendors and suppliers.
We are currently replacing Mrs. Fields' sales collection systems with
software and hardware that is Year 2000 compliant. Programming and development
of the software is complete and has been installed in approximately 80% of our
stores. We project installation will be complete by September 1999. The
estimated cost of this project is $1.9 million and includes software
development and new store computers and registers. The costs to complete this
project are included in Mrs. Fields' Holding's 1999 budget. Funding for this
project is being provided by internal cash flow and by a lease finance company.
Upgrades of the plant production and distribution software were completed in
the first and second quarters of 1999 at an estimated cost of $10,000. No
information technology projects have been deferred as a result of Mrs. Field's
Holding's Year 2000 efforts.
We are not dependent on the proper operation of the sales collection systems
to run the day-to-day operations of the business. Therefore, failure or
malfunction of these systems due to untimely or incomplete remediation would
not have a material adverse effect on its results of operations.
Mrs. Fields has completed its assessment of Year 2000 issues with respect to
its significant vendors and financial institutions as to their compliance plans
and whether any Year 2000 issues will impede the ability of such third-party
vendors to continue providing goods and services to us. Failure of our key
suppliers to remedy
39
<PAGE>
their own Year 2000 issues could delay shipments of essential products, thereby
disrupting our operations. Furthermore, we rely on various service providers,
such as utility and telecommunication service companies, which are beyond our
control. Based upon the results of the assessment, we are not aware of any Year
2000 issues relating to its significant third-party vendors or financial
institutions.
We have performed an analysis to identify significant non-IT systems to
determine the probability of them not being year 2000 compliant. The analysis
indicated a very low probability of a disruption to our business due to any of
these systems not being year 2000 compliant because either there were no
embedded microchips in the systems or they have been certified by their
manufacturer to be year 2000 compliant.
We do not have a contingency plan in place to address untimely or incomplete
remediation of Year 2000 issues, but are currently developing contingency
plans. These contingency plans are expected to address issues related to
significant vendors and financial institutions.
Inflation
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of Mrs. Fields' Holding's 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' Holding's employees
are paid hourly wages at the Federal minimum wage level. Minimum wage increases
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.
40
<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
the period December 31, 1995 through September 17, 1996) and Mrs. Fields'
Holding (for the period September 18, 1996 through December 28, 1996) and the
consolidated results of Mrs. Fields' Holding for the 53 weeks ended January 3,
1998 ("fiscal year 1997"), for the 52 weeks ended January 2, 1999 ("fiscal year
1998") and for the 26 weeks ended July 4, 1998 and July 3, 1999. 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' Holding historical financial statement presentation.
<TABLE>
<CAPTION>
%
For the 53 % of % of For the 26 Weeks Change
For the 52 Weeks Change For the 52 Change Ended from
Weeks Ended Ended from Weeks Ended from ----------------- 1998
December 28, January 3, 1996 to January 2, 1997 to July 4, July 3, to
1996 1998 1997 1999 1998 1998 1999 1999
------------ ---------- ------- ----------- ------- ------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Net store and food
sales................. $126,330 $127,845 1.2 % $140,235 9.7 % $58,687 $ 71,915 22.5%
Franchising, net....... 3,447 4,535 31.6 12,464 174.8 2,971 11,562 289.2
Licensing, net......... 1,656 2,028 22.5 1,537 (24.2) 683 688 0.7
-------- -------- -------- ------- --------
Total revenues......... 131,433 134,408 2.3 154,236 14.8 62,341 84,165 35.0
-------- -------- -------- ------- --------
Operating costs and
expenses:
Selling and store
occupancy costs....... 69,209 66,832 (3.4) 75,003 12.2 33,908 41,118 21.3
Cost of sales.......... 31,340 32,028 2.2 38,482 20.2 15,185 21,856 43.9
General and
administrative
expenses.............. 20,611 16,436 (20.3) 19,583 19.1 8,673 10,950 26.3
Store closure
provision............. -- 538 -- 7,303 1,257.4
Depreciation and
amortization.......... 9,204 10,450 13.5 19,867 90.1 6,220 11,286 81.4
-------- -------- -------- ------- --------
Total operating costs
and expenses.......... 130,364 126,284 (3.1) 160,238 26.9 63,986 85,210 33.2
-------- -------- -------- ------- --------
Interest expense........ (4,712) (7,527) 59.7 (14,946) 98.6 (5,626) (11,364) 102.0
-------- -------- -------- ------- --------
Interest income......... 143 246 72.0 623 153.3 421 78 (81.5)
-------- -------- -------- ------- --------
Other expense, net...... (2,325) (1,467) (36.9) (1,180) (19.6) (556) (546) (1.8)
-------- -------- -------- ------- --------
Net loss................ $ (5,825) $ (624) (89.3)% $(21,505) 3,346.3 % $(7,406) $(12,877) 73.9%
======== ======== ======== ======= ========
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
%
For the 53 % of % of For the 26 Change
For the 52 Weeks Change For the 52 Change Weeks Ended from
Weeks Ended Ended from Weeks Ended from ---------------- 1998
December 28, January 3, 1996 to January 2, 1997 to July 4, July 3, to
1996 1998 1997 1999 1998 1998 1999 1999
------------ ---------- ------- ----------- ------- ------- ------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Supplemental
Information:
Continuing company-owned
stores:
Net store and food
sales.................. $95,635 $108,174 13.1 % $122,713 13.4 % $51,695 $63,905 23.6%
------- -------- -------- ------- -------
Operating costs and
expenses:
Selling and store
occupancy costs....... 44,963 50,858 13.1 60,900 19.7 27,550 34,866 26.6
Cost of sales.......... 24,499 26,578 8.5 33,621 26.5 13,204 14,962 13.3
Depreciation and
amortization.......... 4,932 3,896 (21.0) 5,972 53.3 2,421 4,528 87.0
------- -------- -------- ------- -------
Total operating costs
and expenses.......... 74,394 81,332 9.3 100,493 23.6 43,175 54,356 25.9
------- -------- -------- ------- -------
Continuing company-owned
store contribution..... $21,241 $ 26,842 26.4 % $ 22,220 (17.2)% $ 8,520 $9,549 12.1%
======= ======== ======== ======= =======
Stores in the Process of
Being Closed or
Franchised:
Net store and food
sales.................. $30,695 $ 19,671 (35.9)% $ 17,522 (10.9)% $ 6,992 $8,010 14.6%
------- -------- -------- ------- -------
Operating costs and
expenses:
Selling and store
occupancy costs....... 24,246 15,974 (34.1) 14,103 (11.7) 6,358 6,252 (1.7)
Cost of sales.......... 6,841 5,450 (20.3) 4,861 (10.8) 1,981 2,431 22.7
Depreciation and
amortization.......... 1,541 45 (97.1) 612 1,260.0 258 190 (26.4)
------- -------- -------- ------- -------
Total operating costs
and expenses.......... 32,628 21,469 (34.2) 19,576 (8.8) 8,597 8,873 3.2
------- -------- -------- ------- -------
Stores in the process of
being closed or
franchised negative
contribution........... $(1,933) $ (1,798) (7.0)% $ (2,054) 14.2 % $(1,605) $ (863) (46,2)%
======= ======== ======== ======= =======
</TABLE>
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. Core store
contribution measures the amount of store contribution from stores that the
Company does not intend to close or franchise. Store contribution for stores in
the process of being closed or franchised measures the amount of store
contribution from stores that the Company has determined to either close or
franchise and the Company has included in a store closure reserve. 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. Store contribution may not be comparable to other similarly titled
measures.
26 Weeks Ended July 3, 1999 Compared to the 26 Weeks Ended July 4, 1998
As of July 3, 1999, there were 492 Company-owned stores and 1,001 franchised
or licensed stores in operation. The store activity for the 26 weeks ended July
4, 1998 and July 3, 1999 is summarized as follows:
Company-owned and Franchised or Licensed Store Activity
<TABLE>
<CAPTION>
July 4, 1998 July 3, 1999
-------------------- --------------------
Company- Franchised Company- Franchised
Owned or Licensed Owned Or Licensed
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of
the 26 weeks ended.................. 481 553 566 972
Stores opened (including
relocations)...................... 5 42 10 49
Stores closed (including
relocations)...................... (7) (42) (23) (38)
Stores sold to franchisees......... (1) 1 (7) 7
Non-core (exit plan) stores closed
(September 18, 1996 forward)...... (8) -- (43) --
Non-core (exit plan) stores
franchised (September 18, 1996
forward).......................... (11) 11 (14) 14
Stores acquired from franchisees... 11 (11) 3 (3)
--- --- --- -----
Stores open as of the end of the 26
weeks ended......................... 470 554 492 1,001
=== === === =====
</TABLE>
42
<PAGE>
Revenues
Net Store and Food Sales. Total net store sales increased $13,228,000, or
22.5%, from $58,687,000 to $71,915,000 for the 26 weeks ended July 3, 1999
compared to the 26 weeks ended July 4, 1998. For stores that had been open two
or more years, sales decreased .4% when compared to the prior year. The
decrease is primarily due to decreased foot traffic in the malls where our
stores are located.
Net store sales from core stores increased $12,210,000, or 23.6%, from
$51,695,000 to $63,905,000 for the 26 weeks ended July 3, 1999 compared to the
26 weeks ended July 4, 1998. The increase in net store sales from core stores
was primarily attributable to the operation of 66 Great American and 2
Pretzelmaker core stores obtained in connection with the acquisitions in August
and November 1998, respectively.
Net store sales from stores in the process of being closed or franchised
increased $1,018,000, or 14.6%, from $6,992,000 to $8,010,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. This increase
results from the addition of 41 to be closed stores and 13 to be franchised
stores in the fourth quarter 1998.
Franchising Revenues. Franchising revenues increased $8,591,000, or 289.2%,
from $2,971,000 to $11,562,000 for the 26 weeks ended July 3, 1999 compared to
the 26 weeks ended July 4, 1998. The increase in franchising revenues was
primarily attributable to batter sales made to franchisees from the Atlanta
batter facility purchased in August 1998 and the addition of 201 Great American
and 205 Pretzelmaker franchisees due to the acquisitions of these companies in
August and November 1998, respectively.
Licensing Revenues. Licensing revenues increased $5,000, or 0.7%, from
$683,000 to $688,000 for the 26 weeks ended July 3, 1999 compared to the 26
weeks ended July 4, 1998. Decreases in the number of licensees and the purchase
volume of some of the licensees was offset by the recognition of license fee
revenue for a Mrs. Fields branded dry cookie mix license.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $7,210,000, or 21.3%, from $33,908,000 to $41,118,000 for the 26
weeks ended July 3, 1999 compared to the 26 weeks ended July 4, 1998.
Selling and store occupancy costs for core stores increased by $7,316,000, or
26.6%, from $27,550,000 to $34,866,000 for the 26 weeks ended July 3, 1999
compared to the 26 weeks ended July 4, 1998. Within this overall increase,
selling expenses increased by $4,047,000, or 34.1%, from $11,865,000 to
$15,912,000 for the 26 weeks ended July 3, 1999 compared to the 26 weeks ended
July 4, 1998. Store occupancy costs increased $2,112,000, or 18.3%, from
$11,569,000 to $13,681,000 for the 26 weeks ended July 3, 1999 compared to the
26 weeks ended July 4, 1998. These increases were primarily attributable to the
66 Great American and 2 Pretzelmaker core stores obtained in connection with
the acquisitions in August and November 1998, respectively, coupled with lease
renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $106,000, or 1.7%, from $6,358,000 to $6,252,000 for
the 26 weeks ended July 3, 1999 compared to the 13 weeks ended July 4, 1998.
This decrease was primarily the result of closing or franchising 57 stores
during the 26 weeks ended July 3, 1999.
Cost of Sales. Total food cost of sales increased $6,671,000 or 43.9%, from
$15,185,000 to $21,856,000 for the 26 weeks ended July 3, 1999 compared to the
26 weeks ended July 4, 1998.
Food cost of sales for core stores increased $1,758,000 or 13.3%, from
$13,204,000 to $14,962,000 for the 26 weeks ended July 3, 1999. This increase
was primarily the result of the addition of 66 Great American and 2
Pretzelmaker core stores in August and November 1998, respectively.
43
<PAGE>
Food cost of sales for stores in the process of being closed or franchised
increased $450,000, or 22.7%, from $1,981,000 to $2,431,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. This increase
was primarily the result of the addition of 41 to be closed stores and 13 to be
franchised stores in the fourth quarter 1998.
General and Administrative Expenses. General and administrative expenses
increased $2,277,000, or 26.3%, from $8,673,000 to $10,950,000 for the 26 weeks
ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. The increase in
general and administrative expenses was primarily attributable to the
acquisitions of Great American and Pretzelmaker. During the 26 weeks ended July
3, 1999, the Company incurred unanticipated consulting and other costs related
to the Company's product offering and marketing programs as well as additional
compensation and other expenses incurred by the Company due to the resignation
of its Chief Financial Officer.
Depreciation and Amortization. Total depreciation and amortization expense
increased by $5,066,000, or 81.4%, from $6,220,000 to $11,286,000 for the 26
weeks ended July 3, 1999 compared to the 26 weeks ended July 4, 1998. This
increase was primarily attributable to increased goodwill and fixed assets from
the Great American and Pretzelmaker acquisitions.
Depreciation and amortization expense for core stores increased $2,107,000,
or 87.0%, from $2,421,000 to $4,528,000 for the 26 weeks ended July 3, 1999
compared to the 26 weeks ended July 4, 1998. This increase in depreciation and
amortization expense was primarily attributable to the acquisitions of 66 Great
American and 2 Pretzelmaker core stores in August and November 1998,
respectively.
Interest Expense. Interest expense increased $5,738,000, or 102.0%, from
$5,626,000 to $11,364,000 for the 26 weeks ended July 3, 1999 compared to the
26 weeks ended July 4, 1998. This increase was primarily attributable to
interest on the $55,000,000 Mrs. Fields' Holding high yield notes and on the
$40,000,000 Mrs. Fields high yield notes, which were issued in August 1998.
Interest Income. Interest income decreased $343,000, or 81.5%, from $421,000
to $78,000 for the 26 weeks ended July 3, 1999 compared to the 26 weeks ended
July 4, 1998. This decrease was primarily the result of interest income earned
in 1998 on excess cash provided by the $100,000,000 in high yield notes which
were put in place in November 1997 that was not earned in fiscal 1999.
Other Expenses. Other expenses for the 26 weeks ended July 3, 1999 were
comparable to the 26 weeks ended July 4, 1998.
Net Loss. The net loss increased by $5,471,000, or 73.9%, from $7,406,000 to
$12,877,000 for the 13 weeks ended July 3, 1999 compared to the 26 weeks ended
July 4, 1998 due to the combination of factors described above.
Contribution from Core Stores. Contribution from core stores increased by
$1,029,000, or 12.1%, from $8,520,000 to $9,549,000 for the 26 weeks ended July
3, 1999 compared to the 26 weeks ended July 4, 1998, primarily due to the
operation of 66 Great American and 2 Pretzelmaker core stores obtained in
connection with the acquisitions in August and November 1998, respectively.
Negative Contribution from Stores in the Process of Being Closed or
Franchised. The negative contribution from stores in the process of being
closed or franchised decreased by $742,000, or 46.2%, from $1,605,000 to
$863,000 for the 26 weeks ended July 3, 1999 compared to the 26 weeks ended
July 4, 1998. This decrease was primarily the result of closing 43 stores and
franchising 14 stores during the 26 weeks ended July 3, 1999 and the effect of
closing or franchising 19 stores during the 26 weeks ended July 4, 1998. In
addition, 22 stores were closed and 4 franchised over the remainder of fiscal
year 1998, which were in operation during the 26 weeks ended July 4, 1998. See
Note 5 to the January 2, 1999 Consolidated Financial Statements and Note 4 to
the Unaudited Condensed Consolidated Financial Statements as of July 3, 1999
for a complete analysis of Mrs. Fields' store closure plans.
44
<PAGE>
52 Weeks Ended January 2, 1999 Compared to the 53 Weeks Ended January 3, 1998
Company-owned and Franchised or Licensed Store Activity
As of January 2, 1999, there were 566 company-owned stores and 972 franchised
or licensed stores in operation. The store activity for the 53 weeks ended
January 3, 1998 ("fiscal 1997") and the 52 weeks ended January 2, 1999 ("fiscal
1998") is summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
-------------------- --------------------
Company- Franchised Company- Franchised
owned or Licensed Owned or Licensed
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of
the fiscal year..................... 482 418 481 553
Stores opened (including relocations
and acquisitions)................... 86 217 128 504
Stores closed (including
relocations)........................ (7) (89) (20) (78)
Non-continuing company-owned (exit
plan) stores closed (September 18,
1996 forward)....................... (73) -- (30) --
Stores sold to franchisees........... (3) 3 (11) 11
Non-continuing company-owned (exit
plan) stores franchised (September
18, 1996 forward)................... (9) 9 (15) 15
Stores acquired from franchisees..... 5 (5) 33 (33)
--- --- --- ---
Stores open as of the end of the
fiscal year......................... 481 553 566 972
=== === === ===
</TABLE>
Revenues
Net Store and Food Sales. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $12,390,000, or 9.7%,
from $127,845,000 to $140,235,000 for the 52 weeks ended January 2, 1999
compared to the 53 weeks ended January 3, 1998.
Net store sales from continuing company-owned stores and mail order increased
$14,539,000, or 13.4%, from $108,174,000 to $122,713,000 for the 52 weeks ended
January 2, 1999 compared to the 53 weeks ended January 3, 1998. The increase in
net store sales from continuing company-owned stores was primarily attributable
to:
(1) the operation of 85 Pretzel Time continuing company-owned stores
acquired in connection with the acquisition of H&M and Pretzel Time in
July 1997,
(2) the operation of 65 Great American stores acquired in connection with
the acquisitions of Great American, Deblan, Chocolate Chip, Cookie
Conglomerate and Karp in fiscal 1998, and
(3) a 35.5% increase in mail order sales.
This increase in net store sales from continuing company-owned stores was
offset in part by the negative effect of a calendar shift. Mrs. Fields' year
end was December 28 for fiscal 1996 and January 3, 1998 for fiscal 1997. As a
result, the New Year's holiday week fell in the first quarter of fiscal 1997
and again in the fourth quarter of fiscal 1997. The first quarter of fiscal
1998 did not benefit from the New Year's holiday sales.
The increase in net store sales was also offset in part by negative same
store sales. Based on stores that have been open for at least two years
(adjusted for the calendar shift), system-wide continuing company-owned store
sales were down 1.8% during the 52 weeks ended January 2, 1999 compared to the
same period in fiscal 1997. Additionally, there were only 52 weeks in fiscal
1998 compared to 53 weeks in fiscal 1997.
Net store sales from stores in the process of being closed or franchised
decreased $2,149,000, or 10.9%, from $19,671,000 to $17,522,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998.
This decrease results from closing or franchising 45 stores during the 52 weeks
ended January 2, 1999 and the effect of closing or franchising 82 stores during
the 53 weeks ended January 3, 1998.
45
<PAGE>
Franchising Revenues. Franchising revenues increased $7,929,000, or 174.8%,
from $4,535,000 to $12,464,000 for the 52 weeks ended January 2, 1999 compared
to the 53 weeks ended January 3, 1998. The increase in franchising revenues was
primarily attributable to royalties earned from 141 Pretzel Time franchised
stores obtained in connection with the acquisition of H&M and Pretzel Time in
1997 and the 211 Great American franchised stores obtained in connection with
the acquisition of Great American in August 1998.
Licensing Revenues. Licensing revenues decreased $491,000, or 24.2%, from
$2,028,000 to $1,537,000 for the 52 weeks ended January 2, 1999 compared to the
53 weeks ended January 3, 1998. The decrease in licensing revenues was
primarily attributable to reduced concept licensing royalties.
Total Revenues. Total revenues increased by $19,828,000, or 14.8%, from
$134,408,000 to $154,236,000 for the 52 weeks ended January 2, 1999 compared to
the 53 weeks ended January 3, 1998 due to the reasons discussed above.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $8,171,000, or 12.2%, from $66,832,000 to $75,003,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998.
Selling and store occupancy costs for continuing company-owned stores
increased by $10,042,000, or 19.7%, from $50,858,000 to $60,900,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998.
Within this overall increase, selling expenses for continuing company-owned
stores increased by $4,836,000, or 21.9%, from $22,094,000 to $26,930,000 for
the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January 3,
1998. The increase in selling expenses was primarily attributable to the 85
Pretzel Time continuing company-owned stores acquired in connection with the
acquisitions of H&M and Pretzel Time in 1997, the 65 Great American continuing
company-owned stores acquired in connection with the acquisitions of Great
American, Deblan, Chocolate Chip, Cookie Conglomerate and Karp in fiscal 1998,
the 2 Pretzelmaker stores acquired in November 1998, and the effect of the
minimum wage increasing to $5.15 from $4.75 on September 1, 1997. Store
occupancy costs for continuing company-owned stores increased $5,206,000, or
18.1%, from $28,764,000 to $33,970,000 for the 52 weeks ended January 2, 1999
compared to the 53 weeks ended January 3, 1998. The increase in store occupancy
costs was primarily attributable to the increase in the number of stores
discussed above, Mrs. Fields' reacquiring 33 continuing company-owned stores
from franchisees during the 52 weeks ended January 2, 1999, rent escalations in
existing leases and lease renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $1,871,000, or 11.7%, from $15,974,000 to $14,103,000
for the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January
3, 1998. This decrease was primarily the result of closing or franchising 45
stores during the 52 weeks ended January 2, 1999 and the effect of closing or
franchising 82 stores during the 53 weeks ended January 3, 1998.
Cost of Sales. Total cost of sales increased $6,454,000, or 20.2%, from
$32,028,000 to $38,482,000 for the 52 weeks ended January 2, 1999 compared to
the 53 weeks ended January 3, 1998.
Cost of sales for continuing company-owned stores increased $7,043,000, or
26.5%, from $26,578,000 to $33,621,000 for the 52 weeks ended January 2, 1999.
This increase was primarily the result of the addition of 85 Pretzel Time
continuing company-owned stores in July 1997, 65 Great American continuing
company-owned stores acquired in connection with the acquisitions of Great
American, Deblan, Chocolate Chip, Cookie Conglomerate and Karp in fiscal 1998
and 2 Pretzelmaker stores acquired in November 1998. Cost of sales also
increased due to the addition of the Great American batter facility in August
1998 which produces batter for the Great American stores, food costs associated
with increased mail order sales and the increasing cost of butter. Butter is
one of the main ingredients in a variety of our products and is a condiment for
other products.
46
<PAGE>
The price of butter has increased from $0.78/lb. at the beginning of fiscal
1997 to a peak of $2.92/lb. in September 1998. Additionally, distribution costs
increased during the 52 weeks ended January 2, 1999 as Mrs. Fields' changed
distributors to improve product availability and the reliability of service to
the stores.
Cost of sales for stores in the process of being closed or franchised
decreased $589,000, or 10.8%, from $5,450,000 to $4,861,000 for the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. This
decrease was primarily the result of closing or franchising 45 stores during
the 52 weeks ended January 2, 1999 and the effect of closing or franchising 82
stores during the 53 weeks ended January 3, 1998.
General and Administrative Expenses. General and administrative expenses
increased $3,147,000, or 19.1%, from $16,436,000 to $19,583,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. The
increase in general and administrative expenses was primarily attributable to
the acquisitions of H&M and Pretzel Time in 1997, the acquisitions of Great
American, Deblan, Chocolate Chip, Karp, Cookie Conglomerate and Pretzelmaker in
1998.
Store Closure Provision. During the fourth quarter of 1998, management
reassessed its strategy with respect to acceptable levels of contribution from
existing stores. This resulted in management setting out a plan to close or
franchise 54 existing stores. The Company recorded an additional $7,303,000 in
store closure reserves to cover early lease termination costs. Management
believes that the level of store closure reserves is adequate to provide for
all closure costs for these stores. See the "Overview" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
more detailed discussion of the Store Closure Provision.
Depreciation and Amortization Expense. Total depreciation and amortization
expense increased by $9,417,000, or 90.1%, from $10,450,000 to $19,867,000 for
the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January 3,
1998. This increase was primarily attributable to increased goodwill
amortization from the acquisitions of H&M and Pretzel Time in fiscal 1997 and
the acquisitions of Great American, Deblan, Chocolate Chip, Karp, Cookie
Conglomerate and Pretzelmaker in fiscal 1998.
For stores with negative contribution that were determined to be closed or
franchised, Mrs. Fields' Holding wrote down the related long-lived assets to
net realizable value. This expense is included in depreciation and amortization
in the 1998 statement of operations and totaled $3,098,000. Mrs. Fields'
Holding also assessed the realization of goodwill associated with these stores
and recorded an impairment of goodwill totaling $1,033,000 during fiscal 1998.
Depreciation and amortization expense for continuing company-owned stores
increased $2,076,000, or 53.3%, from $3,896,000 to $5,972,000 for the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. This
increase in depreciation and amortization expense was primarily attributable to
the addition of 85 Pretzel Time continuing company-owned stores in July 1997,
65 Great American continuing company-owned stores in August and September 1998
and the acquisition of 2 Pretzelmaker continuing company-owned stores in 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $33,954,000, or 26.9%, from $126,284,000 to $160,238,000 for the
52 weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998,
for the reasons discussed above.
Interest Expense. Interest expense increased $7,419,000, or 98.6%, from
$7,527,000 to $14,946,000 for the 52 weeks ended January 2, 1999 compared to
the 53 weeks ended January 3, 1998. This increase was primarily attributable to
interest expense on the $100,000,000 principal amount of notes of Mrs. Fields
that were placed in November 1997 and the $40,000,000 principal amount of notes
of Mrs. Fields and $55,000,000 principal amount of notes of Mrs. Fields'
Holding placed in August 1998.
Interest Income. Interest income increased $377,000, or 153.3%, from $246,000
to $623,000 for the 52 weeks ended January 2, 1999 compared to the 53 weeks
ended January 3, 1998. This increase was primarily the result of interest
earned on excess cash provided by the $100,000,000 principal amount of senior
notes that were placed in November 1997 and the $40,000,000 principal amount of
senior notes and $55,000,000 principal amount of senior secured discount notes
placed in August 1998.
47
<PAGE>
Other Expenses. Other expenses decreased $287,000, or 19.6%, from $1,467,000
to $1,180,000 for the 52 weeks ended January 2, 1999 compared to the 53 weeks
ended January 3, 1998. This decrease was primarily attributable to minority
interest from the acquisitions of H&M and Pretzel Time in 1997 and a decrease
in the income tax provision during the 52 weeks ended January 2, 1999.
Net Loss. The net loss increased by $20,881,000, or 3,346.3%, from $624,000
to $21,505,000 for the 52 weeks ended January 2, 1999 compared to the 53 weeks
ended January 3, 1998 due to the combination of factors described above.
Income from Continuing Company-Owned Stores. Income from continuing company-
owned stores decreased by $4,622,000, or 17.2%, from $26,842,000 to $22,220,000
for the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January
3, 1998. Income from continuing company-owned stores was negatively impacted by
a 1.8% decline in sales from stores that have been open at least two years and
by the increases in selling and store occupancy costs, food cost of sales and
depreciation and amortization described above. Income from continuing company-
owned stores was also negatively impacted by a calendar shift whereby Mrs.
Fields' year end was December 28 for fiscal 1996 and January 3, 1998 for fiscal
1997. As a result, the New Year's holiday week fell in the first quarter of
1997 and again in the fourth quarter of fiscal 1997. The first quarter of
fiscal 1998 did not benefit from the New Year's holiday sales. Additionally,
there were only 52 weeks in fiscal 1998 compared to 53 weeks in fiscal 1997.
Loss from Stores in the Process of Being Closed or Franchised. The loss from
stores in the process of being closed or franchised increased by $256,000, or
14.2%, from $1,798,000 to $2,054,000 for the 52 weeks ended January 2, 1999
compared to the 53 weeks ended January 3, 1998. The increased loss was
primarily attributable to the addition of 65 stores from the acquisitions of
Great American, Deblan, Chocolate Chip, Cookie Conglomerate and Karp in fiscal
1998, offset in part by closing or franchising 45 stores during fiscal 1998.
See Note 5 to the January 2, 1999 Consolidated Financial Statements and Note 4
to the Unaudited Condensed Financial Statements as of July 3, 1999 for a
complete analysis of Mrs. Fields' store closure reserve.
53 Weeks Ended January 3, 1998 ("Fiscal Year 1997") Compared to the 52 Weeks
Ended December 28, 1996 ("Fiscal Year 1996") (Comprised of the Mrs. Fields
Inc., Original Cookie and Hot Sam Pre-Acquisition Period of December 31, 1995
through September 17, 1996 and the Mrs. Fields 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>
Fiscal 1996 Fiscal 1997
-------------------- --------------------
Company- Franchised Company- Franchised
owned or Licensed owned or Licensed
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of
the fiscal year..................... 540 415 482 418
Stores opened (including
relocations)...................... 5 118 3 76
Stores acquired through business
acquisitions...................... -- -- 83 141
Stores closed (including
relocations)...................... (39) (122) (7) (89)
Non-continuing company-owned (exit
plan) stores closed (September 18,
1996 forward)..................... (17) -- (73) --
Stores sold to franchisees........... (9) 9 (3) 3
Non-continuing company-owned (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 fis-
cal year............................ 482 418 481 553
=== ==== === ===
</TABLE>
48
<PAGE>
Revenues
Net Store and Food Sales. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $1,515,000, or 1.2%,
from $126,330,000 to $127,845,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996.
Net store sales from continuing company-owned stores and mail order increased
$12,539,000, or 13.1%, from $95,635,000 to $108,174,000 for the 53 weeks ended
January 3, 1998 compared to the 52 weeks ended December 28, 1996. The increase
in net store sales from continuing company-owned stores was primarily
attributable to the operation of Pretzel Time continuing company-owned stores
obtained in connection with the acquisitions of H&M and Pretzel Time 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 some of our product lines.
Also, three new continuing company-owned stores were opened and five stores
were acquired from franchisees during the 53 weeks ended January 3, 1998.
Based on stores that have been open for at least two years (adjusted for the
calendar shift), system-wide continuing company-owned store sales were up 0.8%
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 73 stores and
franchising 7 (net) stores during fiscal year 1997 and the full year effect of
closing 56 stores and franchising 7 (net) stores during fiscal year 1996.
Franchising Revenues. Franchising revenues increased $1,088,000, or 31.6%,
from $3,447,000 to $4,535,000 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 acquisitions of H&M and Pretzel Time
coupled with new franchise openings in fiscal year 1997 and the full year
effect of new franchise openings in fiscal year 1996.
Licensing Revenues. Licensing revenues increased $372,000, or 22.5%, from
$1,656,000 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.
Total Revenues. Total revenues increased by $2,975,000, or 2.3%, from
$131,433,000 to $134,408,000 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 continuing company-owned 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 $4,029,000, or
15.7%, from $25,650,000 to $29,679,000 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
$1,866,000, or 9.7%, from $19,313,000 to $21,179,000 for
the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28,
1996. The increase in
49
<PAGE>
store occupancy costs was primarily attributable to the addition of Pretzel
Time continuing company-owned stores in July 1997, and the opening of three
continuing company-owned stores and acquiring five stores from franchisees
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 73 stores and
franchising seven (net) stores during fiscal year 1997 and the full year effect
of closing 56 stores and franchising seven (net) stores during fiscal year
1996.
Cost of Sales. Total cost of sales increased $688,000, or 2.2%, from
$31,340,000 to $32,028,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996.
Cost of sales for continuing company-owned stores increased $2,079,000, or
8.5%, from $24,499,000 to $26,578,000 for the 53 weeks ended January 3, 1998.
This increase is primarily the result of the addition in July 1997 of Pretzel
Time continuing company-owned stores, offset by an aggressive product waste
control program which was uniformly applied to all product lines early in the
year. Additionally, Mrs. Fields re-negotiated some of its vendor contracts to
capitalize on Mrs. Fields' economies of scale.
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 73 stores and franchising seven
(net) stores during fiscal year 1997 and the full year effect of closing 56
stores and franchising seven (net) stores during fiscal year 1996.
General and Administrative Expenses. General and administrative expenses
decreased $4,175,000, or 20.3%, from $20,611,000 to $16,436,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
The decrease in expenses was primarily attributable to the cost savings
achieved by combining the operations of Mrs. Fields Inc. and subsidiaries,
Original Cookie, Hot Sam and Pretzel Time which resulted in:
(1) reduced headcount with corresponding decreases in administrative
salaries and benefits;
(2) decreased professional service fees, including legal and accounting
services; and
(3) 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 Harrisburg, Pennsylvania and the H&M
headquarters in Boise, Idaho.
Depreciation and Amortization Expense. Total depreciation and amortization
expense increased by $1,246,000, or 13.5%, from $9,204,000 to $10,450,000 for
the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28,
1996.
Depreciation and amortization expense for continuing company-owned stores
decreased $1,036,000, or 21.0%, from $4,932,000 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
Mrs. Fields 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 Pretzel Time
continuing company-owned stores in July 1997, three newly opened continuing
company-owned stores and five stores acquired from franchisees in fiscal year
1997.
Total Operating Costs and Expenses. Total operating costs and expenses
decreased by $4,080,000, or 3.1%, from $130,364,000 to $126,284,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996,
for the reasons discussed above.
50
<PAGE>
Interest Expense. Interest expense increased $2,815,000, or 59.7%, from
$4,712,000 to $7,527,000 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 debt incurred to fund the
purchase of the assets of Mrs. Fields Inc. and subsidiaries, Original Cookie
and Hot Sam on September 17, 1996.
Other Expenses. Other expenses decreased $858,000, or 36.9%, from $2,325,000
to $1,467,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996. This decrease was primarily attributable to a decrease
in income tax provision, offset in part by an increase in accretion and
dividends on preferred stock of subsidiaries.
Net Loss. The net loss decreased by $5,201,000, or 89.3%, from $5,825,000 to
$624,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks ended
December 28, 1996. The net loss equaled 0.5% of total revenues during the 53
weeks ended January 3, 1998 compared to 4.4% of total revenues 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
acquisitions of H&M and Pretzel Time and improved store operations.
Income from Continuing Company-Owned Stores. The income from continuing
company-owned stores increased by $5,601,000, or 26.4%, from $21,241,000 to
$26,842,000 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.
Loss from Stores in the Process of Being Closed or Franchised. The loss from
stores in the process of being closed or franchised decreased by $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 loss was
primarily attributable to closing 73 stores and franchising seven (net) stores
during fiscal year 1997 and the full year effect of closing 56 stores and
franchising seven (net) stores during fiscal year 1996. See Note 5 to the
January 2, 1999 Consolidated Financial Statements and Note 4 to the Unaudited
Condensed Consolidated Financial Statements as of July 5, 1999 for a complete
analysis of Mrs. Fields' store closure plans.
Liquidity and Capital Resources
General
Mrs. Fields' Holding's principal sources of liquidity are cash flows from
operations, cash on hand and available borrowings under Mrs. Fields' Holding's
existing leases and revolving credit facilities. As of July 3, 1999, Mrs.
Fields' Holding has $4,675,000 of cash and cash equivalents on hand and
$276,000 additional borrowings allowable under its revolving credit facility.
Mrs. Fields' Holding expects to use its existing cash, cash flows from
operations and its credit facilities to provide working capital, finance
capital expenditures, redeem outstanding PTI Preferred Stock, and to meet debt
service requirements. Based on current operations and anticipated cost savings,
Mrs. Fields' Holding believes that its sources of liquidity will be adequate to
meet its anticipated requirements for working capital, capital expenditures,
scheduled debt service requirements and other general corporate purposes. There
can be no assurance, however, that Mrs. Fields' Holding's business will
continue to generate cash flows at or above current levels or that cost savings
can be achieved.
July 3, 1999 Compared to January 2, 1999
As of July 3, 1999, Mrs. Fields' Holding had liquid assets (cash and cash
equivalents and accounts receivable) of $11,053,000, a decrease of 21.6%, or
$3,051,000, from January 2, 1999 when liquid assets were $14,104,000. Cash
decreased $84,000, or 1.8%, to $4,675,000 at July 3, 1999 from $4,759,000 at
January 2, 1999. Accounts receivable decreased $2,967,000 or 31.7%, to
$6,378,000 at July 3, 1999 from $9,345,000 at January 2, 1999 due to the
seasonality of the business and improved collections.
Mrs. Fields' Holding's working capital decreased by $945,000 to a negative
$13,493,000 at July 3, 1999 from a negative $12,548,000 at January 2, 1999.
This decrease is due to the decreases in current assets discussed above which
more than offset the decreases in current liabilities.
51
<PAGE>
Long-term assets decreased $9,048,000, or 4.3%, to $200,830,000 at July 3,
1999 from $209,878,000 at January 2, 1999. This decrease was primarily the
result of scheduled depreciation and amortization of fixed assets, goodwill and
deferred loan costs.
On May 27, 1999, Mrs. Fields' Holding entered into an agreement with
Capricorn Investors II, L.P. ("Capricorn"), the majority shareholder of Mrs.
Fields' Holding, in which Capricorn agreed to make a contribution to Mrs.
Fields' Holding of $2,000,000 by assuming a contract payment from Mrs. Fields
due in the future. The consideration for this debt assumption has not been
determined, but may include the issuance of 101,419 shares of Mrs. Fields'
Holding's common stock or an economically equivalent transaction as permitted
under the debt instruments of Mrs. Fields' Holding, or no consideration. As of
July 3, 1999, a final determination of the consideration had not been made.
This transaction enhanced Mrs. Fields' Holding's tax planning and financial
flexibility.
Mrs. Fields' Holding's cash flows from operating activities of $2,894,000 for
the 26 weeks ended July 3, 1999, resulted primarily from store sales and
franchising and licensing revenues net of costs and expenses incurred to
generate these sales and better management of cash flows.
Mrs. Fields' Holding utilized $2,704,000 of cash in investing activities
during the 26 weeks ended July 3, 1999, primarily for capital expenditures
relating to store remodels and renovations.
Mrs. Fields' Holding utilized $274,000 of cash in financing activities during
the 26 weeks ended July 3, 1999, primarily for the payment of debt related to
the Pretzel Time acquisition.
The specialty cookie and pretzel businesses do not require the maintenance of
significant receivables or inventories; however, Mrs. Fields' Holding
continually invests in its business by upgrading and remodeling stores and
adding new stores, carts, and kiosks as opportunities arise. Investments in
these long-term assets, which are key to generating current sales, reduce Mrs.
Fields' Holding's working capital. During the 26 weeks ended July 3, 1999 and
July 4, 1998, Mrs. Fields' Holding expended $2,604,000 and $3,342,000,
respectively, for capital assets and expects to expend a total of approximately
$7,000,000 in 1999. Management anticipates that these expenditures will be
funded with cash generated from operations and short-term borrowings under its
credit facility as needed.
Inflation
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of Mrs. Fields' Holding's 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' Holding's employees
are paid hourly wages at the Federal minimum wage level. Minimum wage increases
will negatively impact Mrs. Fields' Holding's 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.
Consolidated Results of Operations of Cookies USA and its Wholly Owned
Operating Subsidiary, Great American, Prior to the Great American Acquisition
As Great American is a significant subsidiary of Mrs. Fields, management's
discussion and analysis of financial condition and results of operations is
also included for the consolidated operations of Cookies USA and Great American
for the 52 weeks ended June 28, 1998 compared to the 52 weeks ended June 29,
1997, for the 52 weeks ended June 29, 1997 compared to the 52 weeks ended June
30, 1996, and the 52 weeks ended June 30, 1996 compared to the 52 weeks ended
June 29, 1995. See the historical financial statements and the related notes to
the financial statements of Cookies USA, Inc. and subsidiary contained
elsewhere in this prospectus.
52
<PAGE>
References to the beliefs of the management of Great American or Cookies USA
in this discussion are to management prior to the acquisition of Great American
by Mrs. Fields. As used in this discussion, "management" refers to David Barr,
the chief executive officer of Great American and Cookies USA at the time of
its acquisition by Mrs. Fields. The factors cited in the following discussion
as contributing to changes in operating results are listed in order of
importance; however, unless otherwise indicated in such discussion, the
quantitative importance of any such factors cannot be determined by Great
American management and have not been stated.
The "forward-looking statements" contained in this section represent Great
American's expectations or beliefs concerning future events, including
statements regarding unit growth and cash requirements. Management cautions
that a number of important factors could, individually or in the total, cause
actual results to differ materially from those stated in the forward-looking
statements including, without limitation, the following:
. consumer spending trends and habits,
. mall traffic trends,
. increased competition among snack retailers,
. economic conditions in the regions where Great American and its
franchisees operate stores,
. the ability to identify and secure suitable locations for new stores,
. the availability of experienced management and hourly employees, and the
laws and regulations affecting labor and employee benefit costs.
Accounting Period
During the 52 weeks ended June 30, 1996, Great American changed its year end
from the last Thursday in the month of June to the last Sunday in the month of
June. As a result, three days were added to the fifty-two week period ended
Thursday, June 27, 1996 to effectively change Great American's fiscal year end
to Sunday, June 30, 1996. This change does not materially impact the
comparability of the years presented in the accompanying consolidated financial
statements.
52 Weeks Ended June 28, 1998 ("Fiscal Year 1998") Compared to 52 Weeks Ended
June 29, 1997 ("Fiscal Year 1997")
Company and Franchise Store Activity
As of June 28, 1998, there were 77 company-operated stores and 247 franchised
stores in operation. The store activity for fiscal year 1997 and for fiscal
year 1998 is summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
------------------- -------------------
Company- Company-
Operated Franchised Operated Franchised
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Stores open as of beginning of the
fiscal year........................... 104 225 91 233
Stores opened (including
relocations)........................ 1 12 3 7
Stores closed (including
relocations)........................ (10) (8) (2) (8)
Stores sold to franchisees........... (12) 12 (15) 15
Stores acquired from franchisees..... 8 (8) 0 0
--- --- --- ---
Stores open as of the end of the year.. 91 233 77 247
Satellite locations as of the end of
the year............................ 9 30 4 32
--- --- --- ---
Total outlets as of the end of the
year................................ 100 263 81 279
=== === === ===
</TABLE>
The above activity results in 5,161 company-operated equivalent store weeks
and 11,858 franchisee-operated equivalent store weeks during the fiscal year
ended June 29, 1997 compared to 4,288 company-operated equivalent store weeks
and 12,581 franchisee-operated equivalent store weeks during the fiscal year
ended June 28, 1998.
53
<PAGE>
Total Revenue
Total revenue decreased approximately $2,696,000, or 6.7%, during the fiscal
year ended June 28, 1998 compared to the fiscal year ended June 29, 1997. Each
of Mrs. Fields' revenue sources is discussed below:
. Cookie and beverage sales at company-operated retail stores decreased
approximately $3,521,000, or 15.7%, during the fiscal year ended June
28, 1998 compared to the fiscal year ended June 29, 1997. The decrease
in revenue from company-operated retail stores was attributable to (a) a
16.9% decrease in company-operated equivalent store weeks offset by (b)
a 1.2% increase in the average retail sales volume for company-operated
stores. Based on those stores which were company-operated during the
entire 1998 and 1997 fiscal years, sales volumes did not change.
. Batter sales to franchisees increased approximately $944,000, or 8.4%,
during the fiscal year ended June 28, 1998 compared to the fiscal year
ended June 29, 1997. The increase in batter sales to franchisees was
primarily attributable to (a) a 6.1% increase in franchisee-operated
equivalent store weeks and (b) a 2.3% increase in the volume of batter
sold per franchisee-operated equivalent store week.
. Franchise royalties increased approximately $538,000, or 11.4%, during
the fiscal year ended June 28, 1998 compared to the fiscal year ended
June 29, 1997. The increase in franchise royalties was attributable to
(a) a 6.1% increase in franchisee-operated equivalent store weeks and
(b) an increase in the average retail sales volume per franchisee-
operated store of 5.3%. Based on those stores which were franchisee-
operated during the entire 1998 and 1997 fiscal years, management
estimates franchisees' sales volumes increased 3.5%.
. Revenue from franchise license fees decreased approximately $172,000, or
25.5%, during the fiscal year ended June 28, 1998 compared to the fiscal
year ended June 29, 1997. Revenue from selling existing and new stores
to franchisees is summarized as follows (rounded):
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
----------- -----------
<S> <C> <C>
Number of licenses sold to franchisees
--existing stores................................ 12 15
--new stores..................................... 12 5
Cash and notes from sale of existing stores........ $2,045,000 $1,980,000
Less: net book value of existing stores sold....... 818,000 1,235,000
---------- ----------
Revenue from sale of existing stores............... 1,227,000 745,000
---------- ----------
Revenue from license fees for new stores........... 300,000 125,000
Revenue from other fees............................ 75,000 3,000
---------- ----------
Revenue from license fees for new stores and other
fees.............................................. 375,000 128,000
---------- ----------
Total revenue from sale of existing and new stores
to franchisees.................................... 1,602,000 873,000
Less: Gain on sale of existing stores.............. 927,000 370,000
---------- ----------
Revenue from franchise license fees................ $ 675,000 $ 503,000
========== ==========
</TABLE>
. Other revenue increased approximately $73,000, or 111.6%, during the
fiscal year ended June 28, 1998 compared to the fiscal year ended June
29, 1997. The increase in other revenue was primarily attributable to:
(a) an increase in construction assistance revenue derived from
construction assistance performed by Great American for the benefit
of franchisees and
(b) an increase in sales of miscellaneous supplies to franchise stores,
offset by
(c) an increase in batter discounts given to franchisees as a result of
increased batter sales to franchisees in fiscal 1998.
54
<PAGE>
Cost of Sales
Cost of sales decreased approximately $1,559,000, or 8.4%, during the fiscal
year ended June 28, 1998 compared to the fiscal year ended June 29, 1997. The
decrease in cost of sales was primarily attributable to:
(a)a decline in cookie and beverage sales due to less company-operated
equivalent store weeks and
(b)an improvement in batter facility margins, offset by
(c)an increase in batter sales to franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $1,318,000, or 18.7%,
during the fiscal year ended June 28, 1998 compared to the fiscal year ended
June 29, 1997. The decrease was primarily attributable to a 16.9% decrease in
company-operated equivalent store weeks.
Other Retail Store Expenses
Other retail store expenses decreased approximately $149,000, or 14.6%,
during the fiscal year ended June 28, 1998 compared to the fiscal year ended
June 29, 1997. The decrease in other retail store expenses was primarily
attributable to a 16.9% decrease in company-operated equivalent store weeks.
Selling, General and Administrative
Selling, general and administrative expenses decreased approximately
$399,000, or 5.2%, during the fiscal year ended June 28, 1998 compared to the
fiscal year ended June 29, 1997. This decrease was primarily attributable to:
(a) a decrease in development and testing expense,
(b) a decrease in salaries and benefits at the support center, and
(c) a decrease in expenses associated with the franchise convention because
a franchise convention was not held in fiscal 1998, offset by
(d) an increase in marketing expenses and
(e) an increase in the cost of training materials related to the rollout of
a new training program. In addition, in 1998 Great American revised its
estimate of the useful life of some of its computer equipment from five
to three years decreasing pre-tax income by $111,000. Management
believes that this revision better reflects the equipments' useful
life.
Other Expenses, Net
Other expenses, net, increased approximately $557,000, or 60%, during the
fiscal year ended June 28, 1998 compared to the fiscal year ended June 29,
1997. The increase was primarily attributable to a decrease in gains on the
sale of existing stores.
Net Loss
Net loss decreased approximately $544,000, or 72.9%, for the fiscal year
ended June 28, 1998 compared to the fiscal year ended June 29, 1997. The
decrease in net loss was primarily attributable to:
(a)a 12.7% increase in operating income,
(b) a 1.7% decrease in other expenses, net, offset by
(c) a 111.0% increase in state and federal income tax expense.
55
<PAGE>
52 Weeks Ended June 29, 1997 ("Fiscal Year 1997") Compared to 52 Weeks Ended
June 30, 1996 ("Fiscal Year 1996")
Great American-Owned and Franchise Store Activity
As of June 29, 1997, there were 91 Great American-owned stores and 233
franchised stores in operation. The store activity for fiscal year 1996 and for
fiscal year 1997 is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1997
-------------------------- --------------------------
Great American- Great American-
Owned Franchised Owned Franchised
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Stores open as of
beginning of the fiscal
year................... 108 215 104 225
Stores opened (including
relocations)........... 12 14 1 12
Stores closed (including
relocations)........... (10) (10) (10) (8)
Stores sold to
franchisees............ (9) 9 (12) 12
Stores acquired from
franchisees............ 3 (3) 8 (8)
--- --- --- ---
Stores open as of the
end of the year........ 104 225 91 233
Satellite locations as
of the end of the
year................... 11 28 9 30
--- --- --- ---
Total outlets as of the
end of the year........ 115 253 100 263
=== === === ===
</TABLE>
The above activity resulted in 5,661 Great American-owned equivalent store
weeks and 11,544 franchised equivalent store weeks during fiscal year 1996
compared to 5,161 Great American-owned equivalent store weeks and 11,858
franchised equivalent store weeks during fiscal year 1997.
Total Revenue
Total revenue decreased approximately $342,000, or 0.9%, during fiscal year
1997 compared to fiscal year 1996. Each of Great American's revenue sources is
discussed below:
. Cookie and beverage sales at Great American-owned retail stores
decreased approximately $2,344,000, or 9.5%, during fiscal year 1997
compared to fiscal year 1996. The decrease in revenue from Great
American-owned retail stores was attributable to
(a) an 8.8% decrease in Great American-owned equivalent store weeks and
(b) a 0.7% decrease in the average retail sales volume for Great
American-owned stores.
Based on those stores which were Great American-owned during the entire
1996 and 1997 fiscal years, sales volumes increased 1.3%. The change in
average store volume does not equal the change in sales volume from
stores that have been open at least two years due to differences in the
stores being compared as a result of opening, closing, selling, and
acquiring stores throughout the year.
. Batter sales to franchisees increased approximately $1,166,000, or
11.5%, during fiscal year 1997 compared to fiscal year 1996. The
increase in batter sales to franchisees was primarily attributable to
(a) an 8.8% increase in the volume of batter sold per franchised
equivalent store week and
(b) a 2.7% increase in franchised equivalent store weeks.
. Franchise royalties increased approximately $440,000, or 10.3%, during
fiscal year 1997 compared to fiscal year 1996. The increase in franchise
royalties was attributable to
(a) an increase in the average retail sales volume per franchised
store of 7.6% and
(b) a 2.7% increase in franchised equivalent store weeks.
Based on those stores which were franchised during the entire 1996 and
1997 fiscal years, management estimates franchisees' sales volumes
increased 5.5%.
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. Revenue from franchise license fees increased approximately $154,000, or
29.6%, during fiscal year 1997 compared to fiscal year 1996. Revenue
from selling existing and new stores to franchisees is summarized as
follows (rounded):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1996 1997
----------- -----------
<S> <C> <C>
Number of licenses sold to franchisees:
Existing stores............................... 9 12
New stores.................................... 11 12
Cash and notes from sale of existing stores..... $1,602,000 $2,045,000
Less: net book value of existing stores sold.... (741,000) (818,000)
---------- ----------
Revenue from sales of existing stores........... 861,000 1,227,000
---------- ----------
Revenue from license fees for new stores........ 275,000 300,000
Revenue from other fees......................... 21,000 75,000
---------- ----------
Revenue from license fees for new stores and
other fees..................................... 296,000 375,000
---------- ----------
Total........................................... 1,157,000 1,602,000
Less: Gain on sale of existing stores........... 636,000 927,000
---------- ----------
Revenue from franchise licensing fees........... $ 521,000 $ 675,000
========== ==========
</TABLE>
. Other revenue, net decreased approximately $49,000, or 42.6%, during
fiscal year 1997 compared to fiscal year 1996. The decrease in other
revenue, net was primarily attributable to
(a) a decrease in construction assistance revenue derived from
construction assistance performed by Great American for the
franchisees and
(b) an increase in batter discounts given to franchisees as a result
of increased batter sales to franchisees in fiscal year 1997.
Cost of Sales
Cost of sales decreased approximately $908,000, or 4.7%, during fiscal year
1997 compared to fiscal year 1996. The decrease in cost of sales was primarily
attributable to
(a) a decline in cookie and beverage sales due to less Great American-
owned equivalent store weeks, and
(b) a decrease in the cost of packaging and freight for Great
American-owned retail stores, offset by
(c) an increase in batter sales to franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $324,000, or 4.4%,
during fiscal year 1997 compared to fiscal year 1996. The decrease was
primarily attributable to an 8.8% decrease in Great American-owned equivalent
store weeks.
Other Retail Store Expenses
Other retail store expenses decreased approximately $297,000, or 22.6%,
during fiscal year 1997 compared to fiscal year 1996. The decrease in other
retail store expenses was primarily attributable to (a) a decrease in operating
supplies expense within Great American-owned stores in fiscal year 1997 due to
(1) the opening of 11 less Great American-owned stores in fiscal year 1997
versus fiscal year 1996 and (2) additional costs incurred in fiscal year 1996
related to the rollout of a new cookie merchandising program and (b) an 8.8%
decrease in Great American-owned equivalent store weeks, offset by (c) an
increase in point-of-sale marketing expenses in Great American-owned stores.
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Selling General and Administrative Expenses
Selling, general and administrative expenses increased approximately
$310,000, or 4.2%, during fiscal year 1997 compared to fiscal year 1996. This
increase was primarily attributable to:
(a) an increase in professional service fees,
(b) an increase in point-of-sale marketing expenses on behalf of
franchisee-owned stores, and
(c) an increase in salaries, offset by
(d) a decrease in travel expense, and
(e) a decrease in insurance costs.
Other Expenses, Net
Other expenses, net decreased approximately $484,000, or 8.7%, during fiscal
year 1997 compared to fiscal year 1996. The decrease was primarily attributable
to an increase in gains on the sale of existing stores.
Net Loss
Net loss decreased approximately $615,000, or 45.2%, for fiscal year 1997
compared to fiscal year 1996. The decrease in net loss was primarily
attributable to:
(a) an $877,000 increase in operating income, and
(b) a $193,000 decrease in other expenses, net, offset by
(c) a $455,000 increase in state and federal income tax expense.
52 Weeks Ended June 30, 1996 ("Fiscal Year 1996") Compared to 52 Weeks Ended
June 29, 1995 ("Fiscal Year 1995")
Great American-Owned and Franchise Store Activity
As of June 30, 1996 there were 104 Great American-owned stores and 225
franchised stores in operation. The store activity for fiscal year 1995 and for
fiscal year 1996 is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996
-------------------------- --------------------------
Great American- Great American-
Owned Franchised Owned Franchised
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Stores open as of
beginning of the fiscal
year................... 111 204 108 215
Stores opened (including
relocations)........... 16 11 12 14
Stores closed (including
relocations)........... (8) (11) (10) (10)
Stores sold to
franchisees............ (12) 12 (9) 9
Stores acquired from
franchisees............ 1 (1) 3 (3)
--- --- --- ---
Stores open as of the
end of the fiscal
year................... 108 215 104 225
Satellite locations as
of the end of the
fiscal year............ 12 36 11 28
--- --- --- ---
Total outlets as of the
end of the fiscal
year................... 120 251 115 253
=== === === ===
</TABLE>
The activity reflected above resulted in 5,879 and 5,661 Great American owned
equivalent store weeks and 10,716 and 11,544 franchised equivalent store weeks
during fiscal year 1995 and fiscal year 1996, respectively.
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<PAGE>
Total Revenue
Total revenue decreased approximately $1,024,000, or 2.5%, during fiscal year
1996 compared to fiscal year 1995, primarily attributable to the following:
Cookie and beverage sales at Great American-owned retail stores decreased
approximately $1,629,000, or 6.2%, during fiscal year 1996 compared to fiscal
year 1995. The decrease in revenue from Great American-owned retail stores was
primarily attributable to:
(a) an approximately 3.7% decrease in Great American-owned equivalent
store weeks and
(b) a decrease in the average retail sales volume for Great American-owned
stores. Specifically, the average retail sales volume for Great
American-owned stores decreased approximately 2.6% per equivalent
store week. Based on those stores which were Great American-owned
during the entire 1995 and 1996 fiscal years, sales volumes decreased
0.3%.
Batter sales to franchisees increased approximately $729,000, or 7.8%, during
fiscal year 1996 compared to fiscal year 1995. The increase in batter sales to
franchisees was primarily attributable to:
(a) an increase of approximately 7.7% in franchised equivalent store weeks
and
(b) a 0.1% increase in the volume of batter sold per franchised equivalent
store week.
Franchise royalties increased approximately $313,000, or 7.9%, during fiscal
year 1996 compared to fiscal year 1995. The increase in franchise royalties was
primarily attributable to:
(a) an increase of approximately 7.7% in equivalent franchised retail
store weeks and
(b) an increase in the average franchised equivalent store sales volume of
0.2%.
Based on those stores which were franchised during the entire 1995 and 1996
fiscal years, management estimates that franchisees' sales volumes did not
change materially.
Revenue from franchise license fees decreased approximately $391,000, or
25.3%, during fiscal year 1996 compared to fiscal year 1995. Revenue from
selling existing and new stores to franchisees is summarized below (rounded):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1995 1996
----------- -----------
<S> <C> <C>
Number of licenses sold to franchisees:
Existing stores.................................... 12 9
New stores......................................... 11 11
Cash proceeds from sale of existing stores........... $ 2,558,000 $1,602,000
Less: net book value of existing stores sold......... (1,346,000) (741,000)
----------- ----------
Revenue from sales of existing stores.............. 1,212,000 861,000
----------- ----------
Revenue from license fees for new stores............. 280,000 275,000
Revenue from other fees.............................. 56,000 21,000
----------- ----------
Revenue from license fees for new stores and other
fees................................................ 336,000 296,000
----------- ----------
Total............................................ 1,548,000 1,157,000
Less: Gain on sale of existing stores................ 912,000 636,000
----------- ----------
Revenue from franchise licensing fees................ $ 636,000 $ 521,000
=========== ==========
</TABLE>
Other revenue, net, decreased approximately $46,000, or 28.6%, during fiscal
year 1996 compared to fiscal year 1995. The decrease in other revenue, net, is
primarily attributable to:
(a) an increase in batter discounts taken by franchisees consistent with
the increase in batter sales to franchisees, partially offset by
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(b) an increase in sales of, miscellaneous supplies to franchise stores.
Cost of Sales
Cost of sales decreased approximately $452,000, or 2.3%, during fiscal year
1996 compared to fiscal year 1995. The decrease was primarily attributable to:
(a) a decline in retail cookie and beverages sales volume in Great
American-owned stores and
(b) an improvement in wholesale batter margins, partially offset by
(c) an increase in the volume of batter sold to franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $209,000, or 2.8%,
during fiscal year 1996 compared to fiscal year 1995. The decrease in retail
store occupancy costs was primarily attributable to:
(a) a decrease of approximately 3.7% in Great American-owned store weeks,
partially offset by
(b) an increase in depreciation due to Great American revising its
estimate of the useful life of selected leasehold improvements. Great
American began amortizing leasehold improvements using accelerated
methods over an average of eight years instead of using the straight
line method over an average of ten years. The effect of this change in
estimate was to increase fiscal year 1996 pre-tax loss by $214,000.
Management believes that this revision better reflects the leasehold
improvements economic useful life.
Other Retail Store Expenses
Other retail store expenses decreased approximately $223,000, or 14.5%,
during fiscal year 1996 compared to fiscal year 1995. The decrease in other
retail store expenses was primarily attributable to:
(a) a decrease in marketing expenses and
(b) a decrease in bank charges and supplies expense as a result of cost
containment efforts.
Selling, General and Administrative Expense
Selling, general and administrative expenses decreased approximately
$376,000, or 4.9%, during fiscal year 1996 compared to fiscal year 1995. The
decrease in selling, general and administrative expenses was primarily
attributable to:
(a) a reduction in administrative salaries and benefits,
(b) a decrease in professional service fees, including legal and
accounting services, and
(c) a decrease in various home office expenditures, including postage,
supplies, and training materials, partially offset by
(d) an increase in travel costs due to additional review of stores by
field supervisors.
Other Expenses, Net
Other expenses, net, increased approximately $231,000, or 4.4%, during fiscal
year 1996 compared to fiscal year 1995. The increase was primarily attributable
to:
(a) decreased gains on the sale of existing stores,
(b) a decrease in interest income due to lower average cash balances, and
(c) an increase in interest expense due to an increase in capital lease
obligations.
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Non-Recurring Litigation Charge
During the third quarter of fiscal year 1995, a non-recurring litigation
charge of $439,000 was recorded to cover a potential forthcoming judgment
against Great American in the Haagen-Burbank lawsuit. In June 1993, Great
American won a judgment for breach of written contract to a lease entered into
with a developer, Haagen-Burbank. On appeal, the Court of Appeals of the State
of California Second Appellate District overturned the jury's verdict and
directed the trial court to determine the amount of attorney fees and costs due
to Haagen-Burbank as the prevailing party in the litigation. Haagen-Burbank had
submitted to the court a request for legal fees totaling $439,000; however, on
April 27, 1995, the trial court entered a judgment of $417,985. On September
15, 1995, Great American paid $395,966 to Haagen-Burbank as settlement of the
judgment against Great American.
Net Loss
Net loss decreased approximately $469,000, or 25.6%, for fiscal year 1996
compared to fiscal year 1995. The decrease in net loss was primarily
attributable to:
(a) a $236,000 increase in operating income, and
(b) the occurrence of the non-recurring litigation charge in fiscal 1995,
offset by
(c) a $118,000 decrease in state and federal income tax benefit, and
(d) a $45,000 increase in other expenses, net.
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WHERE YOU CAN FIND MORE INFORMATION
We have not been, prior to the effectiveness of this registration statement,
required to file reports and other information with the Commission under the
Exchange Act. We have agreed that, whether or not we are required to do so by
the rules and regulations of the Commission, we will deliver to The Bank of New
York, as trustee under the indenture, to each holder of notes and to each
prospective purchaser of notes identified to us by a placement agent for the
offering in August 1998, annual and quarterly financial statements
substantially equivalent to financial statements that would be included in
reports filed with the Commission, if we were subject to the reporting and
other informational requirements of the Exchange Act.
We have filed with the Commission a registration statement on Form S-4 under
the Securities Act, with respect to the notes offered in this prospectus. This
prospectus, which forms a part of the registration statement, does not contain
all of the information in the registration statement and the exhibits to it,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to Mrs. Fields' Holding
and the notes offered in this prospectus, we refer you to the registration
statement. With respect to any statements made in this prospectus concerning
the provisions of any documents, we refer you to the copy of the document filed
as an exhibit to the registration statement otherwise filed with the
Commission.
Upon the effectiveness of the registration statement, we will become subject
to the informational requirements of the Exchange Act, and will file reports
and other information with the Commission. You may read and copy the
registration statement, the exhibits forming a part of it and the reports and
other information filed by Mrs. Fields' Holding with the Commission in
accordance with the Exchange Act, 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. You may obtain copies
of all or any portion of the material 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 is available electronically on the
Commission's home page on the Internet (http://www.sec.gov).
If we are not required to be subject to the reporting requirements of the
Exchange Act in the future, we will be required under the indenture, to furnish
the holders of the notes with
(1) 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, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the financial
information by our independent public accountants and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K, in each case, within the time periods
specified in the Commission's rules and regulations.
This prospectus incorporates documents by reference that are not presented in
or delivered with this prospectus. These documents are available upon request
from Michael Ward, Esq., Mrs. Fields' Holding Company, Inc., 2855 East
Cottonwood Parkway, Suite 400, Salt Lake City, Utah 84121, (801) 736-5600. In
order to ensure timely delivery, any request should be made by , 1999.
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BUSINESS
General
Mrs. Fields is one of the largest retailers in the premium snack-food
industry, with cookies and pretzels as its major product lines. Mrs. Fields is
the largest retailer of baked on-premises cookies and the second largest
retailer of baked on-premises pretzels in the United States. Mrs. Fields is one
of the most widely recognized and respected brand names in the premium cookie
industry. Based on a 1994 study that we commissioned by Corey, Canapary &
Galanis, 94% of consumers in the study were aware of the Mrs. Fields brand.
Twenty percent named our brand without prompting, and 74% knew of our brand
when prompted. Mrs. Fields 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, Pretzel Time, Pretzelmaker
and H&M, which was formerly the largest Pretzel Time franchisee. As of July 3,
1999, our retail network consisted of 1,493 locations, of which 986 were cookie
stores and 507 were pretzel stores. Of the total 1,493 stores, 492 were
company-owned and 1,001 were franchised or licensed. Mrs. Fields stores average
approximately 600 to 700 square feet in size and are located predominantly in
shopping malls. Mrs. Fields, through licensed locations, also operates kiosks
and carts at airports, universities, stadiums, hospitals and office building
lobbies. Mrs. Fields' objective is to increase sales and profitability by
focusing on its continuing company-owned stores. As a result, by the end of
fiscal year 2000, Mrs. Fields plans to close or franchise approximately 40
company-owned cookie stores and 7 company-owned pretzel stores that do not meet
financial and geographical criteria established by management after giving
effect to the acquisitions of Great American and the capital stock or stores of
several of its franchisees. For the 52 weeks ended January 2, 1999, we
generated pro forma net revenue and EBITDA of $191.2 million and $20.1 million,
respectively. Actual net revenues and EBITDA for the 53 weeks ended January 3,
1998 was $134.4 million and $18.6 million, respectively. For the 26 weeks ended
July 4, 1998 and July 3, 1999, Mrs. Fields' Holding generated proforma net
revenue and EBITDA of $92.6 million and $10.2 million, and actual net revenue
and EBITDA of $84.2 million and $10.2 million, respectively.
Cookies
We operate and franchise 986 retail cookie stores: 574 under the Mrs. Fields
brand, 105 under the Original Cookie brand and 307 under the Great American
brand. As a result of the acquisition of Great American, Mrs. Fields has cookie
stores in 48 states, with Great American stores concentrated in the
southeastern and south central states and Mrs. Fields and Original Cookie
stores strongly represented in the western, midwestern and eastern states.
There is little overlap between Mrs. Fields and Great American stores, with a
dual presence in 9 malls. Management believes that Mrs. Fields is positioned in
the premium quality, baked on-premises segment of what management believes to
be the approximately $12 billion U.S. cookie industry. Mrs. Fields 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 or refrigerated 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, Mrs. Fields 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. one of the predecessors of Mrs. Fields, 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, Mrs.
Fields Inc. experienced financial difficulty as a result of excessive debt
levels, poor real estate locations, and a recessionary retailing environment.
In connection with a financial restructuring by its lenders, Mrs. Fields'
Holding put a new management team 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 Mrs. Fields, which
involved the following key elements:
(1) identifying stores to close or franchise,
(2) introducing company-wide operating procedures to improve store income
before interest, taxes and other expenses,
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(3) developing a marketing strategy and promotional calendar to turn
around sales of stores that have been open at least two years, and
(4) improving employee morale through selective new senior hires,
increased training and various incentive plans.
Mrs. Fields reinvested the savings from the improved store operations in
marketing and other measures designed to improve sales of stores that have been
open at least two years.
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of Mrs. Fields Inc., Original Cookie and Hot
Sam by Mrs. Fields' Holding, a subsidiary of Capricorn. As of January 2, 1999,
Capricorn had invested more than $28 million in Mrs. Fields through Mrs.
Fields' Holding. Capricorn retained Mr. Hodges as Chief Executive Officer of
Mrs. Fields.
Great American, incorporated in 1977, is a leading operator and franchisor of
mall-based specialty retail cookie outlets, including full-size stores and
satellite sites, consisting of carts, wagons and kiosks. As of July 3, 1999,
Great American had 307 in-line stores, including 100 Great American-operated
and 207 franchised retail units, operating primarily in the southeastern and
south central United States. Great American derives its revenue principally
from:
(1)the sale of cookies and beverages at Great American-operated stores,
(2)the sale of proprietary batter to franchised stores, and
(3) the receipt of royalty payments based on gross sales of franchisees.
In addition, Great American generates revenues from initial franchise fees
and the sale of existing Great American-operated stores to franchisees.
Great American outlets sell a variety of cookies and brownies, including
"cookie cakes," as well as assorted soft drinks, frozen drinks, coffee and tea.
Cookie cakes are extra-large cookies, decorated with customer-selected
personalized messages, for special occasions. Although cookie sales are
generally the result of impulse buying, we believe that cookie cakes, which are
often purchased as gifts for special occasions, differentiate Great American
from other specialty cookie retailers by making Great American stores
destination outlets.
Pretzels
Mrs. Fields operates and franchises 507 retail pretzel stores: 235 under the
Pretzel Time brand, 56 under the Hot Sam brand and 216 under the Pretzelmaker
brand, 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 year 1998,
achieved higher average revenue for our continuing company-owned stores than
Hot Sam stores ($277,000 versus $232,000). As a result, Mrs. Fields intends to
continue converting its continuing company-owned and to-be-franchised Hot Sam
stores to Pretzel Time stores, which it believes will result in an increase in
net sales, sales from stores that have been open at least two years, and income
from store operations.
Management believes that retail pretzel stores have similar operating
characteristics to retail cookie stores that will permit us to offer our
products with those of other well-known brand names. In addition, the retail
pretzel business has grown more quickly than the retail cookie business in
recent years. Hot Sam was acquired by Mrs. Fields in connection with the
acquisition of Original Cookie. In order to expand its presence in the retail
pretzel industry, Mrs. Fields acquired the business of H&M and common stock of
Pretzel Time and Pretzelmaker.
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Business Strategy
Mrs. Fields' Holding's objective is to increase sales and profitability at
its continuing company-owned and franchised stores by implementing the key
elements of its long-term business strategy. The percentage change in sales
from stores that have been open at least two years was a negative 1.6% for the
fiscal year ended January 2, 1999 compared to a positive 0.6% for the fiscal
year ended January 3, 1998 and a negative 0.4% for the 26 weeks ended July 3,
1999 compared to a negative 1.5% for the same period of 1998. Net franchising
and licensing revenues increased by 29.9% for the fiscal year ended January 3,
1998 over the fiscal year ended December 28, 1996, by 113.3% for the fiscal
year ended January 2, 1999 over the fiscal year ended January 3, 1998 and by
235.2% for the 26 weeks ended July 3, 1999 compared to the same period of 1998.
The key elements of Mrs. Fields' Holding's business strategy are as follows:
. Enhance Quality of Company-Owned Store Base. Since current management
assumed responsibility in 1994, we have focused on closing and
franchising company-owned stores that do not meet our financial and
geographical criteria. From June 1994 through January 2, 1999, Mrs.
Fields closed 178 Mrs. Fields brand stores and franchised an additional
136 Mrs. Fields brand stores. We have targeted 129 additional stores
that sell our various products to be either closed or franchised by the
end of 2000. These measures are expected to result in enhanced income
before interest, taxes and other expenses, as unprofitable stores are
closed and other stores are converted into franchises, with the result
of increasing royalty payments and eliminating administrative and other
costs of Mrs. Fields associated with those stores.
. Improve Productivity of Continuing Company Stores. We have embarked on a
program to improve the performance of our continuing company-owned
stores by:
(1) expanding product offerings to include breakfast items, such as
muffins, croissants and bagels, and low-fat cookies, brownies
and muffins,
(2) raising the average sales by tying sales of products together,
(3) promoting catering services by individual stores to corporate
customers,
(4) decreasing store expenses by reducing waste in the cookie baking
process and controlling the cost of ingredients and supplies,
(5) improving merchandising by enhancing product presentation and
refining selection of products and
(6) 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, and that during fiscal
year 1998, Mrs. Fields brand stores achieved higher average revenue
($397,000 versus $276,000) for the continuing company-owned Mrs. Fields
stores than Original Cookie stores. As a result, we intend to continue
selectively converting our continuing company-owned and to-be-franchised
Original Cookie stores to Mrs. Fields brand stores, which we believe
will result in an increase in net sales, sales from stores that have
been open at least two years, and income from store operations. We will
also test the success of converting selected Great American company-
owned stores to Mrs. Fields brand stores. In addition, any Great
American franchisee will have the option to convert to Mrs. Fields brand
stores, at its sole expense, in areas where there is no overlap with
existing Mrs. Fields brand franchise stores. Original Cookie stores
represent 31% and Great American stores represent 29% of all company-
owned cookie stores. In addition, we intend to further capitalize on the
Mrs. Fields brand name by:
(1) further developing and expanding the ways we distribute our
products, including kiosks and carts in malls, airports,
convention centers, office buildings, street fronts and sports
complexes,
(2) increasing the emphasis on the mail order business, and
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<PAGE>
(3) developing and capitalizing on licensing opportunities, such as
linking sales of the Mrs. Fields products with prominent names
in the retailing and food service industry, expanding licensing
agreements with our existing licensees, entering into new
licensing agreements with food service operators and developing
product line extensions, such as frozen cookie dough and in-
store bakery products to be sold in supermarkets and other
convenient locations.
. Develop Great American Brand Name. Management believes that the Great
American brand name has high consumer awareness in the southeast United
States. We intend to build on the Great American brand by continuing to
franchise additional Great American stores and by testing the success of
converting selected company-owned Original Cookie stores into Great
American stores.
. Capitalize on the Strong "Pretzel Time" Brand Name. Through the
acquisition of Pretzel Time, we have obtained the use of the "Pretzel
Time" brand name, one of the leading brand names in pretzel retailing.
Management believes that there are significant opportunities to improve
its existing Hot Sam store operations by continuing to convert our
continuing company-owned and to-be-franchised Hot Sam stores to Pretzel
Time stores. During fiscal year 1998, Pretzel Time stores achieved
higher average revenue per continuing company-owned store and store
contribution than Hot Sam stores. Hot Sam stores represent 38% of all
company-owned pretzel stores. Management believes that the conversion to
the Pretzel Time name will result in an increase in net sales, sales
from stores that have been open at least two years, and income from
store operations for Mrs. Fields pretzel business. In addition, we
believe there are significant new Pretzel Time franchising
opportunities.
. Develop New Company-Owned and Franchised Stores. We plan to build and
franchise new stores, as well as carts and kiosks, in existing and new
markets. We have identified over 100 mall and non-traditional locations,
such as amusement parks and other entertainment centers, that we believe
would be ideal for cookie and pretzel stores. By the end of fiscal year
2000, we intend to franchise approximately 28 existing cookie and 8
existing pretzel stores. Beginning in fiscal year 1999, we intend to add
approximately 20 new company-owned stores per year and to franchise
approximately 38 new cookie and 36 new pretzel stores per year. In
addition to pursuing new store development opportunities within the
United States, we plan to grow internationally by expanding our
franchise operations. As of July 3, 1999, there were 125 franchised Mrs.
Fields and Pretzelmaker brand stores open internationally.
. Realize Purchasing and Overhead Cost Savings. As a result of the
acquisition of Great American and the capital stock or stores of several
of its franchisees, we expect to realize significant cost savings from
the elimination of duplicative administrative functions, the
consolidation of management information systems and the reduction of the
costs of food and other supplies as a result of our enhanced purchasing
power with vendors. Management believes that incremental pre-tax cost
savings would have totaled approximately $4.1 million for the year ended
January 2, 1999. The savings include $2.2 million of savings on
administrative and other costs associated with stores of Mrs. Fields and
$1.9 million of cost savings related to one-time expenses of eliminating
multiple headquarter facilities.
. Pursue Further Strategic Acquisitions of Related Businesses. We intend
to selectively pursue strategic acquisitions, in addition to the
acquisition of Great American, the businesses and stores of several of
its franchisees and other recent acquisitions, in order to expand
geographic presence and achieve efficiencies from consolidating and
reducing administrative and other costs shared by stores. Our management
has demonstrated its ability to identify and integrate new businesses
through acquisitions of the cookie and pretzel businesses of Original
Cookie, Hot Sam, Pretzel Time and H&M in 1997.
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Product Offerings
Our product offerings consist primarily of:
(1)fresh baked cookies, brownies, muffins, and other baked goods and
(2) fresh baked sweet dough and "Bavarian" style pretzels.
During fiscal year 1998, pro forma for the acquisition of Great American
stock and stores of several of its franchisees, our percentage of revenues by
product category consisted of the following:
<TABLE>
<S> <C>
Cookies and Brownies..................................................... 56%
Pretzels................................................................. 21%
Beverages................................................................ 22%
Other.................................................................... 1%
</TABLE>
Cookies. The primary products of our 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, frozen drinks and other beverages. Mrs. Fields stores,
Original Cookie stores and Great American stores also sell decorated cookie
cakes, 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. Based on pounds of batter shipped, cookie cakes
constitute the second largest volume product of Great American stores. We plan
to utilize Great American's superior expertise in baking and marketing cookie
cakes to enhance sales of the existing cookie cake products in Mrs. Fields and
Original Cookie 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 Mrs.
Fields. Great American stores use refrigerated batter that is shipped daily
from the Atlanta production facility. 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, Mrs. Fields 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. We maintain a product development department which
continually creates and tests new products to attract new customers and
revitalize the interest of current customers. Once a new product is identified,
we develop prototypes to determine the initial formula. 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. We continually review our
selection of products in an effort to maximize daytime offerings and
profitability. For example, new muffin flavors, bagels, croissants and a
revitalized coffee program were recently introduced to enhance morning
offerings, as cookies begin selling primarily after mid-day.
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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 our store locations. In the
pretzel business, Mrs. Fields 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 July 3, 1999, Mrs. Fields' store portfolio consisted of 492
company-owned stores, 705 domestic franchised locations, 125 international
franchised locations and 171 licensed locations. By brand, the stores are
distributed as follows:
<TABLE>
<CAPTION>
Company-Owned
----------------------------
To Be To Be Domestic International
Continuing Closed Franchised Franchised Franchised Licensed Total
---------- ------ ---------- ---------- ------------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Mrs. Fields............. 131 2 6 190 86 159 574
Original Cookie......... 86 7 12 -- -- -- 105
Great American.......... 59 31 10 207 -- -- 307
--- --- --- --- --- --- -----
Cookie Subtotal........ 276 40 28 397 86 159 986
--- --- --- --- --- --- -----
Pretzel Time............ 86 2 -- 147 -- -- 235
Hot Sam................. 46 2 8 -- -- -- 56
Pretzelmaker............ 1 3 -- 161 39 12 216
--- --- --- --- --- --- -----
Pretzel Subtotal....... 133 7 8 308 39 12 507
--- --- --- --- --- --- -----
Totals................ 409 47 36 705 125 171 1,493
=== === === === === === =====
</TABLE>
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As of July 3, 1999, Mrs. Fields' domestic stores were located in 48 states.
The following table represents states with ten or more outlets:
Store Geography List
<TABLE>
<CAPTION>
% of Domestic
Company- Retail
State Owned Franchised Licensed Total Outlets
- ----- -------- ---------- -------- ----- -------------
<S> <C> <C> <C> <C> <C>
California..................... 70 89 17 176 12.90%
Texas.......................... 43 57 5 105 7.70%
Florida........................ 20 42 14 76 5.57%
New York....................... 33 23 16 72 5.28%
Ohio........................... 49 9 9 67 4.91%
Illinois....................... 28 20 11 59 4.33%
Georgia........................ 14 27 3 44 3.23%
Michigan....................... 27 16 -- 43 3.15%
Missouri....................... 3 38 1 42 3.08%
Pennsylvania................... 16 12 13 41 3.01%
Virginia....................... 20 17 3 40 2.93%
Colorado....................... 3 23 10 36 2.64%
Arizona........................ 12 17 4 33 2.42%
North Carolina................. 6 22 3 31 2.27%
New Jersey..................... 10 12 8 30 2.20%
Indiana........................ 14 10 6 30 2.20%
Utah........................... 7 20 1 28 2.05%
Iowa........................... 3 24 -- 27 1.98%
Washington..................... 9 17 -- 26 1.91%
Louisiana...................... 12 10 2 24 1.76%
Wisconsin...................... 16 7 -- 23 1.69%
Tennessee...................... 2 19 2 23 1.69%
Minnesota...................... 3 17 3 23 1.69%
Massachusetts.................. 7 8 7 22 1.61%
Connecticut.................... 7 10 5 22 1.61%
Alabama........................ -- 19 3 22 1.61%
Maryland....................... 10 8 3 21 1.54%
Nevada......................... 3 9 8 20 1.47%
South Carolina................. 9 6 3 18 1.32%
Oklahoma....................... 5 6 2 13 0.95%
Nebraska....................... 4 8 -- 12 0.88%
Kentucky....................... 3 8 1 12 0.88%
Kansas......................... 2 9 1 12 0.88%
West Virginia.................. 4 6 1 11 0.81%
</TABLE>
Configurations. We have 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, we
have developed other formats intended to extend our 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, Original Cookie or Great American 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
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feet, and the typical company-owned store is about 600 to 700 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.
Mrs. Fields and its franchisees and licensees also operate cookie kiosks and
carts in a number of malls on a year-round basis. Kiosks have 100 to 250 square
feet of retail space, supported by off-site storage and preparation space.
Carts range in size from 30 to 92 square feet. Currently only the Great
American kiosks have self-contained baking ovens. Because of their small size,
carts and other kiosks do not have baking equipment, and are supplied cookie
products by a fully-equipped store usually located in the same mall. We plan 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. We see expansion
opportunities from the use of carts, which create incremental revenue at a
relatively low cost.
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 Mrs. Fields. The store designs are bright with high-profile
trademark identity. All products are baked throughout the day on the premises
with ovens located in full view of the customer to support the "fresh-baked"
image.
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 product'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, Mrs.
Fields 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 Mrs. Fields stores are located in shopping malls, with the
vast majority of Mrs. Fields brand stores in malls falling into the "A" and "B"
classifications, or the better-quality malls in the country. As of July 3,
1999, Mrs. Fields, 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
. Population having a median family income greater than $50,000
. Generally supported by national fashion anchor tenants
. Located to minimize competition from other malls
Great American stores are located primarily in high-traffic "B" malls.
Marketing and Advertising. Mrs. Fields' in-house marketing department and an
outside promotional agency market products emphasizing product sampling, local
store marketing and brand name identification. We advertise at the store level,
using the aroma of fresh-baked cookies and the attractive arrangement of
finished products to create a store ambiance that is conducive to sales.
Recently we experimented with an advertising campaign with nationally televised
commercials during peak holiday periods. We cultivate local
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customer loyalty by offering regular 20% discounts to employees in malls where
stores are located and occasional other discounts. Historically we have spent
relatively little on paid advertising, relying mainly on in-store signage,
promotions and the public relations of Debbi Fields, who makes store visits
and local media appearances throughout the country and internationally for
Mrs. Fields. In addition to posters and display of products, we promote
products by offering special packaging and selling other promotional items. A
recent promotion for Mrs. Fields' 20th anniversary featured a tie-in with the
popular Peanuts characters from the syndicated comic strip, a sweepstakes, and
gifts with purchases. Mrs. Fields 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. We also promote
our products as gifts, particularly at holiday time.
Great American's marketing strategy has emphasized strong merchandising of
its products and the use of proactive sales techniques, including the free
sampling of products and other methods intended to increase the size of
customer orders.
Mail Order Business. Our 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
$5.2 million in revenues during fiscal year 1998. We believe that there is
significant potential in the mail order business and are developing this
division by targeting both corporate customers and individuals with a history
of purchases at Mrs. Fields stores. Sales from the mail order division for the
fiscal year 1999 have increased approximately 9.4% over sales for the prior
fiscal year.
Customer Profile. We believe that our 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. We believe
that this demographic profile remains valid.
Seasonality. Our sales and profitability in both the cookie business and the
pretzel business are subject to seasonal fluctuation and are traditionally
higher during the Thanksgiving and Christmas holiday season and other gift-
giving holidays due to increased mall traffic and holiday gift purchases.
Supplies and Distribution
Ingredients and Supplies. We rely primarily on outside suppliers and
distributors for the ingredients used in our products and other items used in
our stores. Mrs. Fields stores receive frozen products, made according to
proprietary recipes of Mrs. Fields, from our primary supplier, Pennant Food
Corp. Pennant uses stringent quality controls in testing ingredients and
manufacturing. Products are not released for distribution unless they pass all
quality control steps, including an evaluation of the finished baked product.
Pennant's contract for making frozen products for Mrs. Fields expires on
December 31, 2000 and is renewable every three years at the option of
Mrs. Fields. Pennant supplies the majority of Mrs. Fields and Original Cookie
frozen bakery product. J&J Foods, Inc. supplies the majority of the frozen
pretzel dough to Hot Sam Stores. We have 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 are ordered from distributors by either Mrs.
Fields or the franchisee and are directly shipped to the store. We sell
exclusively Coca Cola soft drinks in Mrs. Fields, Original Cookie, Pretzel
Time, Hot Sam and Great American stores under agreements with Coca-Cola USA
Fountain.
Great American stores receive "ready to bake" refrigerated batter from a
batter facility in Atlanta, which Mrs. Fields acquired in the Great American
acquisition. The batter, which has a shelf life of about 90 days, is stored at
the batter facility for an average of one to three weeks, depending on demand,
before being shipped. Most other supplies are ordered from third-party vendors
by Great American or the franchisee and are shipped directly to the store.
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Distribution. Regional distributors handle distribution of perishable and
non-perishable items to Mrs. Fields and Original Cookie stores weekly. Regional
distributors own and maintain all of the inventory, but are authorized to
purchase inventory items only from authorized vendors at prices that have been
negotiated by Mrs. Fields. Hot Sam distributes perishable and non-perishable
items weekly to stores using seven different regional distribution companies.
Pretzel Time franchisees use a variety of distributors. Mrs. Fields ships
equipment related items, including smallwares, equipment and oven parts,
directly from public warehouses. Great American stores receive batter from the
Atlanta batter facility by refrigerated common carrier.
Management Information Systems
We have made a substantial investment in developing our point-of-sale system,
which gathers information transmitted daily to corporate headquarters from most
of our Mrs. Fields brand continuing company-owned stores. We plan to install
our upgraded back-office system, along with the point-of-sale registers and
Pentium computers, in our continuing company-owned Original Cookie stores, Hot
Sam stores, Pretzel Time stores and selected Great American stores by November
1999.
We are currently replacing our sales collection systems with software and
hardware that is Year 2000 compliant. Replacement of the plant production and
distribution software was completed in the first half of 1999 at an estimated
cost of $10,000. For more information on our information technology, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
Management has assessed Year 2000 issues with respect to its significant
vendors and financial institutions as to their compliance plans and whether any
Year 2000 issues will impede the ability of our vendors to continue providing
goods and services to us. See "Risk Factors--failure in Year 2000 compliance
could disrupt our operations."
Store Management
Management Structure. We monitor 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. We plan to consolidate 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 four regional vice-presidents of
store operations. The field staff is also responsible for introducing new
products and processes to the stores, ensuring proper implementation and
quality control.
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.
We believe that our incentive and other programs for management have achieved a
strong retention rate for managers. Without giving effect to the acquisition of
Great American, 72% of Mrs. Fields' district sales managers have been with Mrs.
Fields for at least 4 years (67% for over 5 years), and 51% of store managers
have been with Mrs. Fields for at least 4 years (40% for over 5 years).
Training. We believe store managers are a critical component in creating an
effective retail environment, and accordingly have developed ongoing programs
to improve the quality and effectiveness of our store managers and to increase
retention rates. New store managers are required to attend a two-week training
program at our Salt Lake City training facility and ongoing training courses in
new products, standards, and procedures are available throughout the year to
all of our personnel. New franchisees and store managers of Great American are
required to attend a one-week training program at Great American's Atlanta
training facility, known as "Cookie University." In addition, training courses
are available throughout the year to all Great American and franchisee
personnel.
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Franchise Operations
In accordance with our business strategy, we have been selling, and expect to
continue to sell, selected company-owned stores to franchisees to reduce costs,
increase profitability and provide for liquidity and development of additional
stores in the future. We are also actively seeking to franchise new stores.
Cookie Business. Each franchisee pays Mrs. Fields 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. However, the cost of opening a new store can vary based on
individual operating and location costs. We also charge 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 us of 6% of the franchised store's annual gross sales and an
advertising fee of 1% of annual gross sales. We do not currently anticipate
franchising Original Cookie stores.
Franchisees come from a wide variety of business backgrounds and bring with
them different operating styles and business objectives. Among our franchisees
are full-time store operators, passive investors, retired professionals and
people seeking a second source of income. The majority of Mrs. Fields
franchisees own one store. As of January 2, 1999, the 22 largest Mrs. Fields
franchisees operated 164 stores, and the largest Mrs. Fields franchisee
operated 14 stores.
Each Great American franchisee pays an initial licensing fee of $25,000 per
store and is responsible for funding the building-out of the new store and
purchasing initial batter inventory and supplies, at a total cost of
approximately $164,000, including the initial licensing fee. However, the cost
of opening a new store can be significantly higher for franchisees who purchase
existing company-owned stores and otherwise varies based on individual
operating and location costs. We also charge franchisees a fee to purchase
equipment and to provide other assistance in helping the franchisee to set up
operations.
Pretzel Business. We do not franchise Hot Sam stores. We are a franchisee of
87 Pretzel Time stores, with rights to sub-franchise, if desired. Each
franchisee pays Pretzel Time an initial licensing fee of $25,000 for a new
Pretzel Time store location and is responsible for funding the building-out of
the new store and supplies, at a total cost of approximately $190,000 to
$240,000, including the initial franchise fee. However, 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. We have been successful in recruiting
franchisees and completing franchise transactions and believe we will continue
to realize significant cash flows from franchising by:
(1) emphasizing the use of proprietary dough that minimizes product quality
issues and ensures a consistent product across all outlets,
(2) frequent quality, service and cleanliness evaluations of franchised
stores by operations support staff, and
(3) initial and continuing training of franchisees to improve their
financial and retail sales skills.
We believe our franchisees are a critical component in creating an effective
retail environment, and accordingly we make our ongoing programs available to
franchisees to improve their quality and effectiveness. Franchisees are
required to attend a two-week training program at our Salt Lake City training
facility and ongoing training courses in new products, standards, and
procedures are available throughout the year to all franchisee personnel.
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Licensing
In the past few years, we utilized a "branding" strategy which allows a
licensee the right to use the Mrs. Fields name (which is a registered
trademark) from which a licensee can capitalize on the highly-recognized Mrs.
Fields brand to build traffic, expand sales, improve market share, and to
increase profits through cultivating different ways of distributing our
products. The following is a comprehensive list of branding strategies, with
examples of current licensees within Mrs. Fields' system:
Concept Licensing. We have developed a licensing program for non-mall retail
outlets that enables us to enter difficult-to-reach markets and facilitate
brand exposure through "presence" and "prestige" marketing. Our licensees
duplicate the Mrs. Fields store concept and purchase dough from our various
distributors. Several of these licensees are contract management companies that
manage and operate food service in host locations. Mrs. Fields' licensees
include Host Marriott, which has a non-exclusive license to sell our product in
airports and travel plazas from which we receive a royalty on product sold,
ARAMark, which sells our product in stadiums and convention centers and Holiday
Inn Worldwide, which sells our product in hotels.
Retail Licensing. We plan to capitalize on our 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
our retail cookie store concept. A current example is Creative Innovations,
LLC, which has an exclusive 5 year license with 5 consecutive 5 year renewal
options to manufacture and sell, under our registered trademarks, a dry mix for
cookies, brownies and muffins in North America. Creative Innovations pays a
royalty on each case of product sold. Another licensee is Wham-O, Inc., which
has an exclusive 5 year license with one 5 year renewal option to market the
Mrs. Fields Baking Oven for children which is sold in most toy stores and
through mass merchandisers.
Supply Licensing. We currently have arrangements with United Airlines and TWA
under which our mail order division sells cookies to the airlines and allows
the airlines to promote the Mrs. Fields brand and products to their first-class
customers. We are pursuing similar relationships to compete with other
manufacturers' brands selling in this business.
Competition
We compete for both leasing opportunities and customers with other cookie and
pretzel retailers, as well as other confectionery, sweet snack and specialty
food retailers, including cinnamon rolls, yogurt, ice cream, baked goods and
candy shops. The specialty retail food and snack industry is highly competitive
with respect to price, service, location and food quality, and there are many
well-established competitors with greater resources than those of Mrs. Fields.
We compete with these retailers on the basis of price, quality, location and
service. We face competition from a wide variety of sources, including such
companies as Cinnabon, Inc., TCBY Yogurt Inc., Auntie Anne's Soft Pretzels, and
Baskin-Robbins 31 Flavors.
Properties
As of July 3, 1999, we leased 796 retail stores, of which 304 were subleased
to franchisees under terms which cover all obligations of Mrs. Fields
thereunder. Under our franchise agreements, we have rights to gain control of a
retail site in the event of default under the lease or the franchise agreement.
Most of our operating leases provide for the payment of lease rents plus real
estate taxes, utilities, insurance, common area charges and 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--We may not be
able to obtain leases in the future; if we do not obtain leases in high quality
shopping malls at reasonable rents", we may not be able to conduct our business
at a profit and "--We have continuing obligations under real estate leases; if
we close an unprofitable store but must still make lease payments on it, we
will lose money."
We lease 31,000 square feet of office space in Salt Lake City, Utah, which we
use as our corporate headquarters. We also lease approximately 20,000 square
feet of office space in Salt Lake City, Utah for our
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product development, training and mail order operations. We own substantially
all of the equipment used in both of these facilities and in company-owned
retail outlets. Great American owned its headquarters and batter production
facility, located in a building of approximately 28,000 square feet in Atlanta,
Georgia. We acquired this facility in the acquisition of Great American. Great
American's headquarters have been transferred to Salt Lake City since the
acquisition of Great American. The batter facility remains in Atlanta.
Employees
As of July 3, 1999, we had approximately 4,086 employees in company-owned
stores, of whom approximately 802 were store managers and assistant store
managers and 3,284 were part-time sales assistants. The typical Mrs. Fields
store employs 5 to 13 employees. During the period from November through
February, we may hire as many as 750 additional part-time employees to handle
additional mall traffic. Most employees are paid on an hourly basis, except
store managers. Our employees are not unionized. We have never experienced any
significant work stoppages and believe that our employee relations are good.
Many of our employees are paid hourly rates based upon the federal minimum
wage. The federal minimum wage increased from $4.75 to $5.15 on September 1,
1997. As of July 3, 1999, 851 of our 4,086 employees in company-owned stores
earned the federal minimum wage. The September 1, 1997 minimum wage increase is
expected to negatively impact our labor costs, increasing wages by
approximately $354,000 annually, but management believes this impact can be
negated in the long term through increased efficiencies in our operations and,
as necessary, through retail price increases.
Trademarks
Mrs. Fields is the holder of numerous trademarks that have been federally
registered in the United States and in other countries located throughout the
world. Mrs. Fields is a party to disputes with respect to trademarks, none of
which, in the opinion of management of Mrs. Fields' Holding, is material to
Mrs. Fields' Holding's business, financial condition and results of operations.
We currently hold 52 trademarks that are federally registered in the United
States and 141 trademarks that are registered in 48 countries outside the
United States. Our trademarks consist of various brand and product names and
logos. Trademarks are registered under United States laws for periods of 7 to
10 years and in other countries for periods of 7 to 20 years, and at any time,
we may have trademarks whose registration will soon expire and must be renewed.
Under our license agreements, our licensees receive the rights to use our
recipes and our registered trademarks. We view our trademarks and the ability
to license them to third parties as some of our most valuable assets.
Legal Proceedings; Government Regulation
In the ordinary course of business, we are involved in routine litigation,
including franchise disputes and trademark disputes. Except as described below,
we are not a party to any legal proceedings which, in the opinion of management
of Mrs. Fields' Holding, after consultation with legal counsel, is material to
our business, financial condition and results of operations.
In connection with the initial discussions relating to the acquisition of
Great American, on or about September 12, 1997, 9 franchisees of Great American
filed an action challenging a possible acquisition of Great American by Mrs.
Fields. Under settlement agreements and waivers with most Great American
franchisees, those Great American franchisees released all claims with respect
to this litigation, and it was a condition of the acquisition of Great American
that this litigation be dismissed with prejudice. A motion dismissing the
litigation with prejudice was filed on August 24, 1998. See "The Transactions--
The Great American Transactions."
Our 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.
75
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding the executive officers
and directors of Mrs. Fields' Holding as of October 1, 1999. The directors are
also directors of Mrs. Fields.
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Larry A. Hodges......... 50 Director, President and Chief Executive Officer
Pat W. Knotts........... 44 Senior Vice President of Operations
Garry Remington......... 47 Senior Vice President of Real Estate
Mark S. Tanner.......... 45 Senior Vice President and Chief Financial Officer
Michael R. Ward......... 41 Vice President, General Counsel and Secretary
Herbert S. Winokur,
Jr..................... 55 Chairman of the Board of Directors
Richard Ferry........... 61 Director
Debbi Fields............ 43 Director
Nat Gregory............. 50 Director
Walker Lewis............ 54 Director
Peter Mullin............ 58 Director
Gilbert Osnos........... 69 Director
</TABLE>
Mr. Hodges has been President and Chief Executive Officer of Mrs. Fields Inc.
and Mrs. Fields since March 1994, and a Director of Mrs. Fields' Holding and
Mrs. Fields since April 1993. From 1992 to 1994, Mr. Hodges was the Chief
Executive Officer of Food Barn Stores, Inc. (Kansas City, Missouri). Earlier
Mr. Hodges was a consultant to various manufacturers and retailers. For 25
years, Mr. Hodges was with American Stores Company where he served as President
of two of its subsidiaries ranging in annual sales from $600 million to $2.3
billion. Mr. Hodges has over 32 years of experience in the retail field serving
as president of four supermarket chains and consultant and director to large
food companies. Mr. Hodges is a director of Ameristar Casinos, Inc. and
Coinstar, Inc.
Mr. Knotts has been Senior Vice President of Mrs. Fields since October 1996.
Mr. Knotts' responsibilities include all aspects of store operations and
related support functions. Between January 1992 and October 1996, Mr. Knotts
served as Executive Vice President of Operations for Original Cookie and Hot
Sam, where he was responsible for store operations, marketing, purchasing,
construction and store design. Mr. Knotts also held the position of Regional
Vice President of Stores for Silo Inc., a $1 billion consumer electronics and
major appliance chain.
Mr. Remington has been Senior Vice President of Real Estate of Mrs. Fields
since July 1997. Mr. Remington's responsibilities include all aspects of real
estate, store construction, remodels and lease negotiations. Between October
1996 and July 1997, Mr. Remington served as Vice President of Real Estate for
Sbarro, Inc. From 1994 to 1996, Mr. Remington held the position of Senior Vice
President of Leasing for the Woolworth Corporation, with responsibilities for
Footlocker, Champ Sports, Northern Reflections, Afterthoughts, and seven other
divisions, and from 1992 to 1994, Mr. Remington was Vice President and Director
of Leasing for the Woolworth Corporation, which he joined in 1972.
Mr. Tanner has been Chief Financial Officer and Senior Vice President of
Finance & Administration since June 1999. Prior to Mrs. Fields, Mr. Tanner held
the position of CFO and Sr. Vice President with the Salt Lake Organizing
Committee for the XIX Olympic Winter Games, where he was responsible for
finance and administration. Prior to SLOC, Mr. Tanner was Vice President and
CFO for Pepsi Cola International's operations in Asia, the Middle East, and
Africa (AMEA). He also held the positions of Vice President of Strategic
Planning & Finance for Pepsi Cola North America, and Chief Financial Officer,
Eastern Division of Pepsi Cola during his tenure with Pepsi Cola.
Mr. Ward serves as Vice President, General Counsel and Secretary for Mrs.
Fields. Mr. Ward's responsibilities include management of our Legal Department.
Between 1991 and 1996, Mr. Ward's
76
<PAGE>
responsibilities were overseeing the Legal Department and the Human Resources
Department for Mrs. Fields Inc. He is admitted to practice law in the State of
Utah. Mr. Ward was appointed acting Chief Financial Officer on April 30, 1999
and acted in that capacity prior to Mr. Tanner's assuming responsiblities as
Chief Financial Officer.
Mr. Winokur has been Chairman of the Board of Directors of Mrs. Fields and
Mrs. Fields' Holding since their inception in September 1996. Mr. Winokur is
managing member of Capricorn Holdings, L.L.C., the General Partner of
Capricorn. Mrs. Fields is owned by Mrs. Fields' Holding, a portfolio company of
Capricorn which owns the majority of Mrs. Fields' Holding stock. Mr. Winokur is
President of Winokur Holdings, Inc. (an investment company) and Managing
General Partner of Capricorn Investors, L.P. and Capricorn, private investment
partnerships concentrating on investments in restructure situations, organized
by Mr. Winokur in 1987 and 1994, respectively. Prior to his current
appointment, Mr. Winokur was Senior Executive Vice President and a director of
Penn Central Corporation. Mr. Winokur is also a director of NAC Re Corporation,
The WMF Group, Ltd., C.C.C. Information Service Corp., Inc., DynCorp., and
Enron Corp.
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. Mr. Gregory is a member
and managing director of Capricorn Holdings, L.L.C., the General Partner of
Capricorn, and a director of Marine Drilling Companies, Inc.
Mr. Lewis has been a director of Mrs. Fields since its inception in September
1996. Mr. Lewis is the Chairman of Devon Value Advisers. Mr. Lewis served as
Chairman of Strategic Planning Associates, specializing in shareholder value
strategies. Mr. Lewis was a Senior Advisor at Dillon Read & Co., Inc. and his
company, Devon Value Advisors, continues to act as a consultant to Dillon Read.
He was a Managing Director of Kidder, Peabody & Co., Inc., President of Avon
North America and Executive Vice President of Avon Products, Inc. Mr. Lewis has
served on the Board of Directors of Owens Corning, American Management Systems,
Incorporated, Jostens, Inc., Marakon Associates and London Fog.
Mr. Mullin has been a director of Mrs. Fields since its inception in
September 1996. Mr. Mullin founded Mullin Consulting, Inc. in Los Angeles in
1969, and serves as its Chairman and Chief Executive Officer. He also co-
founded Strategic Compensation Associates and serves as Chairman of the firm's
Executive Committee. Mr. Mullin is a member of the Board of Directors of Avery
Dennison Corporation, 1st Business Bank, Process Technology Holdings, Inc.,
Golden State Vintners, M Life Insurance Company and the Board of Advisors of
CMS Companies.
Mr. Osnos has been a director of Mrs. Fields since its inception in September
1996. Mr. Osnos has served since 1992 as Chairman of Osnos & Company, which
provides interim management to companies. He has served as Interim
President/CEO/COO to a large array of companies in manufacturing, distribution,
retailing and service industries. In 1979 he joined the predecessor firm and
became a partner in 1981. He has been Chairman of the Turnaround Management
Association and a member of its Board since prior to 1993. He is also on the
Board of Directors of Furr's/Bishop's, Inc. He serves on the Advisory Committee
of Business Executives for National Security in the New York chapter.
77
<PAGE>
Executive Compensation
The following table sets forth information with regard to compensation for
services rendered in all capacities to Mrs. Fields' Holding by its Chief
Executive Officer and the four other most highly compensated executive officers
of Mrs. Fields other than the CEO who were serving as executive officers at the
end of the last completed fiscal year. Information described in the table
reflects compensation earned by these individuals for services with Mrs.
Fields. The officers do not separately receive compensation for services to
Mrs. Fields' Holding.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
--------------------------------- ----------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Salary Bonus Compensation Award(s) Options/Sars(7) Compensation
Principal Position Year ($) ($) ($) ($) (#) ($)
------------------ ---- -------- -------- ------------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry Hodges............ 1998 $339,583 $150,000 $4,833 -- -- $471,000(8)
President and CEO 1997 300,000 185,412 2,177 $50,000(6) -- --
1996 262,834 -- 1,656 -- 229,992 --
L. Tim Pierce(9)........ 1998 193,430 70,000 2,634 -- -- --
Senior Vice President
and CEO 1997 175,000 103,607 1,287 -- -- 71,867(8)
1996 167,723 -- 1,107 -- 32,856 33,000(1)
Pat Knotts.............. 1998 191,699 70,000 -- -- -- --
Senior Vice President 1997 162,500 27,321 -- -- -- 23,920(3)
Operations 1996 172,490 267,212(2) -- -- 32,856 2,912(4)
Michael Ward............ 1998 135,385 50,000 1,370 -- -- --
Vice President Legal 1997 109,904 56,393 619 -- -- 39,488(8)
and Administration 1996 83,020 -- 526 -- 24,642 --
Garry Remington......... 1998 180,000 33,945 -- -- -- --
Senior Vice President 1997 82,859 -- -- -- 24,642 46,707(5)
Real Estate 1996 -- -- -- -- -- --
</TABLE>
- --------
(1) Represents forgiveness of a loan made by Mrs. Fields Inc. 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) Represents payment of relocation expenses.
(6) 50% of the restricted shares vested on January 1, 1999 and the other 50%
vest on January 1, 2000.
(7) The stock options for common stock of Mrs. Fields' Holding have 10-year
terms and were granted as of September 1996, with the exception of Garry
Remington's, which were granted as of July 1997. All options have an
exercise price of $10.00 per share, with the exception of Garry
Remington's, which have an exercise price of $13.00 per share.
(8) Represents payment under Mrs. Fields' Inc. Management Value Creation Plan.
(9) Mr. Pierce resigned from Mrs. Fields on April 30, 1999. Mrs. Fields bought
back his vested shares of stock for $291,560 and entered into a severance
agreement with him for $20,000.
Option Grants and Exercises
The Board of Directors of Mrs. Fields' Holding recently approved the
provisions of a director stock option plan (the "Director Stock Option Plan"),
providing for the issuance of common stock of Mrs. Fields' Holding to directors
of Mrs. Fields' Holding and Mrs. Fields, and an employee stock option plan (the
"Employee Stock Option Plan" and, together with the Director Stock Option Plan,
the "Plans"), providing for the issuance of options to purchase common stock of
Mrs. Fields' Holding to officers and other employees of Mrs. Fields' Holding
and its subsidiaries, including Mrs. Fields. The Plans provide for the issuance
of options to purchase a total of 542,840 shares of common stock of Mrs.
Fields' Holding to directors of Mrs. Fields' Holding and officers and employees
of Mrs. Fields' Holding's subsidiaries, including Mrs. Fields, of which options
to purchase 375,840 shares, representing approximately 10% of the total common
stock of Mrs. Fields' Holding on a fully diluted basis, after giving effect to
the issuance of stock under the warrants and to issuances of stock under
options currently issued to directors and employees under the Plans, have been
issued. See "Certain Relationships and Related Transactions" and "Beneficial
Ownership of Capital Stock."
78
<PAGE>
Board Compensation
The Board of Directors of Mrs. Fields' Holding meets regularly on a quarterly
basis and more often as required. Board members, other than officers of Mrs.
Fields' Holding and Mr. Winokur, Mr. Gregory and Ms. Fields, are compensated
for services rendered annually as follows:
(1) $12,000 cash; and
(2) grants of options to purchase common stock of Mrs. Fields' Holding,
under the Director Stock Option Plan. The Board of Directors of Mrs.
Fields' Holding does not separately compensate its directors, which are
the same as the Mrs. Fields directors, for services as directors.
The Board of Directors of Mrs. Fields' Holding approved the award of options
under the Director Stock Option Plan to purchase 3,350 shares of common stock
of Mrs. Fields' Holding 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 common stock of Mrs. Fields'
Holding as of January 1, 1998, 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.
The Board members were also offered an opportunity to acquire shares of
common stock of Mrs. Fields' Holding under a director stock purchase plan (the
"Director Stock Purchase Plan"). The compensation in shares that would be
payable or issuable to Messrs. Winokur and Gregory will be paid to Capricorn. A
total of 51,667 vested shares of common stock of Mrs. Fields' Holding and
28,333 restricted shares of common stock of Mrs. Fields' Holding have been
issued to directors and officers of Mrs. Fields' Holding and Mrs. Fields under
the Director Stock Purchase Plan. Board members of Mrs. Fields' Holding are the
same as the Board members for Mrs. Fields and are not separately compensated.
Board Committees
Three functioning committees of the Board have been organized including: an
Executive Committee, a Compensation Committee and an Audit Committee. Following
is a brief description of each of these committees.
Executive Committee. The Executive Committee is composed of Messrs. Winokur
(Chairman), Gregory and Hodges. The purpose of this committee is to act on 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 Mrs. Fields' Holding has a broad plan of executive compensation
that is competitive and motivating to the degree that it will attract, hold and
inspire performance of managerial and other key personnel of a quality and
nature that will enhance the growth and profitability of Mrs. Fields' Holding.
Audit Committee. The Audit Committee is comprised of Messrs. Ferry (Chairman)
and Osnos. The purpose of the Audit Committee is to provide oversight and
review of Mrs. Fields' Holding's accounting and financial reporting process in
consultation with Mrs. Fields' Holding's independent and internal auditors.
Indemnification And Compensation
Mrs. Fields' Holding's By-laws authorize Mrs. Fields' Holding to indemnify
its present and former directors and officers and to pay or reimburse expenses
for those individuals in advance of the final disposition of a proceeding upon
receipt of an undertaking by or on behalf of those individuals to repay any
amounts if so required.
79
<PAGE>
Employment Agreements
All of the executive officers are parties to employment agreements with Mrs.
Fields. Each employment agreement provides for a period of employment of two
years (or three years, in the case of Larry Hodges) from the date of the
agreement, subject to termination provisions and to automatic extension of the
agreement. Each employment agreement permits the employee to participate in any
incentive compensation plan adopted by Mrs. Fields to replace the Fiscal 1994
Incentive Compensation Plan of Mrs. Fields Inc. benefit plans and an equity-
based plan or arrangement. If Mrs. Fields terminates employment for cause or if
the employee terminates employment without good reason, Mrs. Fields has no
further obligation to pay the employee. If Mrs. Fields terminates employment
without cause, or the employee terminates employment with good reason, the
employee can receive in severance pay the amount equal to the product of his or
her then current semi-monthly base salary by the greater of the number of semi-
monthly periods from the notice of termination or 36 semi-monthly periods, plus
a portion of any discretionary bonus that would otherwise have been payable.
The employment agreement prohibits the employee, for a year from the date of
termination of employment under the agreement, from becoming an employee,
owner, officer, agent or director of a firm or person that directly competes
with Mrs. Fields in a line or lines of business of Mrs. Fields that accounts
for 10% or more of Mrs. Fields' gross sales, revenues or earnings before taxes.
An exception is made for investments of not more than 3% of the equity of a
company listed or traded on a national securities exchange or over-the-counter
securities market. The employment agreements have customary provisions for
vacation, fringe benefits, payment of expenses and automobile allowances. The
employees who have employment agreements, and their base salaries, are: Larry
Hodges, President and Chief Executive Officer, $350,000, Pat Knotts, Senior
Vice President of Operations, $210,000, Michael Ward, Vice President, General
Counsel and Secretary, $150,000 and Garry Remington, Senior Vice President of
Real Estate, $190,000.
80
<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
The following table shows certain information, as of October 1, 1999,
believed by us to be accurate based on information provided to it concerning
the beneficial ownership of common stock by each stockholder who is known by us
to own beneficially in excess of 5% of the outstanding common stock, and by
each director, Mrs. Fields' Holding's Chief Executive Officer, each of Mrs.
Fields' Holding's other four most highly compensated executive officers and all
officers and directors as a group, as of October 1, 1999. The stockholders
listed below are also deemed beneficial owners of common stock of Mrs. Fields
as a result of their ownership of common stock of Mrs. Fields' Holding, the
owner of 100% of the capital stock of Mrs. Fields. Except as otherwise
indicated, all persons listed below have (1) sole voting power and investment
power with respect to their shares, except to the extent that authority is
shared by spouses under applicable law, and (2) record and beneficial ownership
with respect to their shares. The shares and percentages described below
include shares of common stock which were outstanding or issuable within 60
days upon the exercise of options outstanding as of October 1, 1999 and give
effect to the exercise of the Mrs. Fields' Holding. See "Management--Option
Grants and Exercises." As of October 1, 1999, there were eight record holders
of Common Stock of Mrs. Fields' Holding.
<TABLE>
<CAPTION>
Common Stock
--------------------
Number Of Percentage
Title Of Class Name Of Beneficial Owner Shares Of Class
-------------- ------------------------ --------- ----------
<C> <S> <C> <C>
Common stock, par value $0.001
per share, of Mrs. Fields' Capricorn Investors II,
Holding L.P.(1)(2)(3)........... 3,181,513 86.1%
Larry Hodges(2)(3)...... 89,141 2.5%
Peter Mullin(2)(3)...... 17,123 0.5%
Richard Ferry(2)(3)..... 12,123 0.3%
Walker Lewis(2)(3)...... 9,623 0.3%
Gilbert Osnos(2)(3)..... 9,623 0.3%
Pat Knotts(3)........... 14,785 0.4%
Michael Ward(3)......... 11,500 0.3%
Garry Remington(3)...... 6,435 0.2%
All executive officers
and directors
as a group (9
persons)(2)(3)(4)....... 3,351,866 90.9%
</TABLE>
- --------
(1) The address of Capricorn is 30 East Elm Street, Greenwich, CT 06830.
(2) Larry Hodges, Peter Mullin, Richard Ferry, Walker Lewis and Gilbert Osnos
are directors of Mrs. Fields' Holding. Herbert Winokur and Nat Gregory are
managing member and member, respectively, of Capricorn Holdings, L.L.C.,
the General Partner of Capricorn, and are directors of the Mrs. Fields'
Holding. See "Management."
(3) The shares and percentages include shares subject to options granted to
directors and officers of Mrs. Fields that are currently vested as of
October 1, 1999, as follows: Capricorn, 4,246 shares; Mr. Hodges, 59,141
shares; Mr. Mullin, 2,123 shares; Mr. Ferry, 2,123 shares; Mr. Lewis, 2,123
shares; Mr. Osnos, 2,123 shares; Mr. Knotts, 14,785 shares; Mr. Ward,
11,500 shares; and Mr. Remington, 6,434 shares; all executive officers and
directors as a group, 104,598 shares. Capricorn's shares include the
101,419 shares to be issued under the assignment and assumption agreement.
An economically equivalent transaction may be entered into instead. See
"Certain Relationships and Related Transactions."
(4) Includes shares beneficially owned by Capricorn.
81
<PAGE>
RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Debbi Fields and Affiliates. In November 1996, Mrs. Fields
entered into a consulting agreement with Debbi Fields, a director of Mrs.
Fields and Mrs. Fields' Holding, under which Debbi Fields travels and performs
public relations and advertising activities on behalf of Mrs. Fields for at
least 50 days a year for a fee of $250,000 per year, with an option to perform
20 additional days a year for additional pay of $5,000 per day. The
compensation increases by 10% a year beginning on January 1, 1999. The
consulting agreement expires on December 31, 1999. Mrs. Fields 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 Mrs. Fields, including recipes
and trade secrets, and may not, without the prior written consent of Mrs.
Fields, compete with Mrs. Fields.
In addition, Mrs. Fields has a license agreement with FSG Holdings, Inc., a
Delaware corporation, under which Debbi Fields has a nonexclusive license to
use selected trademarks, names, service marks and logos of Mrs. Fields 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 Mrs. Fields as a license fee.
Mrs. Fields, until recently, leased certain office space to an entity which
is owned in part by Debbi Fields. Billings to the entity for the fiscal years
ended January 3, 1998 and January 2, 1999 totaled approximately $274,000, and
$0, respectively, of which approximately $23,000 and $0 is included in accounts
receivable as of January 3, 1998 and January 2, 1999, respectively. The lease
was terminated in the first quarter of fiscal year 1998. Mrs. Fields believes
that the arrangements were on terms that could have been obtained from an
unaffiliated third party.
Arrangements with Walker Lewis. Mr. Lewis, a director of Mrs. Fields' Holding
and Mrs. Fields, acts as a consultant and an advisor to Dillon Read. In
addition, Mr. Lewis' company, Devon Value Advisers, received a fee of $250,000,
plus expenses, from Mrs. Fields in the first quarter of 1998 under an agreement
to provide advisory acquisition and consulting services to Mrs. Fields. Mrs.
Fields believes that the arrangements were on terms that could have been
obtained from an unaffiliated third party.
Korn/Ferry Agreement. Mrs. Fields has paid fees of approximately $157,000 and
$70,600 during the years ended January 3, 1998 and January 2, 1999,
respectively, to Korn/Ferry International, an executive search firm of which
Richard Ferry, a director of Mrs. Fields and Mrs. Fields' Holding, is the
Chairman, in connection with the hiring of employees for Mrs. Fields. Mrs.
Fields believes that the arrangements are on terms that could have been
obtained from an unaffiliated third party.
Arrangements with Mrs. Fields. Mrs. Fields and Mrs. Fields' Holding expect to
enter into a Tax Sharing Agreement as defined in and permitted by the
Indenture. See "Description of Notes--Covenants."
As of January 3, 1998 and January 2, 1999, Mrs. Fields had payables of
$105,000 and $150,000 due to Mrs. Fields' Holding, respectively, and as of July
3, 1999, Mrs. Fields had a receivable of $16,500 was due from Mrs. Fields'
Holding. The receivables stem primarily from goods sold and an allocation of
payroll and other operating expenses. Mrs. Fields' Holding believes that the
terms of the sale and allocations are essentially equivalent to the terms that
would have been obtained from an unaffiliated third party in a similar
transaction.
Incentive Arrangements. Under a senior management value creation plan that
was adopted by Mrs. Fields Inc. and assumed by Mrs. Fields at the time of its
formation in September 1996, the following payments were made in 1998: $471,484
to Mr. Hodges; $71,867 to Mr. Pierce; $39,488 to Mr. Ward; and $71,078 to a
vice president of MFI. Mr. Hodges used $250,000, representing substantially all
of this payment after his payment of related taxes, to purchase 25,000 shares
of common stock of Mrs. Fields' Holding at $10.00 per share.
82
<PAGE>
Director Stock Purchase Plan. Each of the directors of Mrs. Fields' Holding
was offered an opportunity to purchase common stock of Mrs. Fields' Holding
under the Director Stock Purchase Plan. Under the Director Stock Purchase Plan,
shares of common stock of Mrs. Fields' Holding, either restricted or vested,
can be issued to outside directors of Mrs. Fields' Holding. Restricted shares
vest 50% on January 1, 1999 and 50% on January 1, 2000, or earlier, upon a
change of control of Mrs. Fields' Holding or Mrs. Fields. See "Management--
Board Compensation." A total of 51,667 vested shares of common stock of Mrs.
Fields' Holding and 28,333 restricted shares of common stock of Mrs. Fields'
Holding have been issued to directors and officers of Mrs. Fields' Holding and
Mrs. Fields under the Director Stock Purchase Plan.
The Plans. Under the Employee Stock Option Plan, a committee of the Board of
Directors is authorized to administer the Employee Stock Option Plan and has
the power, among other things, to grant awards of options for common stock of
Mrs. Fields' Holding to officers and other employees of Mrs. Fields' Holding.
The Employee Stock Option Plan provides for the issuance of three types of
options. Performance vested options are deemed to be vested 20% for fiscal year
1997 and vest an additional 20% per year for each subsequent fiscal year in
which there is a 10% increase in the implied valuation of Mrs. Fields which is
equal to the excess of 5.5 times Adjusted EBITDA for that fiscal year over net
debt at the end of that fiscal year. Time vested options vest 25% per year on
the anniversaries of the dates on which they are granted, and vest in full upon
a change of control of Mrs. Fields' Holding or Mrs. Fields. Upside options vest
upon the earlier to occur of the expiration of the option and a change of
control, in accordance with internal rate of return targets:
(1) if the IRR through the vesting date is less than 20%, the option will
not vest;
(2) if the IRR is from 20% to 24.99%, the option will vest one-third;
(3) if the IRR is from 25% to 29.99%, the option will vest two-thirds; and
(4) if the IRR is at least 30%, the option will vest in full.
(5) IRR means, as of any date, the internal rate of return, determined in
accordance with generally accepted practice, on one share of common
stock of Mrs. Fields' Holding calculated from September 18, 1996,
through the date as of which the determination is being made, using
(1) a value of $10.00 per share at September 18, 1996 (subject to
adjustments),
(2) if the relevant date is the date of a change of control, the value
paid under or implicit in the change of control transaction (as
determined in good faith by a committee of the Board of Directors),
and
(3) if the relevant date of determination is the expiration of such
option, the value determined in good faith based on the implied
valuation for the 4 most recent fiscal quarters for which financial
statements are available.
A total of 492,840 shares of common stock of Mrs. Fields' Holding have been
reserved for issuance under the Employee Stock Option Plan. Stock issued under
the Employee Stock Option Plan is subject to customary restrictions on
transfer.
Under the Director Stock Option Plan, a committee of the Board is authorized
to administer the Director Stock Option Plan and has the power, among other
things, to grant awards of options for common stock of Mrs. Fields' Holding to
outside directors of Mrs. Fields' Holding. The Director Stock Option Plan
provides for the issuance of time vested options, which vest 25% per year on
the anniversaries of the dates on which they are granted, and vest in full upon
a change of control of Mrs. Fields' Holding or Mrs. Fields. A total of 50,000
shares of common stock of Mrs. Fields' Holding are reserved for issuance under
the Director Stock Option Plan. Common stock of Mrs. Fields' Holding issued
under the Director Stock Option Plan is subject to customary restrictions on
transfer. Options have been awarded under the Director Stock Option Plan to
each of Messrs. Ferry, Gregory, Lewis, Osnos and Winokur to purchase 3,350
shares of common stock of Mrs. Fields' Holding as of January 1, 1997, at an
exercise price of $10.00 per share, and to purchase 1,792 shares of common
stock of Mrs. Fields' Holding as of January 1, 1998, at an exercise price of
$16.74 per share, with the options of Messrs. Gregory and Winokur being issued
to Capricorn.
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The Stockholders' Agreement. Mrs. Fields' Holding has entered into a
stockholders' agreement with its stockholders. The stockholders' agreement
gives rights of first refusal to Mrs. Fields' Holding if any Mrs. Fields'
Holding stockholder receives an offer to purchase common stock of Mrs. Fields'
Holding and, if Mrs. Fields' Holding does not exercise its rights, gives the
rights of first refusal to other Mrs. Fields' Holding stockholders. In the
event of a sale to a third party approved by Capricorn, Capricorn has the right
to require the other Mrs. Fields' Holding stockholders to sell their common
stock of Mrs. Fields' Holding. If Capricorn sells any common stock of Mrs.
Fields' Holding, the other Mrs. Fields' Holding stockholders will have the
opportunity to sell their common stock of Mrs. Fields' Holding in proportion to
their holdings. The stockholders' agreement also provides for piggyback
registration rights for all Mrs. Fields' Holding stockholders, and gives one
Mrs. Fields' Holding stockholder demand registration rights. The stockholders'
agreement gives Mrs. Fields' Holding the option to purchase all of the common
stock of Mrs. Fields' Holding held by an officer or director that holds common
stock of Mrs. Fields' Holding if the officer or director is terminated. If an
officer or director is terminated other than for cause, the officer or director
has the right to sell shares to Mrs. Fields' Holding. The stockholders'
agreement provides for customary restrictions on transfer of common stock of
Mrs. Fields' Holding.
Arrangements With Capricorn. On May 27, 1999, Mrs. Fields, Mrs. Fields'
Holding, Pretzel Time, Martin Lisiewksi and Capricorn entered into an
assignment and assumption agreement under which Capricorn agreed to assume a
payment obligation of Mrs. Fields of $2,000,000 for Pretzel Time stock held by
Mr. Lisiewksi that is due on December 31, 1999. In a related transaction on the
same date, Capricorn and Mrs. Fields' Holding entered into a contribution
agreement under which Mrs. Fields' Holding and Capricorn agreed to treat the
assumption by Capricorn of the Mrs. Fields payment obligation described above
as a capital contribution from Capricorn to Mrs. Fields' Holding, and Mrs.
Fields' Holding agreed either to issue 101,419 shares of its common stock to
Capricorn at the request of Capricorn or to enter into an economically
equivalent transaction that is permitted under the debt instruments of Mrs.
Fields' Holding and its subsidiaries or no consideration. The transaction
enhanced Mrs. Fields' Holdings tax planning and financial flexibility.
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DESCRIPTION OF NOTES
You can find the definitions of terms used in this description under the
subheading "Definitions." In this description, the word "Mrs. Fields' Holding"
refers only to Mrs. Fields' Holding Company, Inc. and not to any of its
subsidiaries. The term "Mrs. Fields" refers to Mrs. Fields' Holding's wholly
owned subsidiary, Mrs. Fields' Original Cookies, Inc.
Mrs. Fields' Holding will issue the new notes under an indenture between
itself and The Bank of New York, as trustee. The terms of the new notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture, the pledge agreement and the registration rights agreement. It does
not restate those agreements in their entirety. We urge you to read the
indenture, the pledge agreement and the registration rights agreement because
they, and not this description, define your rights as holders of these notes.
We have filed copies of the indenture, the pledge agreement and the
registration rights agreement as exhibits to the registration statement which
includes this prospectus.
Brief Description of the Notes
The Notes
These notes:
. are general obligations of Mrs. Fields' Holding;
. are secured by a pledge of all of the Capital Stock of Mrs. Fields and
all Subsidiary Intercompany Notes, if any, held by Mrs. Fields' Holding;
. are senior in right of payment to all existing and future unsecured and
subordinated indebtedness of Mrs. Fields' Holding;
. are equal in right of payment to all existing and future senior secured
indebtedness of Mrs. Fields' Holding; and
. were issued with original issue discount.
As of July 3, 1999, Mrs. Fields' Holding had approximately $151 million in
indebtedness other than the notes.
Principal, Maturity and Interest
Mrs. Fields' Holding can issue up to $55.0 million in principal amount at
maturity of notes under the indenture.
. We will not pay any interest on the new notes prior to December 1, 2002.
. Interest on the new notes will accrue at the rate of 14% per annum.
. We will pay interest on the new notes semi-annually in arrears on June 1
and December 1 of each year, commencing on June 1, 2003. We will make
each interest payment to holders of record of the notes on the
immediately preceding May 15 and November 15.
. Interest on the new notes will accrue from the date it was most recently
paid. We will compute interest on the basis of a 360-day year comprised
of twelve 30-day months.
. Old notes that are accepted for exchange will cease to accrue interest
from and after the date the exchange offer is completed.
. The notes mature on December 1, 2005.
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Methods of Receiving Payments on the Notes
If a holder has given wire transfer instructions to Mrs. Fields' Holding,
Mrs. Fields' Holding will make all principal, premium and interest payments
and, if any, liquidated damages on those notes in accordance with those
instructions. All payments on the notes will be made at the office or agency
that Mrs. Fields' Holding maintains within the City and State of New York
unless Mrs. Fields' Holding elects to make interest payments by check mailed to
the holders at their addresses described in the register of holders. Until Mrs.
Fields' Holding designates otherwise, its office or agency in New York will be
the office of the trustee.
Transfer and Exchange
A holder may transfer or exchange 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 Mrs. Fields' Holding may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. We are not required to transfer or exchange any note selected for
redemption. Also, we are not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
Security
The notes will be secured by:
(1) a pledge of the Capital Stock of Mrs. Fields; and
(2) a pledge of all Subsidiary Intercompany Notes, if any, payable to
Mrs. Fields' Holding.
"Subsidiary Intercompany Notes" means the intercompany notes, if any, issued
by Subsidiaries of Mrs. Fields' Holding in favor of Mrs. Fields' Holding, in
each case, in the form attached as Exhibit F to the indenture.
Mrs. Fields' Holding and The Bank of New York, as collateral agent, have
entered into a pledge agreement defining the terms of the pledges that secure
these notes. These pledges will secure the payment and performance when due of
all of the obligations of Mrs. Fields' Holding under the indenture and these
notes as provided in the pledge agreement.
So long as no Default or Event of Default shall have occurred and be
continuing, and subject to terms and conditions, Mrs. Fields' Holding will be
entitled to receive all cash dividends, interest and other payments made upon
or with respect to the collateral pledged by them and to exercise any voting
and other consensual rights pertaining to the collateral pledged by them.
Upon the occurrence and during the continuance of a Default or Event of
Default,
(1) all rights of Mrs. Fields' Holding to exercise those voting or other
consensual rights shall cease, and all such rights shall become vested in
the collateral agent, which, to the extent permitted by law, shall have the
sole right to exercise those voting and other consensual rights;
(2) all rights of Mrs. Fields' Holding and its subsidiaries to receive
all cash dividends, interest and other payments made upon or with respect
to the pledged collateral will cease and those cash dividends, interest and
other payments will be paid to the collateral agent; and
(3) the collateral agent may sell the pledged collateral or any part
thereof in accordance with the terms of the pledge agreement. All funds
distributed under the pledge agreement and received by the collateral agent
for the benefit of the holders of the notes will be distributed by the
collateral agent in accordance with the provisions of the indenture.
A "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.
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The collateral agent will determine the circumstances and manner in which the
collateral shall be disposed of, including, but not limited to, the
determination of whether to release all or any portion of the collateral from
the Liens created by the pledge agreement and whether to foreclose on the
pledged collateral following a Default or Event of Default.
The pledge will be released:
(1) upon the full and final payment and performance of all obligations
of Mrs. Fields' Holding under the indenture and the notes; or
(2) on the day after the first anniversary of the Legal Defeasance of
all of the obligations under the indenture (other than those
surviving obligations specified in the indenture).
Optional Redemption
Until December 1, 2002, Mrs. Fields' Holding may on any one or more occasions
redeem all, but not less than all, of the notes, in cash at a redemption price
equal to 114% of the Accreted Value (determined at the date of redemption) with
the net cash proceeds of one or more Public Equity Offerings; provided that the
redemption must occur within 60 days of the date of the closing of the Public
Equity Offering.
"Accreted Value" means, for each $1,000 face amount of notes, as of any date
of determination prior to December 1, 2002, the sum of:
(1) $561.17; and
(2) the portion of the excess of the principal amount of each note over
$561.17 that will have been accreted on the note through that date,
that amount to be so accreted on a daily basis and compounded semi-
annually on each June 1 and December 1 at the rate of 14% per annum
from August 24, 1998.
Except under the preceding paragraph, the notes will not be redeemable at
Mrs. Fields' Holding's option prior to December 1, 2002.
After December 1, 2002, Mrs. Fields' Holding may redeem all or a part of
these notes upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) described
below plus accrued and unpaid interest and liquidated damages, if any, on those
notes, to the applicable redemption date, if redeemed during the 12-month
period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002........................................................... 107.000%
2003........................................................... 103.500%
2004 and thereafter............................................ 100.000%
</TABLE>
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each holder of notes will have the right to
require Mrs. Fields' Holding to repurchase all or any part (equal to $1,000 or
an integral multiple of $1,000) of that holder's notes under the Change of
Control Offer. In the Change of Control Offer, Mrs. Fields' Holding will offer
a Change of Control Payment in cash equal to 101% of the Accreted Value of
notes on the date of purchase (if the purchase is prior to December 1, 2002),
or 101% of the total principal amount of notes, plus accrued and unpaid
interest and liquidated damages, on those notes, if any, to the date of
purchase (if the date of purchase is on or after December 1, 2002). Within 60
days following any Change of Control, Mrs. Fields' Holding will mail a notice
to each holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase notes on the Change of Control
Payment Date specified in the notice, under the procedures required
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by the indenture and described in such notice. Mrs. Fields' Holding will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations under the Exchange Act to the extent those laws
and regulations are applicable in connection with the repurchase of the notes
as a result of a Change of Control.
On the Change of Control Payment Date, Mrs. Fields' Holding will, to the
extent lawful:
(1) accept for payment all notes or portions of notes properly tendered
under the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes so
tendered; and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an officers' certificate stating the total
principal amount of notes or portions of notes being purchased by
Mrs. Fields' Holding.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for those notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each new note will be in a principal amount
of $1,000 or an integral multiple of $1,000. Mrs. Fields' Holding 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 provisions described above that require Mrs. Fields' Holding to make a
Change of Control Offer following a Change of Control will be applicable
regardless of 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 notes to
require that Mrs. Fields' Holding repurchase or redeem the notes in the event
of a takeover, recapitalization or similar transaction.
Indebtedness of Mrs. Fields' Holding currently prohibits, and it is expected
that future indebtedness of Mrs. Fields' Holding will prohibit, events that
would constitute a Change of Control. In addition, the exercise by the holders
of notes of their right to require Mrs. Fields' Holding to repurchase the
notes, could cause a default under that Indebtedness, even if the Change of
Control itself does not, due to the financial effect of those repurchases on
Mrs. Fields' Holding. Finally, Mrs. Fields' Holding's ability to pay cash to
the holders of notes upon a repurchase may be limited by Mrs. Fields' Holding's
then existing financial resources.
Mrs. Fields' Holding 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
described in the indenture applicable to a Change of Control Offer made by Mrs.
Fields' Holding and purchases all notes validly tendered and not withdrawn
under the Change of Control Offer.
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 Mrs. Fields' Holding and its subsidiaries taken as a whole.
Although there is a limited 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 notes to require
Mrs. Fields' Holding to repurchase its notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of
Mrs. Fields' Holding and its subsidiaries taken as a whole to another person or
group may be uncertain.
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Asset Sales
Mrs. Fields' Holding will not, and will not permit any of its Subsidiaries
to, consummate an Asset Sale unless:
(1) Mrs. Fields' Holding (or the Subsidiary, as the case may be)
receives consideration at the time of the Asset Sale at least equal
to the fair market value of the assets or Equity Interests issued
or sold or otherwise disposed of;
(2) the fair market value is
(a) evidenced by an officers' certificate delivered to the
trustee, in the case of an Asset Sale or Asset Sales
aggregating $10,000 or more; or
(b) determined by Mrs. Fields' Holding's Board of Directors and
evidenced by a resolution of the Board of Directors
described in an officers' certificate delivered to the
trustee, in the case of any Asset Sale having a fair market
value or resulting in net proceeds in excess of $5.0
million; and
(3) at least 75% of the consideration therefor received by Mrs. Fields'
Holding or the Subsidiary is in the form of cash. For purposes of
this provision, each of the following shall be deemed to be cash:
(a) any liabilities (as shown on Mrs. Fields' Holding's or the
subsidiary's most recent balance sheet), of Mrs. Fields'
Holding or any Subsidiary (other than contingent liabilities
and liabilities that are by their terms subordinated to the
notes or any guarantee of those liabilities) that are
assumed by the transferee of any assets under a customary
novation agreement that releases Mrs. Fields' Holding or the
Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Mrs.
Fields' Holding or the subsidiary from the transferee that
are immediately converted by Mrs. Fields' Holding or the
subsidiary into cash (to the extent of the cash received in
that conversion).
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
Mrs. Fields' Holding may apply the Net Proceeds at its option:
(1) to make a Permitted Investment;
(2) to make a capital expenditure in the same or a similar line of
business as Mrs. Fields' Holding and its Subsidiaries were engaged
in on August 24, 1998, including, without limitation, the specialty
retail snack-food business or
(3) to acquire long-term assets in the same or a similar line of
business as Mrs. Fields' Holding and its Subsidiaries were engaged
in on August 24, 1998, including, without limitation, the specialty
retail snack-food business.
Pending the final application of any Net Proceeds, Mrs. Fields' Holding may
temporarily or permanently reduce Indebtedness under a credit facility of Mrs.
Fields with a maximum total amount of $15.0 million that is permitted under the
indenture, including the credit agreement with LaSalle National Bank, or
otherwise invest the 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 preceding paragraph will constitute Excess Proceeds. When the
total amount of Excess Proceeds exceeds $5.0 million, Mrs. Fields' Holding will
make an Asset Sale Offer to all holders of notes to purchase the maximum
principal amount of notes that may be purchased out of the Excess Proceeds. The
offer price in any Asset Sale Offer will be equal to 100% of the Accreted Value
thereof on the date of purchase (if such date of purchase is prior to December
1, 2002) or 100% of principal amount plus accrued and unpaid interest and
liquidated damages, if any, to the date of purchase (if such date of purchase
is on or after December 1, 2002), and will be payable in cash. If any Excess
Proceeds remain after completion of an Asset Sale Offer, Mrs. Fields' Holding
may use those Excess Proceeds for general corporate purposes. If the total
principal amount of notes tendered into the Asset Sale
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Offer exceeds the amount of Excess Proceeds, the trustee shall select the notes
to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer,
the amount of Excess Proceeds shall be reset at zero.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are
listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
any method as the trustee shall deem fair and appropriate.
No 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 notes to be redeemed at its
registered address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder of that note upon
cancellation of the original note. Notes called for redemption become due on
the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
Covenants
Restricted Payments
Mrs. Fields' Holding will not, and will not permit any of its Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Mrs. Fields' Holding's or any of its
Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving
Mrs. Fields' Holding) or to the direct or indirect holders of Mrs.
Fields' Holding'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 Mrs.
Fields' Holding);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving Mrs. Fields' Holding) any Equity Interests
of Mrs. Fields' Holding or any direct or indirect parent of Mrs.
Fields' Holding or other Affiliate of Mrs. Fields' Holding (other
than the Equity Interests owned by Mrs. Fields' Holding or any
Wholly Owned Subsidiary of Mrs. Fields' Holding);
(3) 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 notes, except a payment of interest or
principal at the Stated Maturity of that Indebtedness; or
(4) make any Restricted Investment
(all of the payments and other actions described in clauses (1) through (4)
above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to the Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence of the Restricted
Payment, and
(2) Mrs. Fields' Holding would, at the time of the Restricted Payment
and after giving pro forma effect to it as if such Restricted
Payment had been made at the beginning of the applicable four-
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quarter period, have been permitted to incur at least $1.00 of
additional Indebtedness under the Fixed Charge Coverage Ratio test
described in the first paragraph of the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(3) the Restricted Payment, together with the total amount of all other
Restricted Payments made by Mrs. Fields' Holding and its
Subsidiaries after August 24, 1998 (excluding Restricted Payments
permitted by clauses (2), (3) or (4) of the next succeeding
paragraph), is less than the sum of
(a) 50% of the Consolidated Net Income of Mrs. Fields' Holding
for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after
August 24, 1998 to the end of Mrs. Fields' Holding's most
recently ended fiscal quarter for which internal financial
statements are available at the time of the Restricted
Payment (or, if the Consolidated Net Income for that period
is a deficit, less 100% of the deficit), plus
(b) 100% of the total net cash proceeds (other than proceeds
referred to in the proviso to the first sentence of the
definition of "Investments") received by Mrs. Fields'
Holding since August 24, 1998 of Equity Interests of Mrs.
Fields' Holding (other than Disqualified Stock) or
Disqualified Stock or debt securities that have been
converted into Equity Interests (other than Equity Interests
(or Disqualified Stock or convertible debt securities) sold
to a Subsidiary of Mrs. Fields' Holding and other than
Disqualified Stock or convertible debt securities that have
been converted into Disqualified Stock), plus
(c) to the extent that any Investment other than a Permitted
Investment that was made after August 24, 1998 is sold for
cash or otherwise liquidated or repaid for cash, the lesser
of:
(1) the cash return of capital with respect to the
Investment (less the cost of disposition, if any),
and
(2) the initial amount of the Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at said date of declaration the
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of
Mrs. Fields' Holding in exchange for, or out of the net cash
proceeds of, the substantially concurrent sale (other than to a
Subsidiary of Mrs. Fields' Holding) of, other Equity Interests of
Mrs. Fields' Holding (other than Disqualified Stock); provided that
the amount of any net cash proceeds that are utilized for that
redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Subsidiary of Mrs. Fields' Holding
to the holders of any Equity Interests on a pro rata basis; and
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Mrs. Fields' Holding or any
Subsidiary of Mrs. Fields' Holding held by any member of Mrs.
Fields' Holding's (or any of its Subsidiaries') management under
any management equity subscription agreement or stock option
agreement; provided that the total price paid for all of those
repurchased, redeemed, acquired or retired Equity Interests shall
not exceed, in any 12-month period, $250,000, plus the amount of
cash proceeds received by Mrs. Fields' Holding from any reissuance
of Equity Interests by Mrs. Fields' Holding to members of
management of
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Mrs. Fields' Holding or its Subsidiaries during that period, which
total 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 the transaction;
(6) payments to Mrs. Fields' Holding under the Tax Sharing Agreement;
(7) payments under the Employment Agreement, dated as of September 2,
1997, between Pretzel Time and Martin E. Lisiewski and the
Management Agreement, dated as of September 2, 1997, between Mrs.
Fields and Pretzel Time; and
(8) the redemption or repurchase of preferred stock of Pretzel Time
outstanding on August 24, 1998.
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 Mrs. Fields' Holding or its
Subsidiary, as the case may be, under the Restricted Payment. The fair market
value of any assets or securities that are required to be valued by this
covenant shall be determined by the Board of Directors whose resolution with
respect to it shall be delivered to the trustee. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $2.0 million. Not later than the date of making any
Restricted Payment, Mrs. Fields' Holding shall deliver to the trustee an
officers' certificate stating that the Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this
"Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
Mrs. Fields' Holding 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 Mrs. Fields' Holding will not issue any Disqualified Stock
and will not permit any of its Subsidiaries to issue any shares of preferred
stock; provided that Mrs. Fields' Holding may incur Indebtedness (including
Acquired Indebtedness) or issue Disqualified Stock, if:
(1) the Fixed Charge Coverage Ratio for Mrs. Fields' Holding's most
recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date
on which the additional Indebtedness is incurred or the
Disqualified Stock is issued would have been at least 1.5 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 that four-quarter period; and
(2) the Weighted Average Life to Maturity of the Indebtedness is equal
to or greater than the remaining Weighted Average Life to Maturity
of the notes, provided that this clause (2) shall not apply in the
case of Acquired Indebtedness.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following, items of Indebtedness (collectively, "Permitted
Indebtedness"):
(1) the incurrence by Mrs. Fields' Holding and its Subsidiaries of the
Existing Indebtedness other than the notes and Mrs. Fields' 10 1/8%
Series C Senior Notes due 2004.
(2) the incurrence by Mrs. Fields' Holding on August 24, 1998 of
Indebtedness represented by the notes;
(3) the issuance by Mrs. Fields' Holding of the new notes;
(4) the incurrence by Mrs. Fields of Indebtedness represented by Mrs.
Fields' 10 1/8% Series C Senior Notes due 2004 and the guarantee of
those notes by Mrs. Fields' Subsidiaries, and any other
Indebtedness of Mrs. Fields or its Subsidiaries permitted under
Mrs. Fields' indenture and
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the guarantee of the Indebtedness by Mrs. Fields' Subsidiaries
permitted under Mrs. Fields' indenture;
(5) the incurrence by Mrs. Fields' Holding 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 improvement of property, plant or equipment used
in the business of Mrs. Fields' Holding or that Subsidiary, in an
total principal amount not to exceed $5.0 million at anytime
outstanding;
(6) the incurrence by Mrs. Fields' Holding 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;
(7) the incurrence by Mrs. Fields' Holding or any of its Subsidiaries
of intercompany Indebtedness between or among Mrs. Fields' Holding
and any of its Wholly Owned Subsidiaries; provided, that:
(a) if Mrs. Fields' Holding is the obligor on that Indebtedness,
the Indebtedness must be expressly subordinated to the prior
payment in full in cash of all obligations with respect to
the notes; and
(b)
(1) any subsequent issuance or transfer of Equity
Interests that results in any of the Indebtedness
being held by a Person other than Mrs. Fields'
Holding or a Wholly Owned Subsidiary thereof and
(2) any sale or other transfer of any of that
Indebtedness to a person that is not either Mrs.
Fields' Holding or a Wholly Owned Subsidiary
thereof, shall be deemed, in each case, to
constitute an incurrence of that Indebtedness by
Mrs. Fields' Holding or the Subsidiary, as the case
may be;
(8) 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 the
same or a similar line of business as Mrs. Fields' Holding
and its Subsidiaries were engaged in on August 24, 1998,
including, without limitation, the specialty retail snack-
food business and
(b) the extension of credit represented by the 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 total
amount of all Indebtedness incurred under this clause (8) shall not
exceed $5.0 million at any time outstanding;
(9) the incurrence of Indebtedness arising from agreements of Mrs.
Fields' Holding 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
the business, assets or Subsidiary for the purpose of financing the
acquisition), provided that the maximum total liability of all such
Indebtedness shall at no time exceed 50% of the gross proceeds
actually received by Mrs. Fields' Holding or such Subsidiary in
connection with the disposition; and
(10) the guarantee by Mrs. Fields' Holding or any Subsidiary of
Indebtedness of Mrs. Fields' Holding or any Subsidiary that was
permitted to be incurred by another provision of this covenant;
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For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (1) through (10) above, or is
entitled to be incurred under the first paragraph of this covenant, Mrs.
Fields' Holding will be permitted to classify that item of Indebtedness on the
date of its incurrence in any manner that complies with this covenant. 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
Mrs. Fields' Holding will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Mrs. Fields' Holding will not, and will not permit any of its Subsidiaries,
directly or indirectly, to create or permit to exist or become effective any
encumbrance or restriction on the ability of any Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to Mrs. Fields' Holding or any of Mrs. Fields' Holding's
Subsidiaries, or with respect to any other interest or
participation in, or measured by, its profits, or pay any
indebtedness owed to Mrs. Fields' Holding or any of Mrs. Fields'
Holding's Subsidiaries;
(2) make loans or advances to Mrs. Fields' Holding or any of Mrs.
Fields' Holding's Subsidiaries; or
(3) transfer any of its properties or assets to Mrs. Fields' Holding or
any of Mrs. Fields' Holding's Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on August 24, 1998
(2) the indenture and the notes and the Mrs. Fields Indenture and the
notes issued under it;
(3) the credit facility of Mrs. Fields with a maximum total amount of
$15.0 million that is permitted under the indenture;
(4) applicable law;
(5) any instrument governing Indebtedness or Capital Stock of a person
acquired by Mrs. Fields' Holding or any of its Subsidiaries as in
effect at the time of the acquisition (except to the extent the
Indebtedness was incurred in connection with or in contemplation of
the 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,
the Indebtedness was permitted by the terms of the indenture to be
incurred;
(6) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(7) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so
acquired of the nature described in clause (5) above;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing the Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
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(9) customary restrictions imposed on the transfer of copyrighted or
patented materials and customary provisions in agreements that
restrict the assignees of the agreements or any rights thereunder;
or
(10) restrictions with respect to a Subsidiary of Mrs. Fields' Holding
imposed under a binding agreement relating to the sale or
disposition of all or substantially all of the Capital Stock or
assets of the Subsidiary.
Merger, Consolidation, or Sale of Assets
Mrs. Fields' Holding may not:
(1) consolidate or merge with or into another person (whether or not Mrs.
Fields' Holding is the surviving corporation); or
(2) 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 person; unless:
(a) either:
(1) Mrs. Fields' Holding is the surviving corporation; or
(2) the person formed by or surviving any such consolidation or
merger (if other than Mrs. Fields' Holding) or to which such
sale, assignment, transfer, conveyance or other disposition
shall have been made is a corporation organized or existing
under the laws of the United States, any state of the United
States or the District of Columbia;
(b) the person formed by or surviving the consolidation or merger (if
other than Mrs. Fields' Holding) or the person to which the sale,
assignment, transfer, conveyance or other disposition shall have
been made assumes all the obligations of Mrs. Fields' Holding under
the notes and the indenture under a supplemental indenture
reasonably satisfactory to the trustee;
(c) immediately after the transaction no Default or Event of Default
exists; and
(d) except in the case of a merger of Mrs. Fields' Holding with or into
a Wholly Owned Subsidiary of Mrs. Fields' Holding, Mrs. Fields'
Holding or the entity or person formed by or surviving any such
consolidation or merger (if other than Mrs. Fields' Holding), or to
which the sale, assignment, transfer, lease, conveyance or other
disposition shall have been made:
(1) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net
Worth of Mrs. Fields' Holding immediately preceding the
transaction; and
(2) will, on the date of the transaction after giving pro forma
effect to it and any related financing transactions as if
the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness under the Fixed Charge Coverage
Ratio test described in the first paragraph of the covenant
described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
Mrs. Fields' Holding 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, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
Mrs. Fields' Holding or the relevant Subsidiary than those that
would have been obtained in a comparable transaction by Mrs.
Fields' Holding or the Subsidiary with an unrelated person; and
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(2) Mrs. Fields' Holding delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving total consideration
in excess of $1.0 million, a resolution of the Board of
Directors contained in an officers' certificate certifying
that the Affiliate Transaction complies with this covenant
and that the 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 total consideration
in excess of $5.0 million, an opinion as to the fairness to
the holders of the Affiliate Transaction from a financial
point of view issued by an accounting, appraisal or
investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) payments to Mrs. Fields' Holding under the Tax Sharing Agreement;
(2) any employment agreement entered into by Mrs. Fields' Holding or
any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of Mrs. Fields' Holding or the
Subsidiary;
(3) transactions between or among Mrs. Fields' Holding and/or its
Subsidiaries;
(4) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "--Restricted
Payments";
(5) the payment of reasonable fees, expense reimbursements and
customary indemnification, advances and other similar arrangements
to directors and officers of Mrs. Fields' Holding and its
Subsidiaries; and
(6) reasonable loans or advances to employees of Mrs. Fields' Holding
and its Subsidiaries in the ordinary course of business of Mrs.
Fields' Holding or the Subsidiary.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Subsidiaries
Mrs. Fields' Holding will not, and will not permit any of its Wholly Owned
Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any
Capital Stock of any Wholly Owned Subsidiary of Mrs. Fields' Holding to any
person (other than Mrs. Fields' Holding or a Wholly Owned Subsidiary of Mrs.
Fields' Holding), unless:
(1) the transfer, conveyance, sale, lease or other disposition is of
all the Capital Stock of the Wholly Owned Subsidiary; and
(2) the cash Net Proceeds from the 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."
In addition, Mrs. Fields' Holding will not permit any Wholly Owned Subsidiary
of Mrs. Fields' Holding 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 Mrs. Fields' Holding or a Wholly Owned
Subsidiary of Mrs. Fields' Holding.
Business Activities
Mrs. Fields' Holding will not, and will not permit any Subsidiary to, engage
in any business other than the same or a similar line of business as Mrs.
Fields' Holding and its Subsidiaries were engaged in on August 24, 1998,
including, without limitation, the specialty retail snack-food business, except
to an extent as would not be material to Mrs. Fields' Holding and its
Subsidiaries taken as a whole.
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In addition,
(1)Neither Mrs. Fields' Holding nor Mrs. Fields will engage in any Asset
Sale involving Mrs. Fields' Brand,
(2)none of Mrs. Fields' Holding, Mrs. Fields or Mrs. Fields' Brand will
engage in any Asset Sale involving the "Mrs. Fields" or "Pretzel Time"
brand name, and
(3)for so long as Mrs. Fields' Brand is a subsidiary of Mrs. Fields or Mrs.
Fields' Holding, Mrs. Fields' Brand will not incur any indebtedness (other
than its guarantee of notes under the Mrs. Fields Indenture and any
guarantee of Indebtedness under a credit facility of Mrs. Fields with a
maximum total amount of $15.0 million that is permitted under the
indenture).
Advances to Subsidiaries
All advances to Subsidiaries made by Mrs. Fields' Holding after the date of
the indenture, other than the Mrs. Fields' Holding Capital Contributions, will
be evidenced by unsecured Subsidiary Intercompany Notes in favor of Mrs.
Fields' Holding. These Subsidiary Intercompany Notes will be pledged under the
pledge agreement as collateral to secure the notes. Each Subsidiary
Intercompany Note will be payable upon demand, will bear interest at the same
rate as the notes, and will be subordinated in right of payment to all existing
Senior Debt of the Subsidiary to which the loan is made.
"Senior Debt" of Subsidiaries for the purposes of the Subsidiary Intercompany
Notes will be defined as all Indebtedness of the Subsidiaries that is not
specifically by its terms made pari passu with or junior to the Subsidiary
Intercompany Notes. A form of Subsidiary Intercompany Note is attached as an
exhibit to the indenture. Repayments of principal with respect to any
Subsidiary Intercompany Note will be required to be pledged to under the pledge
agreement as collateral to secure the notes until those amounts are advanced to
a Subsidiary in accordance with the indenture.
Mrs. Fields' Holding will not permit any Subsidiary in respect of which Mrs.
Fields' Holding is a creditor by virtue of a Subsidiary Intercompany Note to
incur any Indebtedness that is subordinate or junior in right of payment to any
Debt of the Subsidiary and senior in any respect in right of payment to any
Subsidiary Intercompany Note.
Payments for Consent
Mrs. Fields' Holding will not, and will not permit any of its Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration to or for
the benefit of any holder of notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the indenture or the
notes unless the consideration is offered to be paid and is paid to all holders
of the notes that consent, waive or agree to amend in the time frame described
in the solicitation documents relating to the consent, waiver or agreement.
Reports
Whether or not required by the Commission, so long as any notes are
outstanding, Mrs. Fields' Holding will furnish to the holders of notes, within
the time periods specified in the Commission's rules and regulations:
(1) 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 Mrs. Fields' Holding were required to file those
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 on the annual financial
statements by Mrs. Fields' Holding's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Mrs. Fields' Holding were required to
file those reports.
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In addition, Mrs. Fields' Holding has agreed that, for so long as any notes
remain outstanding, it will furnish to the holders of notes and to securities
analysts and prospective investors, upon their request, the information
required to be delivered under Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
liquidated damages, if any, with respect to the notes;
(2) default in payment when due of the principal of or premium, if any,
on the notes;
(3) failure by Mrs. Fields' Holding for 30 days after notice to comply
with any of its other agreements in the indenture or the notes;
(4) 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 Mrs. Fields' Holding or any
of its Subsidiaries (or the payment of which is guaranteed by Mrs.
Fields' Holding or any of its Subsidiaries) whether the
Indebtedness or guarantee now exists, or is created after August
24, 1998, if that default
(a) is caused by a failure to pay principal of or premium, if any,
or interest on that Indebtedness prior to the expiration of the
grace period provided in that Indebtedness on the date of that
default (a "Payment Default"); or
(b) results in the acceleration of that Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any that Indebtedness,
together with the principal amount of any other Indebtedness under
which there has been a Payment Default or the maturity of which has
been so accelerated, totals $2.5 million or more;
(5) failure by Mrs. Fields' Holding 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;
(6) breach by Mrs. Fields' Holding or any Subsidiary that has pledged a
Subsidiary Intercompany Note of any representation or warranty
described in the pledge agreement, or repudiation by Mrs. Fields'
Holding or any such Subsidiary of its obligations under the pledge
agreement or the unenforceability of the pledge agreement against
Mrs. Fields' Holding or any such Subsidiary for any reason; and
(7) events of bankruptcy or insolvency with respect to Mrs. Fields'
Holding or any of its Subsidiaries;
In the case of an Event of Default arising from events of bankruptcy or
insolvency, with respect to Mrs. Fields' Holding, any Significant Subsidiary or
any group of Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding notes will become due and payable without further
action or notice. If any other Event of Default occurs and is continuing, the
trustee or the holders of at least 25% in principal amount of the then
outstanding notes may declare all the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to limitations, holders of a majority in
principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
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.
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The holders of a majority in total principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
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 notes.
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 Mrs. Fields' Holding with the
intention of avoiding payment of the premium that Mrs. Fields' Holding would
have had to pay if Mrs. Fields' Holding then had elected to redeem the notes
under 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 notes. If an Event of Default
occurs prior to December 1, 2002 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of Mrs. Fields' Holding with the intention
of avoiding the prohibition on redemption of the notes before December 1, 2002,
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 notes.
Mrs. Fields' Holding is required to deliver to the trustee annually a
statement regarding compliance with the indenture. Upon becoming aware of any
Default or Event of Default, Mrs. Fields' Holding is required to deliver to the
trustee a statement specifying the Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Mrs. Fields'
Holding, as such, shall have any liability for any obligations of Mrs. Fields'
Holding under the notes, the indenture, or for any claim based on, in respect
of, or by reason of, those obligations or their creation. Each holder of notes
by accepting a note waives and releases all liability of this kind. The waiver
and release are part of the consideration for issuance of the notes. The waiver
may not be effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
Mrs. Fields' Holding may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest and
liquidated damages, if any, on those notes when those payments are
due from the trust referred to below;
(2) Mrs. Fields' Holding's obligations with respect to the notes
concerning issuing temporary notes, registration of notes,
mutilated, destroyed, lost or stolen notes and the maintenance of
an office or agency for payment and money for security payments
held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Mrs. Fields' Holding's obligations in connection with them; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Mrs. Fields' Holding may, at its option and at any time, elect
to have the obligations of Mrs. Fields' Holding released with respect to some
of the covenants that are described in the indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not constitute
a Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, some of the 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 notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Mrs. Fields' Holding must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S.
dollars, non-callable Government Securities, or a combination
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thereof, in amounts that 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 and liquidation
damages, if any, on the outstanding notes on the stated maturity or
on the applicable redemption date, as the case may be, and Mrs.
Fields' Holding must specify whether the notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, Mrs. Fields' Holding shall have
delivered to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that
(a) Mrs. Fields' Holding has received from, or there has been
published by, the Internal Revenue Service a ruling or
(b) since August 24, 1998, there has been a change in the applicable
federal income tax law, in either case to the effect that, and
based on which opinion of counsel shall confirm that, the holders
of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of the 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 the Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Mrs. Fields' Holding shall have
delivered to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that the holders of the
outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of the 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 the Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either:
(a) on the date of such deposit (other than a Default or Event
of Default resulting from the borrowing of funds to be
applied the deposit); or
(b) 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;
(5) the 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 Mrs.
Fields' Holding or any of its Subsidiaries is a party or by which
Mrs. Fields' Holding or any of its Subsidiaries is bound;
(6) Mrs. Fields' Holding 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;
(7) Mrs. Fields' Holding must deliver to the trustee an officers'
certificate stating that the deposit was not made by Mrs. Fields'
Holding with the intent of preferring the holders of notes over the
other creditors of Mrs. Fields' Holding with the intent of
defeating, hindering, delaying or defrauding creditors of Mrs.
Fields' Holding or others; and
(8) Mrs. Fields' Holding must deliver to the trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
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(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes
(other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the notes (except a rescission
of acceleration of the notes by the holders of at least a majority
in total principal amount of the notes and a waiver of the payment
default that resulted from the acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to
receive payments of principal of or premium, if any, or interest on
the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
Mrs. Fields' Holding and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Mrs. Fields' Holding's obligations
to holders of notes in the case of a merger or consolidation or
sale of all or substantially all of Mrs. Fields' Holding's assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect
the legal rights under the indenture of any holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act.
Concerning the Trustee
If the trustee becomes a creditor of Mrs. Fields' Holding, the Indenture
limits its right to obtain payment of claims in some cases, or to realize on
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 the 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 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
exceptions. The indenture provides that in case an Event of Default shall occur
and be continuing, 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 these 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 notes, unless that holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Book-Entry, Delivery and Form
The new notes exchanged for outstanding notes through the Book-Entry Transfer
Facility will be represented by a Global Note (the "New Global Note"). One New
Global Note shall be issued with respect to each $100 million or less in total
principal amount at maturity of the New Global Note. The New Global Note will
be issued on the date of the closing of the exchange offer with the trustee, as
custodian of The Depository
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Trust Company, under a FAST Balance Certificate Agreement between the trustee
and The Depository Trust Company and registered in the name of Cede & Co., as
nominee of The Depository Trust Company (that nominee being referred to as the
"Global Holder").
New notes exchanged for outstanding notes which are in the form of registered
definitive certificates will be issued in the form of certificated notes. The
certificated 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 notes being transferred.
The Depository Trust Company has advised us that it is a limited-purchase
trust company that was created to hold securities for its participating
organizations (collectively, the "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 Participants
include securities brokers and dealers (including the placement agents for the
old notes), banks and trust companies, clearing corporations and other
organizations. Access to The Depository Trust Company system is also available
to the other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" Trust Company) 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 Trust Company only through the
Participants or The Indirect Participants.
We expect that under procedures established by The Depository Trust Company
(1) upon deposit of the New Global Note, The Depository Trust Company
will credit the accounts of Participants with portions of the New
Global Note; and
(2) ownership of the notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained
by The Depository, the Participants and the Indirect Participants.
The laws of some states require that persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer notes may be limited.
For so long as the Global Holder is the registered owner of any New Global
Notes, the Global Holder will be considered the sole owner of those new notes
represented by those New Global 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 notes represented by the New Global Note registered in
their names, will not receive or be entitled to receive physical delivery of
Certificated 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 notes represented by a New Global Note to
pledge that interest to persons or entities that do not participate in the
Depository Trust Company's system or to otherwise take actions in respect of
that interest, may be affected by the lack of physical certificate evidencing
that interest. Accordingly, each person owning a beneficial interest in a New
Global Note must rely on the procedures of the Depository Trust Company and, if
that person is not a Participant or an Indirect Participant, on the procedures
of the Participant through which that person owns its interest, to exercise any
rights of a holder under that New Global Note of the indenture.
Neither Mrs. Fields' Holding nor the trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of new notes by The Depository Trust Company, or for maintaining, supervising
or reviewing any records of The Depository Trust Company relating to those new
notes.
The trustee will make payments in respect of the principal of, premium, if
any, interest and liquidated damages, if any, on any new notes registered in
the name of a Global Holder on the applicable record date to or at the
direction of the Global Holder in its capacity as the registered holder under
the indenture. Under the terms of the indenture, Mrs. Fields' Holding and the
trustee may treat the persons in whose name the notes,
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including the New Global Notes, are registered as the owners of those notes for
the purpose of receiving those payments and all other purposes.
We expect that The Depository Trust Company or its nominee, upon receipt of
payments of principal, premium, if any, interest and liquidated damages, if
any, on the New Global Notes, will credit their Participants' or Indirect
Participants' accounts with payments in amounts proportionate to their
respective interests in the principal amount of the New Global Notes as shown
on the records of The Depository Trust Company. Neither Mrs. Fields' Holding
nor the trustee has any responsibility or liability for those payments.
Payments by the Participants and the Indirect Participants to the beneficial
owners of new notes will be governed by standing instructions and customary
practice. Those payments will be the responsibility of the Trust Company
Participants or the Indirect Participants.
Certificated Securities
If:
(1) Mrs. Fields' Holding notifies the trustee in writing that The
Depository Trust Company is no longer willing or able to act as a
depository and Mrs. Fields' Holding is unable to locate a qualified
successor within 90 days or
(2) Mrs. Fields' Holding, at its option, notifies the trustee in
writing that it elects to cause the issuance of the new notes in
definitive form under the indenture, then, upon surrender by the
relevant Global Holder of its New Global Note, new 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
notes.
In addition, subject to conditions, any person having a beneficial interest
in the New Global Note may, upon request to the trustee, exchange that
beneficial interest for certificated notes. Upon issuance, the trustee is
required to register the new notes in the name of, and cause the same to be
delivered to, that person or persons (or the nominee of any of them). The new
notes would be issued in fully registered forms.
Exchange Offer; Registration Rights
Mrs. Fields' Holding and the placement agents for the outstanding notes
entered into the registration rights agreement on August 24, 1998. The
registration rights agreement requires Mrs. Fields' Holding to file with the
Commission the registration statement on the appropriate form under the
Securities Act with respect to an offer to exchange the outstanding notes for
the new notes, which will have terms substantially similar in all material
respects to the outstanding notes. Upon the effectiveness of the registration
statement, Mrs. Fields' Holding will offer to the holders of notes that are
subject to restrictions on transfer under the exchange offer who are able to
make the necessary representations the opportunity to exchange their notes that
are subject to restrictions on transfer for new notes.
If:
(1) Mrs. Fields' Holding had not been required to file the registration
statement or is not permitted to consummate the exchange offer
because the exchange offer is not permitted by applicable law or
Commission policy; or
(2) any holder of notes that are subject to restrictions on transfer
notifies Mrs. Fields' Holding prior to the 20th day following
consummation of the exchange offer that
(a) it is prohibited by law or Commission policy from
participating in the exchange offer or
(b) that it may not resell the new notes acquired by it in the
exchange offer to the public without delivering a prospectus
and the prospectus contained in the registration statement
is not appropriate or available for resales or
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(c) that it is a broker-dealer and owns outstanding notes
acquired directly from Mrs. Fields' Holding or an affiliate
of Mrs. Fields' Holding,
then Mrs. Fields' Holding will file with the Commission a shelf registration
statement to cover resales of the old notes by the holders of those notes who
satisfy specific conditions relating to the provision of information in
connection with the shelf registration statement. Mrs. Fields' Holding will use
its best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. Notes will be subject to
restrictions on transfer until:
(1) a person other than a broker-dealer has exchanged notes in the
exchange offer;
(2) a broker-dealer has exchanged notes in the exchange offer and sells
them to a purchaser that receives this prospectus from the broker-
dealer on or before the sale;
(3) the notes are sold under an effective shelf registration statement
that we have filed; or
(4) the notes are sold to the public under Rule 144 of the Securities
Act.
The registration rights agreements requires that:
(1) Mrs. Fields' Holding must file a registration statement with the
Commission on or prior to 90 days after August 24, 1998,
(2) Mrs. Fields' Holding must use its best efforts to have the
registration statement declared effective by the Commission on or
prior to 150 days after August 24, 1998,
(3) unless the exchange offer would not be permitted by applicable law
or Commission policy, Mrs. Fields' Holding 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
was declared effective by the Commission, new notes in exchange for
all old notes tendered prior to it in the exchange offer, and
(4) if obligated to file the shelf registration statement, Mrs. Fields'
Holding will use its best efforts to file the shelf registration
statement with the Commission on or prior to 90 days after that
filing obligation arises and to cause the shelf registration
statement to be declared effective by the Commission on or prior to
150 days after that obligation arises.
If
(1) Mrs. Fields' Holding fails to file any of the registration
statements required by the registration rights agreement on or
before the date specified for the filing,
(2) any of the registration statements is not declared effective by the
Commission on or prior to the date specified for effectiveness (the
"Effectiveness Target Date"), or
(3) Mrs. Fields' Holding fails to consummate the exchange offer within
30 business days of the Effectiveness Target Date with respect to
the registration statement, or
(4) the shelf registration statement or the registration statement is
declared effective but thereafter ceases to be effective or usable
in connection with resales of notes that are subject to
restrictions on transfer during the periods specified in the
registration rights agreement
(each event referred to in clauses (a) through (d) above a "Registration
Default"), then Mrs. Fields' Holding will pay liquidated damages to each holder
of old 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 old notes held by the holder. The amount of
the liquidated damages will increase by an additional $.05 per week per $1,000
principal amount of old 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 $.50 per week per $1,000 principal amount of old notes.
Mrs. Fields' Holding will pay all accrued liquidated damages on each damages
payment date to the Global Note Holder by wire transfer of immediately
available funds or by federal funds check and to holders of certificated old
notes by wire transfer to the accounts
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specified by them or by mailing checks to their registered addresses if no
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of liquidated damages will cease.
Since the registration statement was not effective by January 21, 1999, Mrs.
Fields' Holding has incurred liquidated damages of approximately $77,000 as of
July 3, 1999. On June 1, 1999, Mrs. Fields' Holding paid $57,500 of this amount
to the holders of old notes.
Holders of old notes will be required to make representations to Mrs. Fields'
Holding in order to participate in the exchange offer and will be required to
deliver information to be used in connection with the shelf registration
statement and to provide comments on the shelf registration statement within
the time periods described in the registration rights agreement in order to
have their notes included in the shelf registration statement and benefit from
the provisions regarding liquidated damages described above.
Definitions
Set forth below are some of the 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 in this prospectus for which no
definition is provided.
"Acquired Indebtedness" means, with respect to any specified person:
(1) Indebtedness of any other person existing at the time the other
person is merged with or into or became a Subsidiary of the
specified person, excluding, however, Indebtedness incurred in
connection with, or in contemplation of, the other person merging
with or into or becoming a Subsidiary of the specified person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
the 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 the specified person. For purposes of this definition, "control,"
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 the person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the voting stock of a person shall be deemed to be control. For purposes of
this definition, the terms "controlling," "controlled by" and "under common
control with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of
business consistent with past practices; provided that the sale,
conveyance or other disposition of all or substantially all of the
assets of Mrs. Fields' Holding and its Subsidiaries taken as a
whole will be governed by the provisions of the indenture described
above under the caption "--Change of Control" and/or the provisions
described above under the caption "--Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant;
and
(2) the issuance of Equity Interests of any of Mrs. Fields' Holding's
Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of equal to or
less than $1.0 million; or
(b) results in net proceeds of equal to or less than $1.0
million;
(2) a transfer of assets between or among Mrs. Fields' Holding and its
Wholly Owned Subsidiaries,
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(3) an issuance of Equity Interests by a Wholly Owned Subsidiary to
Mrs. Fields' Holding or to another Wholly Owned Subsidiary;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "--Restricted Payments";
(5) arrangements providing for the receipt by Mrs. Fields' Holding of
franchise and royalty fees but not otherwise involving the sale of
assets of Mrs. Fields' Holding or any of its Subsidiaries (other
than inventory in the ordinary course of business); and
(6) a disposition of any Non-Core Stores.
"Beneficial Owner" has the meaning assigned to that term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), that "person" shall be deemed to have beneficial
ownership of all securities that the "person" has the right to acquire, whether
that right is currently exercisable or is exercisable only upon, the occurrence
of a subsequent condition.
"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 that time be required to be capitalized on a balance sheet in accordance
with generally accepted accounting principles in effect on August 24, 1998.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents
(however designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited);
and
(4) 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:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of
any of them having maturities of not more than six months from the
date of acquisition;
(3) marketable direct obligations issued by any State of the United
States or any local government or other political subdivision of
any of them rated (at the time of the acquisition of the security)
at least "AA" by Standard & Poor's Rating Service or an equivalent
rating by Moody's Investors Service, Inc. and having maturities of
not more than one year from the acquisition of the security;
(4) 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
Standard & Poor's Rating Service or an equivalent rating by Moody's
Investors Service, Inc.;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (4)
above entered into with any financial institution meeting the
qualifications specified in clause (4) above;
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(6) commercial paper rated at least "A-1" by Standard & Poor's Rating
Service or an equivalent rating by Moody's Investors Service, Inc.
and, in each case, maturing within six months after the date of
acquisition; and
(7) investments in money market funds all of whose assets consist of
securities described in clauses (2) through (6) above.
"Change of Control" means the occurrence of any of the following:
(1) the sale, 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 Mrs.
Fields' Holding and its Subsidiaries taken as a whole to any
"person" (as that term is used in Section 13(d)(3) of the Exchange
Act) other than Herbert S. Winokur, Jr. and Capricorn Investors II,
L.P. or their Related Parties;
(2) the adoption of a plan relating to the liquidation or dissolution
of Mrs. Fields' Holding;
(3) 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 Herbert S. Winokur, Jr. and
Capricorn Investors II, L.P. or their Related Parties, becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the
voting stock of Mrs. Fields' Holding, measured by voting power
rather than number of shares; or
(4) the first day on which a majority of the members of the Board of
Directors of Mrs. Fields' Holding 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 Mrs.
Fields' Holding will be deemed to be a transfer of that portion of the voting
stock as corresponds to the portion of equity of the entity that has been so
transferred.
"Consolidated Cash Flow" means, with respect to any person for any period,
the Consolidated Net Income of that Person for that period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale, to the extent those
losses were deducted in computing the Consolidated Net Income; plus
(2) provision for taxes based on income or profits of that person and
its Subsidiaries for that period, to the extent that the provision
for taxes was deducted in computing the Consolidated Net Income;
plus
(3) consolidated interest expense of that person and its Subsidiaries
for that 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, under Hedging
Obligations), to the extent that the expense was deducted in
computing the Consolidated Net Income; plus
(4) 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 the 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 the person and its Subsidiaries for that period to
the extent that the depreciation, amortization and other non-cash
expenses were deducted in computing the Consolidated Net Income;
minus
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(5) non-cash items increasing the Consolidated Net Income for that
period, in each case, on a consolidated basis and determined in
accordance with generally accepted accounting principles in effect
on August 24, 1998.
Notwithstanding the preceding, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges
of, a Subsidiary of the specified 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 the 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 Mrs. Fields' Holding by the
Subsidiary without prior governmental approval (that has not been obtained),
under 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 specified person for any
period, the total of the Net Income of the Person and its Subsidiaries for that
period, on a consolidated basis, determined in accordance with generally
accepted accounting principles in effect on August 24, 1998; provided that:
(1) 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 specified person or
a Wholly Owned Subsidiary of the person;
(2) 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;
(3) the Net Income of any person acquired in a pooling of interests
transaction for any period prior to the date of the acquisition
shall be excluded; and
(4) 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:
(1) the consolidated equity of the common stockholders of the person
and its consolidated Subsidiaries as of that date plus
(2) the respective amounts reported on that 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 those dividends may be declared and
paid only out of net earnings in respect of the year of declaration
and payment, but only to the extent of any cash received by the
person upon issuance of the preferred stock, less
(a) 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 August 24, 1998
in the book value of any asset owned by the person or a
consolidated Subsidiary of the person,
(b) all investments as of that date in unconsolidated
Subsidiaries and in persons that are not Subsidiaries
(except, in each case, Permitted Investments), and
(c) all unamortized debt discount and expense and unamortized
deferred charges as of that date,
all of the foregoing determined in accordance with generally accepted
accounting principles in effect on August 24, 1998.
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"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Mrs. Fields' Holding who:
(1) was a member of the Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to the Board of Directors
with the approval of a majority of the Continuing Directors who
were members of the Board at the time of the nomination or
election.
"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, under a sinking fund obligation or otherwise, or redeemable at the
option of its holder, in whole or in part, on or prior to the date that is 91
days after the date on which the notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely as
a result of any maturity or redemption of that Capital Stock shall not
constitute Disqualified Stock if that maturity or redemption complies with the
covenant described above under the caption "--Covenants--Restricted Payments."
"Existing Indebtedness" means Indebtedness of Mrs. Fields' Holding and its
Subsidiaries (including preferred stock of Pretzel Time outstanding on August
24, 1998 but excluding any Indebtedness of Mrs. Fields' Holding or any of its
Subsidiaries under any credit facility of Mrs. Fields with a maximum total
amount of $15.0 million that is permitted under the indenture existing on
August 24, 1998) in existence on August 24, 1998, until those amounts are
repaid.
"Fixed Charges" means, with respect to any person for any period, the sum,
without duplication, of
(1) the consolidated interest expense of the person and its
Subsidiaries for that 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) under Hedging Obligations);
(2) the consolidated interest expense of the person and its
Subsidiaries that was capitalized during that period,
(3) any interest expense on Indebtedness of another person that is
guaranteed by that person or one of its Subsidiaries or secured by
a Lien on assets of that person or one of its Subsidiaries (whether
or not that guarantee or Lien is called upon); and
(4) the product of
(a) all dividend payments, whether or not in cash, on any series of
preferred stock of the person or any of its Subsidiaries, other
than dividend payments on Equity Interests payable solely in Equity
Interests of Mrs. Fields' Holding, 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 the person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with generally
accepted accounting principles in effect on August 24, 1998.
"Fixed Charge Coverage Ratio" means with respect to any person for any
period, the ratio of the Consolidated Cash Flow of that person for such period
to the Fixed Charges of that person for such period. In the event that Mrs.
Fields' Holding 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 that
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incurrence, assumption, guarantee or redemption of Indebtedness, or that
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:
(1) acquisitions that have been made by Mrs. Fields' Holding 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 that 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 that reference period shall be
calculated without giving effect to clause (3) of the proviso
described in the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with generally accepted accounting
principles in effect on August 24, 1998, and operations or
businesses disposed of prior to the Calculation Date, shall be
excluded,
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with generally accepted accounting
principles in effect on August 24, 1998, 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 those Fixed Charges will not be obligations of the specified
person or any of its Subsidiaries following the Calculation Date;
and
(4) the financial information of Mrs. Fields' Holding with respect to
any portion of the four fiscal quarters prior to August 24, 1998
may be adjusted to eliminate some historical expenses that are not
expected to recur after the consummation of the Pretzel
Contributions so long as those adjustments are not deemed to be
contrary to the requirements of Regulation S-X under the Securities
Act.
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 the same or a similar
line of business as Mrs. Fields' Holding and its Subsidiaries were engaged in
on August 24, 1998, including, without limitation, the specialty retail snack-
food business, Mrs. Fields' Holding 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 the 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.
"Hedging Obligations" means, with respect to any person, the obligations of
that person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect that person
against fluctuations in interest or foreign currency exchange
rates.
"Indebtedness" means, with respect to any specified person, any indebtedness
of that person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect of those
instruments);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property, except any balance that constitutes an accrued expense or
trade payable; or
(6) representing any Hedging Obligations,
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if and to the extent any of the preceding (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of the
specified person prepared in accordance with generally accepted accounting
principles in effect on August 24, 1998. In addition, the term "Indebtedness"
includes all Indebtedness of others secured by a Lien on any asset of the
specified person (whether or not the Indebtedness is assumed by the specified
person) and, to the extent not otherwise included, the guarantee by the person
of any indebtedness of any other person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness that does not require current payments of interest;
and
(2) the principal amount of the Indebtedness, together with any
interest on the Indebtedness 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 that
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
generally accepted accounting principles in effect on August 24, 1998, provided
that an acquisition of assets, Equity Interests or other securities by Mrs.
Fields' Holding for consideration consisting of common stock of Mrs. Fields'
Holding shall not be deemed to be an Investment. If Mrs. Fields' Holding or any
Subsidiary of Mrs. Fields' Holding sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of Mrs. Fields' Holding such
that, after giving effect to the sale or disposition, the person is no longer a
Subsidiary of Mrs. Fields' Holding, Mrs. Fields' Holding shall be deemed to
have made an Investment on the date of any sale or disposition equal to the
fair market value of the Equity Interests of the Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of that 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 of that of encumbrance, 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 Mrs. Fields'
Holding to the extent that the option, call or right is granted
(a) under any employee stock option plan, employee stock ownership plan
or similar plan or arrangement of Mrs. Fields' Holding or its
Subsidiaries or
(b) in connection with the issuance of Indebtedness permitted to be
incurred under the covenant described under the caption "--
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
"Mrs. Fields" means Mrs. Fields' Original Cookies, Inc., a Delaware
corporation and a wholly owned subsidiary of Mrs. Fields holding.
"Mrs. Fields' Holding Capital Contributions" means the capital contribution
of Mrs. Fields' Holding to Mrs. Fields on August 24, 1998 and all future
capital contributions or purchases made by Mrs. Fields' Holding to or from Mrs.
Fields in exchange for capital stock of Mrs. Fields.
"Net Income" means, with respect to any person, the net income (loss) of that
person, determined in accordance with generally accepted accounting principles
in effect on August 24, 1998 and before any reduction in respect of preferred
stock dividends, excluding, however:
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(1) any gain (but not loss), together with any related provision for
taxes on that gain (but not loss), realized in connection with
(a) any Asset Sale (including, without limitation, dispositions
under sale and leaseback transactions) or
(b) the disposition of any securities by the person or any of
its Subsidiaries or the extinguishment of any Indebtedness
of the person or any of its Subsidiaries; and
(2) any extraordinary or nonrecurring gain (but not loss), together
with any related provision for taxes on that extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the total cash proceeds received by Mrs. Fields' Holding
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 the 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 the Asset Sale and any reserve for
adjustment in respect of the sale price of the asset or assets established in
accordance with generally accepted accounting principles in effect on August
24, 1998.
"Non-Core Stores" means the stores listed in Exhibit G to the Indenture.
"Permitted Investments" means:
(1) any Investment in Mrs. Fields' Holding or in a Wholly Owned
Subsidiary of Mrs. Fields' Holding that is engaged in the same
or a similar line of business as Mrs. Fields' Holding and its
Subsidiaries were engaged in on August 24, 1998, including,
without limitation, the specialty retail snack-food business;
(2) any Investment in Cash Equivalents;
(3) any Investment by Mrs. Fields' Holding or any Subsidiary of Mrs.
Fields' Holding in a person, if as a result of the Investment:
(a) the person becomes a Wholly Owned Subsidiary of Mrs. Fields'
Holding that is engaged in the same or a similar line of
business as Mrs. Fields' Holding and its Subsidiaries were
engaged in on August 24, 1998, including, without limitation,
the specialty retail snack-food business or
(b) the person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or
is liquidated into, Mrs. Fields' Holding or a Wholly Owned
Subsidiary of Mrs. Fields' Holding and that is engaged in the
same or a similar line of business as Mrs. Fields' Holding and
its Subsidiaries were engaged in on August 24, 1998, including,
without limitation, the specialty retail snack-food business;
(4) any Investment other than a Permitted Investment made as a
result of the receipt of non-cash consideration from an Asset
Sale that was made under and in compliance with the covenant
described above under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Mrs. Fields'
Holding;
(6) any Investments in accounts and notes receivable acquired in the
ordinary course of business;
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(7) any Investments in notes of employees, officers, directors and
their transferees and Affiliates issued to Mrs. Fields' Holding
or Mrs. Fields representing payment of the exercise price of
options to purchase common stock of Mrs. Fields' Holding;
(8) any Investments by Mrs. Fields' Holding or Mrs. Fields in
Hedging Obligations otherwise permitted to be incurred under the
indenture;
(9) any Investments existing on August 24, 1998; and
(10) any purchase of any and all remaining common stock of Pretzel
Time.
"Permitted Liens" means:
(1) Liens securing Indebtedness under a credit facility of Mrs.
Fields with a maximum total amount of $15.0 million that is
permitted under the indenture that was permitted by the terms of
the indenture to be incurred;
(2) Liens in favor of Mrs. Fields' Holding or Mrs. Fields;
(3) Liens on property of a person existing at the time the person is
merged into or consolidated with Mrs. Fields' Holding or any
Subsidiary of Mrs. Fields' Holding, provided that those Liens
were in existence prior to the contemplation of the merger or
consolidation and do not extend to any assets other than those
of the person merged into or consolidated with Mrs. Fields'
Holding;
(4) Liens on property existing at the time of acquisition thereof by
Mrs. Fields' Holding or any Subsidiary of Mrs. Fields' Holding,
provided that those Liens were in existence prior to the
contemplation of the acquisition and do not extend to any assets
of Mrs. Fields' Holding other than the property so acquired;
(5) 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;
(6) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clauses (4) and (11) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock," provided that, in the case of
Indebtedness permitted by clause (3), covering only the assets
acquired with that Indebtedness;
(7) Liens existing on August 24, 1998;
(8) 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
generally accepted accounting principles in effect on August 24,
1998 shall have been made therefor; and
(9) Liens incurred in the ordinary course of business of Mrs.
Fields' Holding or any Subsidiary of Mrs. Fields' Holding 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 total materially detract from the value of the
property or materially impair the use thereof in the
operation of business by Mrs. Fields' Holding or the
Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of Mrs. Fields'
Holding 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 Mrs. Fields' Holding or any of its Subsidiaries, provided that
(1) the principal amount (or accreted value, if applicable) of the
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);
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(2) the 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;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of
payment to the notes, the Permitted Refinancing Indebtedness has
a final maturity date later than the final maturity date of, and
is subordinated in right of payment to, the notes on terms at
least as favorable to the holders of notes as those contained in
the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) the Indebtedness is incurred either by Mrs. Fields' Holding or
by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Pretzel Contributions" means the contribution from Mrs. Fields' Holding to
Mrs. Fields of the pretzel business formerly owned by H&M Concepts Ltd. Co., an
Idaho limited liability company, and its subsidiaries, and the common stock of
Pretzel Time.
"Public Equity Offering" means a public offering registered under the
Securities Act (except for any registration under Form S-8) of common stock of
Mrs. Fields' Holding.
"Related Party" with respect to Herbert S. Winokur, Jr. or Capricorn
Investors II, L.P. means:
(1) any greater than 50% owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of Herbert S.
Winokur, Jr. or Capricorn Investors II, L.P. or
(2) 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 Herbert S. Winokur, Jr. or Capricorn
Investors II, L.P. and/or the other persons referred to in the
immediately preceding clause (1).
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
under the Securities Act, as that Regulation is in effect on August 24, 1998.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing the Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase the interest or principal prior to the date
originally scheduled for payment.
"Subsidiary" means, with respect to any person,
(1) 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
(2) any partnership
(a) the sole general partner or the managing general partner of
which is that person or a Subsidiary of that person or
(b) the only general partners of which are that person or of one or
more Subsidiaries of that person (or any combination of the
preceding).
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"Tax Sharing Agreement" means any tax allocation agreement between Mrs.
Fields' Holding or any of its Subsidiaries with Mrs. Fields' Holding or any
direct or indirect shareholder of Mrs. Fields' Holding with respect to
consolidated or combined tax returns including Mrs. Fields' Holding or any of
its Subsidiaries, but, in each case, only to the extent that amounts payable
from time to time by Mrs. Fields' Holding or the Subsidiary under any such
agreement do not exceed the corresponding tax payments that Mrs. Fields'
Holding or the Subsidiary would have been required to make to any relevant
taxing authority had Mrs. Fields' Holding or the Subsidiary not joined in those
consolidated or combined returns, but instead had filed returns including only
Mrs. Fields' Holding and its Subsidiaries.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) 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 of the
Indebtedness, by
(b) the number of years (calculated to the nearest one-twelfth) that
will elapse between that date and the making of that payment; by
(2) the then outstanding principal amount of that Indebtedness.
"Wholly Owned Subsidiary" of any person means a Subsidiary of that 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 that person or
by one or more Wholly Owned Subsidiaries of that person and one or more Wholly
Owned Subsidiaries of that person.
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DESCRIPTION OF INDEBTEDNESS
Credit Agreement
Mrs. Fields entered into an Amended and Restated Loan Agreement, as amended,
dated as of February 28, 1998, with LaSalle National Bank. Under the credit
agreement, La Salle National Bank will provide Mrs. Fields with a revolving
loan commitment of up to $15.0 million until the maturity date of March 31,
2001 or until the credit agreement is otherwise terminated or accelerated by La
Salle National Bank. Principal amounts due on revolving loans made under the
credit agreement bear interest at Mrs. Fields' option at either the Prime rate
or LIBOR plus two percent per annum. Any amount of principal or interest that
is not paid when due bears interest payable on demand at the default rate of
interest, which is the regular interest rate plus two percent. The credit
agreement also provides that La Salle National Bank may issue letters of credit
on behalf of Mrs. Fields in a total amount not to exceed $500,000. The total
amount of letters of credit issued plus the total amount of revolving loans
outstanding cannot exceed $15.0 million. Substantially all of the assets of
Mrs. Fields have been pledged to La Salle National Bank under the agreement.
The credit agreement contains restrictions on, among other things, payments,
the incurrence of indebtedness and liens, which are substantially similar to
the restrictions in the indenture. As of July 3, 1999, there was $7.0 million
outstanding under the credit agreement. Under the borrowing base, Mrs. Fields
is limited to borrowing an additional $276 thousand in accordance with
restrictions of the indenture.
On May 27, 1999, Pretzel Time entered into agreements with LaSalle National
Bank under which Pretzel Time borrowed, on May 28, 1999, $1,000,000 in
aggregate principal amount from LaSalle. Pretzel Time issued a revolving note
to LaSalle to evidence its borrowing, which bears interest at the Prime rate,
or Prime plus 2% for any balance payable after the note has matured on June 30,
2000. Pretzel Time has pledged its assets to LaSalle to secure its obligations,
and Mrs. Fields has guaranteed Pretzel Time's obligations to LaSalle.
WARRANTS
The outstanding notes were issued concurrently with the warrants, with $1,000
in principal amount at maturity of notes and one warrant constituting a unit.
Each warrant is exercisable for 3.14411 shares of common stock of Mrs. Fields'
Holding. The notes and the warrants became separately transferable on
February 20, 1999, which was 180 days after the closing of the offering of
outstanding notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives notes for its own account issued in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of those 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 notes issued in the exchange offer received in exchange for
outstanding notes where those outstanding notes were acquired as a result of
market-making activities or other trading activities. We have agreed that, for
a period of 120 days after the consummation of the exchange offer, we will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with this type of resale. In addition, until , 1999, all
dealers effecting transactions in the notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sale of notes issued in the
exchange offer by broker-dealers. Notes issued in the exchange offer received
by broker-dealers for their own account under 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 notes issued
in the exchange offer or a combination of these methods of resale, at market
prices prevailing at the time of resale, at prices related to those prevailing
market prices or negotiated prices. Any resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from the broker-dealer or the purchasers
of these notes issued in the exchange offer. Any broker-dealer that resells
notes issued in the
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exchange offer that were received by it for its own account under the exchange
offer and any broker or dealer that participates in a distribution of these
notes issued in the exchange offer may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on the resale of notes issued
in the exchange offer and any commission or concessions received by these
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 completion of the exchange offer, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these
documents in the letter of transmittal or agent's message. We have 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 some related
liabilities, including liabilities under the Securities Act.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of U.S. Federal income tax consequences
associated with the exchange of the outstanding notes for the notes issued in
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
outstanding notes or notes issued in the exchange offer. In addition, the
discussion does not address any aspect of state, local or foreign taxation.
The exchange of the outstanding notes for the notes issued in the exchange
offer should not be treated as an "exchange" for U.S. Federal income tax
purposes because the notes issued in the exchange offer should not be
considered to differ materially in kind or extent from the outstanding notes.
Rather, the notes issued in the exchange offer received by a holder should be
treated as a continuation of the outstanding notes in the hands of such holder.
As a result there should be no U.S. Federal income tax consequences to holders
exchanging the outstanding notes for the notes issued in the exchange offer,
and any exchanging holder of outstanding notes should have the same tax basis
and holding period in, and original issue discount income in respect of, the
notes issued in the exchange offer as such holder had in the outstanding notes
immediately prior to the exchange.
Prospective holders of the notes issued in the exchange offer are urged to
consult their tax advisors concerning the particular tax consequences of
exchanging such holders' outstanding notes for the notes issued in the exchange
offer, including the applicability and effect of any state, local or foreign
income and other tax laws.
LEGAL MATTERS
The validity of the notes issued in the exchange offer offered hereby will be
passed upon by Skadden, Arps, Slate, Meagher & Flom LLP.
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EXPERTS
The historical consolidated financial statements of Mrs. Fields' Holding
Company, Inc. and subsidiaries as of January 3, 1998 and January 2, 1999 and
for the period from inception (September 18, 1996) to December 28, 1996 and for
the years ended January 3, 1998 and January 2, 1999; the historical
consolidated financial statements of Mrs. Fields' Original Cookies, Inc. and
subsidiaries as of January 3, 1998 and January 2, 1999 and for the period from
inception (September 18, 1996) to December 28, 1996 and for the years ended
January 3, 1998 and January 2, 1999; 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 combined financial
statements of The Original Cookie Company, Incorporated and the Carved-Out
Portion of Hot Sam Company, Inc. as of September 17, 1996 and for the year
ended December 30, 1995 and for the period ended September 17, 1996; the
historical financial statements of Chocolate Chip Cookies of Texas, Inc. as of
September 30, 1996 and 1997 and for the years ended September 30, 1995, 1996
and 1997; the historical combined financial statements of the Combined Karp
Entities as of December 31, 1996 and 1997 and for the years ended December 31,
1995, 1996 and 1997, included in this prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect to it, and are included in this prospectus in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The financial statements of Mrs. Fields Inc. and subsidiaries for the year
ended December 30, 1995 included in this prospectus, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing in this prospectus and is included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of Deblan Corporation as of December 31, 1996 and
1997, and for the years ended December 31, 1995, 1996 and 1997 included in this
prospectus, have been audited by Weinstein Spira & Company, P.C., independent
auditors, as stated in their report appearing in this prospectus.
The financial statements of Cookies USA, Inc. and subsidiary as of June 29,
1997 and June 28, 1998 and for each of the three years in the period ended June
28, 1998 included in this prospectus, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing in this prospectus.
The financial statements of Cookie Conglomerate, Inc. as of December 31, 1997
and 1996, and for the years ended December 31, 1997 and 1996 included in this
prospectus, have been audited by Habif, Arogeti & Wynne, P.C., independent
auditors, as stated in their report appearing in this prospectus.
The financial statements of Pretzelmaker Holdings, Inc. and subsidiaries as
of December 31, 1997, and for the year ended December 31, 1997 included in this
prospectus, have been audited by AJ. Robbins, PC, independent public
accountants as stated in their report appearing in this prospectus.
The financial statements of Pretzelmaker Holdings, Inc. as of December 31,
1996 and for the period from inception (February 24, 1995) to December 31, 1995
and for the year ended December 31, 1996 included in this prospectus, have been
audited by BDO Seidman, LLP, independent public accountants, as stated in their
report appearing in this prospectus.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On August 24, 1998, Mrs. Fields' Holding Company, Inc. sold 55,000 Units,
consisting of $55,000,000 in total principal amount of Senior Secured Discount
Notes due 2005 and warrants to purchase 172,926 shares of common stock of Mrs.
Fields' Holding. The net proceeds of the Mrs. Fields' Holding offering and the
net proceeds of the $40,000,000 Mrs. Fields' Original Cookies, Inc. offering on
the same date, together with existing Mrs. Fields' cash, were used to: (1)
finance the acquisition of all of the outstanding capital stock of Great
American; (2) finance the tender offer to repurchase all of Great American's
$40,000,000 total principal amount of 10 7/8% Senior Secured Notes due 2001,
including accrued but unpaid interest and a premium of $1,600,000; (3) finance
the repayment of all of Great American's $10,000,000 total principal amount of
12.5% Subordinated Notes, including accrued but unpaid interest; (4) finance
the retirement of Great American's Senior Redeemable Preferred Stock and Junior
Redeemable Preferred Stock at a total discounted purchase price of $8,400,000;
(5) finance the acquisition of all of the outstanding capital stock of Deblan
Corporation and Chocolate Chip Cookies of Texas, Inc., two franchisees of Great
American, including the repayment of assumed debt; and (6) finance the asset
purchase of eight stores controlled by another Great American franchisee,
defined as the Combined Karp Entities.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and
related business and operations of eleven Great American stores, defined as
Cookie Conglomerate, for a total purchase price of $2,800,000. The Cookie
Conglomerate acquisition was funded with financing provided by T&W Financial
Services Company, L.L.C. and such funding is secured by the assets of the
acquired stores.
On November 19, 1998, Mrs. Fields acquired all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. for $5,739,000, including $5,419,000
related to outstanding capital stock and $320,000 related to severance payments
in lieu of outstanding capital stock options, and assumed liabilities totaling
$1,299,000. The transaction was financed with notes issued to the sellers that
were paid by Mrs. Fields in installments through January 4, 1999. Of the
assumed indebtedness, $722,000 was paid by Mrs. Fields in installments through
January 4, 1999. The notes are secured by all of the outstanding capital stock
of Pretzelmaker.
The unaudited pro forma condensed combined statements of operations for the
52 weeks ended January 2, 1999 are based upon the historical financial
statements of Mrs. Fields' Holding, Great American, Deblan, Chocolate Chip, the
Combined Karp Entities, Cookie Conglomerate and Pretzelmaker, and should be
read in conjunction with the audited and unaudited financial statements and
related notes of these entities. The unaudited pro forma condensed combined
financial statements have been prepared using the purchase method of accounting
for the acquisitions of Great American, Deblan, Chocolate Chip, the Combined
Karp Entities, Cookie Conglomerate and Pretzelmaker. Mrs. Fields' Holding
operates using a 52/53-week year ending near December 31. Great American
operates using a 52/53-week year ending near June 30. Deblan, Cookie
Conglomerate and Pretzelmaker operate using a year ending December 31 and
Chocolate Chip operates using a year ending September 30. The Combined Karp
Entities operate using various year ends, which have been recast to December
31. We have recast the historical financial statements for those entities that
did not operate using a year ending near December 31 to be comparative for the
52 weeks ended January 2, 1999. None of the revenues and income (loss) of any
entity has been excluded or included more than once in the unaudited pro forma
condensed combined financial statements.
The unaudited pro forma condensed combined statements of operations for the
52 weeks ended January 2, 1999 assume that the above transactions occurred as
of January 4, 1998 (the first day of fiscal 1998) and combine the historical
results of operations of the entities for those periods with pro forma
adjustments to give effect to the Mrs. Fields' Holding's offering, the Mrs.
Fields' offering in August 1998 and the acquisitions.
P-1
<PAGE>
The unaudited pro forma condensed combined financial statements included in
this Registration Statement are 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 periods indicated, nor is
it indicative of actual or future operating results or financial position that
may occur. See also "Risk Factors" included elsewhere in this Registration
Statement.
P-2
<PAGE>
MRS. FIELDS' HOLDING
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED JANUARY 2, 1999
(unaudited)
<TABLE>
<CAPTION>
Combined Pretzel-
Great Chocolate Karp Cookie maker Pro Forma
Mrs. Fields' American Deblan Chip Entities Conglomerate (See Adjustments
Holding (See Note 2) (See Note 3) (See Note 4) (See Note 5) (See Note 6) Note 7) (See Note 1)
------------ ------------ ------------ ------------ ------------ ------------ -------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net store and
food sales..... $140,235 $18,932 $6,370 $1,873 $1,489 $2,906 $1,222 $(1,338)(a)
Franchising,
net............ 12,464 3,531 -- -- -- -- 2,634 (609)(b)
Licensing, net.. 1,537 -- -- -- -- -- -- --
-------- ------- ------ ------ ------ ------ ------ -------
Total revenues.. 154,236 22,463 6,370 1,873 1,489 2,906 3,856 (1,947)
-------- ------- ------ ------ ------ ------ ------ -------
OPERATING COSTS
AND EXPENSES:
Selling and
store occupancy
costs.......... 75,003 7,645 3,523 1,000 914 1,580 1,401 (609)(b)
Cost of sales... 38,482 6,428 1,108 454 373 733 85 (1,338)(a)
General and
administrative.. 19,583 5,288 1,067 421 141 303 2,085 (1,834)(c)
Store closure
provision...... 7,303 -- -- -- -- -- -- --
Depreciation and
amortization... 19,867 1,510 182 22 82 118 657 3,191(d)
-------- ------- ------ ------ ------ ------ ------ -------
Total operating
costs and
expenses....... 160,238 20,871 5,880 1,897 1,510 2,734 4,228 (590)
-------- ------- ------ ------ ------ ------ ------ -------
Income (loss)
from
operations...... (6,002) 1,592 490 (24) (21) 172 (372) (1,357)
INTEREST
EXPENSE......... (14,946) (4,077) (43) (2) (8) (17) (179) (2,854)(e)
INTEREST INCOME.. 623 258 24 4 -- -- -- --
OTHER INCOME
(EXPENSE), net.. (409) (149) 40 11 -- 32 -- --
-------- ------- ------ ------ ------ ------ ------ -------
Income (loss)
before
provision
(benefit) for
income taxes... (20,734) (2,376) 511 (11) (29) 187 (551) (4,211)
PROVISION
(BENEFIT) FOR
INCOME TAXES.... 316 (38) 115 27 6 -- (8) --
-------- ------- ------ ------ ------ ------ ------ -------
Income (loss)
before
preferred stock
accretion and
dividends of
subsidiaries
and minority
interest....... (21,050) (2,338) 396 (38) (35) 187 (543) (4,211)
PREFERRED STOCK
ACCRETION AND
DIVIDENDS OF
SUBSIDIARIES.... (444) -- -- -- -- -- -- --
MINORITY
INTEREST........ (11) -- -- -- -- -- -- --
-------- ------- ------ ------ ------ ------ ------ -------
Net income
(loss)......... $(21,505) $(2,338) $ 396 $ (38) $ (35) $ 187 $ (543) $(4,211)
======== ======= ====== ====== ====== ====== ====== =======
Basic and
diluted net
loss per common
share.......... $ (6.55) $ (0.71) $ 0.12 $(0.01) $(0.01) $ 0.06 $(0.17) $ (1.28)
======== ======= ====== ====== ====== ====== ====== =======
<CAPTION>
Pro Forma
Combined
----------
<S> <C>
REVENUES:
Net store and
food sales..... $171,689
Franchising,
net............ 18,020
Licensing, net.. 1,537
----------
Total revenues.. 191,246
----------
OPERATING COSTS
AND EXPENSES:
Selling and
store occupancy
costs.......... 90,457
Cost of sales... 46,325
General and
administrative.. 27,054
Store closure
provision...... 7,303
Depreciation and
amortization... 25,629
----------
Total operating
costs and
expenses....... 196,768
----------
Income (loss)
from
operations...... (5,522)
INTEREST
EXPENSE......... (22,126)
INTEREST INCOME.. 909
OTHER INCOME
(EXPENSE), net.. (475)
----------
Income (loss)
before
provision
(benefit) for
income taxes... (27,214)
PROVISION
(BENEFIT) FOR
INCOME TAXES.... 418
----------
Income (loss)
before
preferred stock
accretion and
dividends of
subsidiaries
and minority
interest....... (27,632)
PREFERRED STOCK
ACCRETION AND
DIVIDENDS OF
SUBSIDIARIES.... (444)
MINORITY
INTEREST........ (11)
----------
Net income
(loss)......... $(28,087)
==========
Basic and
diluted net
loss per common
share.......... $ (8.55)
==========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
P-3
<PAGE>
MRS. FIELDS' HOLDING
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. Unaudited Pro Forma Condensed Combined Statements Of Operations Adjustments
(a) Adjustment to reflect the elimination of batter sales and batter cost of
sales as a result of combining Great American, Deblan, Chocolate Chip, the
Combined Karp Entities and Cookie Conglomerate.
(b) Adjustment to reflect the elimination of franchise fees and related costs
as a result of combining Great American, Deblan, Chocolate Chip, the Combined
Karp Entities and Cookie Conglomerate.
(c) Adjustment to reflect the impact of the reduction in salaries and payroll
expenses related to employees of Great American, Deblan, Chocolate Chip, the
Combined Karp Entities, Cookie Conglomerate and Pretzelmaker terminated at the
date of the acquisitions assuming that the acquisitions were completed at
January 4, 1998. The terminations were a contractual component of the
acquisition agreements and occurred concurrent with and were a direct result of
the acquisitions. These terminations will have a continuing impact, as the
positions occupied by the terminated employees have been eliminated. The
terminated employees will not be replaced as Mrs. Fields 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.
(d) Adjustment to reflect amortization of goodwill totaling $84,404,000,
which was recorded in connection with the purchase of the net assets of Great
American, Deblan, Chocolate Chip, the Combined Karp Entities, Cookie
Conglomerate and Pretzelmaker. Goodwill is being amortized over a 15-year
period. Also includes adjustment to reflect a reduction in depreciation expense
as a result of reducing Great American, Deblan, Chocolate Chip and the Combined
Karp Entities property and equipment and increasing Cookie Conglomerate's
property and equipment to estimated fair market value in connection with each
respective acquisition. The average estimated depreciable lives for these
assets is seven years.
(e) Adjustment to interest expense related to: (i) the retirement of
$40,000,000 of Great American 10.875% Senior Secured Notes; (ii) the retirement
of $10,000,000 of Great American 12.5% Subordinated Notes; (iii) the
elimination of Great American's original issue discount; (iv) the elimination
of Great American's deferred loan costs; (v) the additional interest expense
related to approximately $6,815,000 of new deferred loan costs amortized over a
seven-year period; (vi) the additional interest expense on the $40,000,000 of
Series C Senior Notes and amortization of $600,000 of assumed discount; (vii)
the interest expense on the $55,000,000 of Mrs. Fields' Holding's 14% Senior
Secured Discount Notes and amortization of $26,612,000 original issue discount;
(viii) the interest expense on $2,800,000 of financing related to the
acquisition of Cookie Conglomerate, and (ix) the interest expense on $4,682,000
of financing related to the acquisition of Pretzelmaker.
2. Great American Acquisition
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital stock
and subordinated indebtedness of Great American for an total purchase price of
$18,400,000. The purchase price was allocated based on the estimated fair
values of the net assets acquired, as presented below:
<TABLE>
<S> <C>
Current assets acquired........................................ $ 11,439,000
Fixed assets acquired.......................................... 2,978,000
Other assets acquired.......................................... 3,128,000
Current liabilities acquired................................... (7,825,000)
Other liabilities acquired..................................... (42,194,000)
Goodwill acquired.............................................. 50,874,000
------------
Total purchase price......................................... $ 18,400,000
============
</TABLE>
P-4
<PAGE>
MRS. FIELDS' HOLDING
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
In the accompanying pro forma condensed combined statement of operations for
the 52 weeks ended January 2, 1999, Great American's results of operations from
December 29, 1997 to August 23, 1998 are included under the "Great American"
column heading. Great American's results of operations from August 24, 1998 to
January 2, 1999 are included under the "Mrs. Fields" column heading.
The following data reconciles the key components of Great American's results
of operations in the pro forma condensed combined statement of operations for
the 52 weeks ended January 2, 1999 with the key components of Great American's
results of operations in its historical financial statements for the 52 weeks
ended June 28, 1998:
<TABLE>
<CAPTION>
Add
Less June 29, 1998 December 29, 1997
52 Weeks Ended 26 Weeks Ended to to
June 28, 1998 December 28, 1997 August 23, 1998 August 23, 1998
-------------- ----------------- --------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net store sales......... $18,854 $10,382 $2,753 $11,225
Batter sales to
franchisees............ 12,214 6,140 1,633 7,707
Franchising, net........ 5,770 2,884 563 3,449
Other, net.............. 139 72 15 82
Operating costs and
expenses............... 31,133 16,044 5,782 20,871
Income (loss) from
operations............. 5,844 3,738 (514) 1,592
Net income (loss)....... (202) 1,182 (954) (2,338)
</TABLE>
3. Deblan Acquisition
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital stock
of Deblan for an total purchase price of $10,465,000. Accordingly, in the
accompanying pro forma condensed combined statement of operations for the 52
weeks ended January 2, 1999, Deblan's results of operations from January 1,
1998 to August 23, 1998 are included under the "Deblan" column heading.
Deblan's results of operations from August 24, 1998 to January 2, 1999 are
included under the "Mrs. Fields" column heading. The purchase price was
allocated based on the estimated fair values of the net assets acquired, as
presented below:
<TABLE>
<S> <C>
Current assets acquired......................................... $ 1,241,000
Fixed assets acquired, net...................................... 1,649,000
Other assets acquired........................................... 245,000
Current liabilities acquired.................................... (1,006,000)
Other liabilities acquired...................................... (565,000)
Goodwill acquired............................................... 8,901,000
-----------
Total purchase price.......................................... $10,465,000
===========
</TABLE>
The following data reconciles the key components of Deblan's results of
operations in the pro forma condensed combined statement of operations for the
52 weeks ended January 2, 1999 with the key components of Deblan's results of
operations in its unaudited historical financial statements for the six months
ended June 30, 1998:
<TABLE>
<CAPTION>
July 1, 1998 January 1, 1998
Six Months Ended to to
June 30, 1998 August 23, 1998 August 23, 1998
---------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Net store sales......... $4,768 $1,602 $6,370
Operating costs and ex-
penses................. 4,418 1,462 5,880
Income from operations.. 350 140 490
Net income.............. 232 164 396
</TABLE>
P-5
<PAGE>
MRS. FIELDS' HOLDING
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
4. Chocolate Chip Acquisition
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital stock
of Chocolate Chip for a total purchase price of $3,965,000. The purchase price
was allocated based on the estimated fair values of the net assets acquired, as
presented below:
<TABLE>
<S> <C>
Current assets acquired.......................................... $ 174,000
Fixed assets acquired, net....................................... 108,000
Other assets acquired............................................ 46,000
Current liabilities acquired..................................... (111,000)
Goodwill acquired................................................ 3,748,000
----------
Total purchase price........................................... $3,965,000
==========
</TABLE>
In the accompanying pro forma condensed combined statement of operations for
the 52 weeks ended January 2, 1999, Chocolate Chip's results of operations from
January 1, 1998 to August 23, 1998 are included under the "Chocolate Chip"
column heading. Chocolate Chip's results of operations from August 24, 1998 to
January 2, 1999 are included under the "Mrs. Fields" column heading.
The following data reconciles the key components of Chocolate Chip's results
of operations in the pro forma condensed combined statement of operations for
the 52 weeks ended January 2, 1999 with the key components of Chocolate Chip's
results of operations in its historical financial statements for the nine
months ended June 30, 1998:
<TABLE>
<CAPTION>
Less Add
Nine Months Three Months July 1, 1998 January 1, 1998
Ended Ended to to
June 30, 1998 December 31, 1997 August 23, 1998 August 23, 1998
------------- ----------------- --------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net store sales......... $2,266 $803 $410 $1,873
Operating costs and ex-
penses................. 2,100 646 443 1,897
Income (loss) from oper-
ations................. 166 157 (33) (24)
Net income (loss)....... 116 155 1 (38)
</TABLE>
5. Combined Karp Entities Acquisition
On September 9, 1998, Mrs. Fields acquired the Combined Karp Entities for a
total purchase price of $1,888,000. Accordingly, in the accompanying pro forma
condensed combined statement of operations for the 52 weeks ended January 2,
1999, the Combined Karp Entities' results of operations from January 1, 1998 to
September 9, 1998 are included under the "Combined Karp Entities" column
heading. The Combined Karp Entities' results of operations from September 10,
1998 to January 2, 1999 are included under the "Mrs. Fields" column heading.
The purchase price was allocated based on the estimated fair values of the net
assets acquired, as presented below:
<TABLE>
<S> <C>
Current assets acquired.......................................... $ 54,000
Fixed assets acquired, net....................................... 1,054,000
Goodwill acquired................................................ 780,000
----------
Total purchase price........................................... $1,888,000
==========
</TABLE>
P-6
<PAGE>
MRS. FIELDS' HOLDING
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following data reconciles the key components of the Combined Karp
Entities results of operations in the pro forma condensed combined statement of
operations for the 52 weeks ended January 2, 1999 with the key components of
the Combined Karp Entities results of operations in its historical financial
statements for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
Six Months Ended July 1, 1998 To January 1, 1998 To
June 30, 1998 September 9, 1998 September 9, 1998
---------------- ----------------- ------------------
(dollars in thousands)
<S> <C> <C> <C>
Net store sales......... $1,181 $308 $1,489
Operating costs and ex-
penses................. 1,259 251 1,510
Income (loss) from oper-
ations................. (78) 57 (21)
Net income (loss)....... (91) 56 (35)
</TABLE>
6. Cookie Conglomerate Acquisition
On October 5, 1998, Mrs. Fields acquired Cookie Conglomerate for a total
purchase price of $2,800,000. Accordingly, in the accompanying pro forma
condensed combined statement of operations for the 52 weeks ended January 2,
1999, Cookie Conglomerate's results of operations from January 1, 1998 to
September 30, 1998 are included under the "Cookie Conglomerate" column heading.
The purchase price was allocated based on the estimated fair values of the net
assets acquired, as presented below:
<TABLE>
<S> <C>
Fixed assets acquired............................................ $1,270,000
Other intangibles acquired....................................... 100,000
Goodwill acquired................................................ 1,430,000
----------
Total purchase price........................................... $2,800,000
==========
</TABLE>
7. Pretzelmaker Acquisition
On November 19, 1998, Mrs. Fields acquired all of the outstanding capital
stock of Pretzelmaker Holdings, Inc., consisting of 229 stores in the United
States and Canada, for $5,419,000 and assumed liabilities of $320,000 related
to severance payments in lieu of outstanding stock options to be paid upon
closing. Mrs. Fields paid $1,100,000 in cash upon closing of the acquisition
and signed a promissory note for $4,319,000, which was paid in three
installments through January 4, 1999. Accordingly, in the accompanying pro
forma condensed combined financial statements of operations for the 52 weeks
ended January 2, 1999, Pretzelmaker's results of operations from January 1,
1998 to November 19, 1998 are included under the "Pretzelmaker" column heading.
The purchase price was allocated based on the estimated fair values of the net
assets (liabilities) acquired, as presented below:
<TABLE>
<S> <C>
Current assets acquired......................................... $ 577,400
Fixed assets acquired........................................... 248,700
Other assets acquired........................................... 50,000
Current liabilities acquired.................................... (1,991,700)
Other liabilities acquired...................................... (1,108,400)
Goodwill acquired............................................... 7,643,000
-----------
Total purchase price.......................................... $ 5,419,000
===========
</TABLE>
P-7
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Mrs. Fields' Holding Company, Inc. and subsidiaries
Report of Independent Public Accountants................................. F-4
Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999.... F-5
Consolidated Statements of Operations for the period from inception
(September 18, 1996) to December 28, 1996, and for the years ended
January 3, 1998 and January 2, 1999..................................... F-7
Consolidated Statements of Stockholders' Equity for the period from
inception (September 18, 1996) to December 28, 1996, and for the years
ended January 3, 1998 and January 2, 1999............................... F-8
Consolidated Statements of Cash Flows for the period from inception
(September 18, 1996) to December 28, 1996, and for the years ended
January 3, 1998 and January 2, 1999..................................... F-9
Notes to Consolidated Financial Statements............................... F-12
Unaudited Condensed Consolidated Balance Sheets as of January 2, 1999 and
July 3, 1999............................................................ F-40
Unaudited Condensed Consolidated Statements of Operations for the
26 weeks ended July 4, 1998 and July 3, 1999............................ F-42
Unaudited Condensed Consolidated Statements of Cash Flows for the
26 weeks ended July 4, 1998 and July 3, 1999............................ F-43
Unaudited Notes to Condensed Consolidated Financial Statements........... F-44
Mrs. Fields' Original Cookies, Inc. and subsidiaries
Report of Independent Public Accountants................................. F-49
Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999.... F-50
Consolidated Statements of Operations for the period from inception
(September 18, 1996) to December 28, 1996, and for the years ended
January 3, 1998 and January 2, 1999..................................... F-52
Consolidated Statements of Stockholder's Equity for the period from
inception (September 18, 1996) to December 28, 1996, and for the years
ended January 3, 1998 and January 2, 1999............................... F-53
Consolidated Statements of Cash Flows for the period from inception
(September 18, 1996) to December 28, 1996, and for the years ended
January 3, 1998 and January 2, 1999..................................... F-54
Notes to Consolidated Financial Statements............................... F-57
Unaudited Condensed Consolidated Balance Sheets as of January 2, 1999 and
July 3, 1999............................................................ F-90
Unaudited Condensed Consolidated Statements of Operations for the 26
weeks ended July 4, 1998 and July 3, 1999............................... F-92
Unaudited Condensed Consolidated Statements of Cash Flows for the 26
weeks ended July 4, 1998 and July 3, 1999............................... F-93
Unaudited Notes to Condensed Consolidated Financial Statements........... F-94
Mrs. Fields Inc. and subsidiaries
Report of Independent Public Accountants (Arthur Andersen LLP)........... F-106
Independent Auditors' Report (Deloitte & Touche LLP)..................... F-107
Consolidated Balance Sheet as of September 17, 1996...................... F-108
Consolidated Statements of Operations for the year ended December 30,
1995 and for the period ended September 17, 1996........................ F-110
Consolidated Statements of Stockholders' Deficit for the year ended
December 30, 1995 and for the period ended September 17, 1996........... F-111
Consolidated Statements of Cash Flows for the year ended December 30,
1995 and for the period ended September 17, 1996........................ F-112
Notes to Consolidated Financial Statements............................... F-114
The Original Cookie Company, Incorporated and the Carved-out Portion of
Hot Sam Company, Inc. (Combined)
Report of Independent Public Accountants................................. F-122
Combined Balance Sheet as of September 17, 1996.......................... F-123
Combined Statements of Operations for the year ended December 30, 1995
and for the period ended September 17, 1996............................. F-125
Combined Statements of Stockholders' Equity for the year ended December
30, 1995 and for the period ended September 17, 1996.................... F-126
Combined Statements of Cash Flows for the year ended December 30, 1995
and for the period ended September 17, 1996............................. F-127
Notes to Combined Financial Statements................................... F-128
</TABLE>
F-1
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Cookies USA, Inc. and subsidiary
Report of Independent Accountants....................................... F-132
Consolidated Balance Sheets as of June 29, 1997 and June 28, 1998....... F-133
Consolidated Statements of Operations for the fifty-two week periods
ended June 30, 1996, June 29, 1997 and June 28, 1998................... F-135
Consolidated Statements of Changes in Stockholders' Deficit for the
fifty-two week periods ended June 30, 1996, June 29, 1997 and June 28,
1998................................................................... F-136
Consolidated Statements of Cash Flows for the fifty-two week periods
ended June 30, 1996, June 29, 1997 and June 28, 1998................... F-137
Notes to Consolidated Financial Statements.............................. F-139
Deblan Corporation
Independent Auditors' Report............................................ F-151
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
(unaudited)............................................................ F-152
Statements of Earnings for the years ended December 31, 1995, 1996 and
1997 and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited)............................................................ F-154
Statements of Shareholders' Equity for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30, 1998
(unaudited)............................................................ F-155
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited)............................................................ F-156
Notes to Financial Statements........................................... F-158
Chocolate Chip Cookies of Texas, Inc.
Report of Independent Public Accountants................................ F-164
Balance Sheets as of September 30, 1996 and 1997 and June 30, 1998
(unaudited)............................................................ F-165
Statements of Operations for the years ended September 30, 1995, 1996
and 1997 and for the nine months ended June 30, 1997 (unaudited) and
1998 (unaudited)....................................................... F-167
Statements of Stockholders' Equity for the years ended September 30,
1995, 1996, and 1997 and for the nine months ended June 30, 1998
(unaudited)............................................................ F-168
Statements of Cash Flows for the years ended September 30, 1995, 1996
and 1997 and for the nine months ended June 30, 1997 (unaudited) and
1998 (unaudited)....................................................... F-169
Notes to Financial Statements........................................... F-171
The Combined Karp Entities
Report of Independent Public Accountants................................ F-176
Combined Balance Sheets as of December 31, 1996 and 1997 and June 30,
1998 (unaudited)....................................................... F-177
Combined Statements of Operations for the years ended December 31, 1995,
1996 and 1997 and for the six months ended June 30, 1997 (unaudited)
and 1998 (unaudited)................................................... F-179
Combined Statements of Stockholders' Equity for the years ended December
31, 1995, 1996 and 1997 and for the six months ended June 30, 1998
(unaudited)............................................................ F-180
Combined Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997 and for the six months ended June 30, 1997 (unaudited)
and 1998 (unaudited)................................................... F-181
Notes to Combined Financial Statements.................................. F-183
The Cookie Conglomerate, Inc. and affiliates
Independent Auditors' Report............................................ F-190
Combined Balance Sheets as of December 31, 1997 and 1996................ F-191
Combined Statements of Operations for the years ended December 31, 1997
and 1996............................................................... F-193
Combined Statements of Changes in Equity for the years ended December
31, 1997 and 1996...................................................... F-194
Combined Statements of Cash Flows for the years ended December 31, 1997
and 1996............................................................... F-195
Notes to the Financial Statements....................................... F-196
Combined Balance Sheet as of September 30, 1998 (unaudited)............. F-200
Combined Statements of Operations for the nine months ended September
30, 1998 and 1997 (unaudited).......................................... F-201
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Combined Statements of Cash Flows for the nine months ended September
30, 1998 and 1997 (unaudited).......................................... F-202
Notes to the Combined Financial Statements.............................. F-203
Pretzelmaker Holdings, Inc. and Subsidiaries
Report of Independent Certified Public Accountants (AJ. Robbins, PC).... F-204
Report of Independent Certified Public Accountants (BDO Seidman, LLP)... F-205
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998 (unaudited)......................................... F-206
Consolidated Statements of Operations for the Period from February 24
(Inception) to December 31, 1995 and the Years Ended December 31, 1996
and 1997 and the Nine Months Ended September 30, 1997 (unaudited) and
1998 (unaudited)....................................................... F-208
Consolidated Statements of Stockholders' Equity for the Period from
February 24 (Inception) to December 31, 1995 and the Years Ended
December 31, 1996 and 1997 and the Nine Months Ended September 30, 1998
(unaudited)............................................................ F-209
Consolidated Statements of Cash Flows for the Period from February 24
(Inception) to December 31, 1995 and the Years Ended December 31, 1996
and 1997 and the Nine Months Ended September 30, 1997 (unaudited) and
1998 (unaudited)....................................................... F-210
Notes to Consolidated Financial Statements.............................. F-211
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields' Holding Company, Inc.:
We have audited the accompanying consolidated balance sheets of Mrs. Fields'
Holding Company, Inc. (a Delaware corporation) and subsidiaries as of January
3, 1998 and January 2, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from inception
(September 18, 1996) to December 28, 1996 and for each of the two years in the
period ended January 2, 1999. 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 consolidated financial position
of Mrs. Fields' Holding Company, Inc. and subsidiaries as of January 3, 1998
and January 2, 1999, and the consolidated results of their operations and their
cash flows for the period from inception (September 18, 1996) to December 28,
1996 and for each of the two years in the period ended January 2, 1999 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Salt Lake City, Utah
April 1, 1999
F-4
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 16,493 $ 4,759
Accounts receivable, net of allowance for doubtful
accounts of $32 and $74, respectively................ 1,535 3,208
Amounts due from franchisees and licensees, net of
allowance for doubtful accounts of $582 and $1,078,
respectively......................................... 2,176 6,137
Inventories........................................... 3,100 5,503
Prepaid rent and other................................ 3,065 4,054
Deferred income tax assets............................ 2,765 861
-------- --------
Total current assets................................ 29,134 24,522
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements................................ 21,099 29,914
Equipment and fixtures................................ 14,100 17,108
Land.................................................. 128 240
-------- --------
35,327 47,262
Less accumulated depreciation and amortization........ (6,125) (15,465)
-------- --------
Net property and equipment.......................... 29,202 31,797
-------- --------
DEFERRED INCOME TAX ASSETS, net of current portion...... 734 2,638
-------- --------
GOODWILL, net of accumulated amortization of $5,040 and
$11,338, respectively.................................. 69,141 146,375
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated
amortization of $1,409 and $2,615, respectively........ 15,193 14,296
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of
$70 and $1,406, respectively........................... 5,906 13,440
-------- --------
OTHER ASSETS............................................ 1,325 1,332
-------- --------
$150,635 $234,400
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-5
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt..................... $ 472 $ 8,046
Current portion of capital lease obligations.......... 142 299
Accounts payable...................................... 3,805 10,723
Bank overdraft........................................ -- 4,133
Accrued liabilities................................... 3,480 3,597
Current portion of store closure reserve.............. 3,664 4,577
Accrued salaries, wages and benefits.................. 1,891 3,155
Accrued interest payable.............................. 1,082 1,260
Sales taxes payable................................... 937 962
Deferred credits...................................... 871 318
-------- --------
Total current liabilities........................... 16,344 37,070
LONG-TERM DEBT, net of current portion and discounts.... 100,284 171,291
STORE CLOSURE RESERVE, net of current portion........... 1,802 10,134
CAPITAL LEASE OBLIGATIONS, net of current portion....... 183 997
-------- --------
Total liabilities................................... 118,613 219,492
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 9 and 10)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of
Pretzel Time (a wholly owned subsidiary), aggregate
liquidation preference of $1,437 and $1,495,
respectively........................................... 902 1,261
-------- --------
MINORITY INTEREST....................................... 58 119
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100 shares authorized
for all series, excluding Series A, none issued...... -- --
Common stock, $.01 par value; 5,000,000 shares
authorized, 3,285,599 shares outstanding............. 33 33
Common stock subscriptions receivable................. (517) --
Warrants to purchase common stock..................... -- 2,895
Additional paid-in capital............................ 33,081 33,889
Deferred compensation expense......................... (189) (438)
Accumulated deficit................................... (1,346) (22,851)
-------- --------
Total stockholders' equity.......................... 31,062 13,528
-------- --------
$150,635 $234,400
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-6
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Inception 53 52
(September 18, Weeks Weeks
1996) to Ended Ended
December 28, January 3, January 2,
1996 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Net store and food sales................ $40,849 $127,845 $140,235
Franchising, net........................ 503 4,535 12,464
Licensing, net.......................... 764 2,028 1,537
------- -------- --------
Total revenues........................ 42,116 134,408 154,236
------- -------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs....... 19,492 66,832 75,003
Cost of sales........................... 10,596 32,028 38,482
General and administrative.............. 4,089 16,436 19,583
Store closure provision................. -- 538 7,303
Depreciation and amortization........... 2,356 10,450 19,867
------- -------- --------
Total operating costs and expenses.... 36,533 126,284 160,238
------- -------- --------
Income (loss) from operations........... 5,583 8,124 (6,002)
------- -------- --------
OTHER INCOME (EXPENSE), net:
Interest expense........................ (1,737) (7,527) (14,946)
Interest income......................... 76 246 623
Other expense........................... -- (368) (409)
------- -------- --------
Total other expense, net.............. (1,661) (7,649) (14,732)
------- -------- --------
Income (loss) before provision for
income taxes, preferred stock accretion
and dividends of subsidiaries and
minority interest...................... 3,922 475 (20,734)
PROVISION FOR INCOME TAXES................ (1,798) (655) (316)
------- -------- --------
Income (loss) before preferred stock
accretion and dividends of subsidiaries
and minority interest.................. 2,124 (180) (21,050)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF
SUBSIDIARIES............................. -- (306) (444)
MINORITY INTEREST......................... -- (138) (11)
------- -------- --------
Net income (loss)....................... 2,124 (624) (21,505)
CUMULATIVE REDEEMABLE SERIES A PREFERRED
STOCK DIVIDENDS.......................... (642) (2,173) --
------- -------- --------
Net income (loss) applicable to common
shares................................. $ 1,482 $ (2,797) $(21,505)
======= ======== ========
Basic and diluted net income (loss) per
common share........................... $ .48 $ (.88) $ (6.55)
======= ======== ========
Weighted average number of common shares
outstanding............................ 3,066 3,167 3,286
======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Warrants to Retained
Common Stock Stock Purchase Additional Deferred Earnings
---------------- Subscriptions Common Paid-in Compensation (Accumulated
Shares Amount Receivable Stock Capital Expense Deficit) Total
--------- ------ ------------- ----------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 18,
1996................... -- $-- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock for cash........ 3,065,848 31 -- -- -- -- (31) --
Cumulative redeemable
Series A preferred
stock dividends....... -- -- -- -- -- -- (642) (642)
Net income............. -- -- -- -- -- -- 2,124 2,124
--------- --- ----- ------ ------- ----- -------- -------
BALANCE, December 28,
1996................... 3,065,848 31 -- -- -- -- 1,451 1,482
Issuance of vested
common stock to
directors and officers
for subscriptions
receivable............ 51,667 1 (517) -- 516 -- -- --
Issuance of restricted
common stock to
directors and officers
for services
rendered.............. 28,333 -- -- -- 283 (283) -- --
Issuance of common
stock to a consultant
in settlement for
services rendered and
other obligations..... 12,402 -- -- -- 124 -- -- 124
Contribution of cash
from Capricorn........ -- -- -- -- 4,700 -- -- 4,700
Cumulative redeemable
Series A preferred
stock dividends....... -- -- -- -- -- -- (2,173) (2,173)
Conversion of
cumulative redeemable
Series A preferred
stock (including
accrued but unpaid
dividends) to common
equity................ -- -- -- -- 25,959 -- -- 25,959
Issuance of common
stock to Harvard as
partial consideration
for purchase of
Harvard's interest in
MFB................... 127,349 1 -- -- 1,499 -- -- 1,500
Amortization of
deferred compensation
expense............... -- -- -- -- -- 94 -- 94
Net loss............... -- -- -- -- -- -- (624) (624)
--------- --- ----- ------ ------- ----- -------- -------
BALANCE, January 3,
1998................... 3,285,599 33 (517) -- 33,081 (189) (1,346) 31,062
Collection of common
stock subscriptions
receivable............ -- -- 517 -- -- -- -- 517
Deferred compensation
expense related to
stock options......... -- -- -- -- 808 (808) -- --
Amortization of
deferred compensation
expense............... -- -- -- -- -- 559 -- 559
Issuance of warrants to
purchase common
stock................. -- -- -- 2,895 -- -- -- 2,895
Net loss............... -- -- -- -- -- -- (21,505) (21,505)
--------- --- ----- ------ ------- ----- -------- -------
BALANCE, January 2,
1999................... 3,285,599 $33 $ -- $2,895 $33,889 $(438) $(22,851) $13,528
========= === ===== ====== ======= ===== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Inception
(September 18, 53 Weeks 52 Weeks
1996) to Ended Ended
December 28, January 3, January 2,
1996 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)....................... $ 2,124 $ (624) $(21,505)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities, net of effects
from acquisitions:
Depreciation and amortization........... 2,356 10,450 19,867
Amortization of discount on notes....... -- 70 1,706
Amortization of deferred loan costs..... -- -- 1,336
Deferred compensation expense........... -- 94 559
Loss on disposition of assets........... -- 368 409
Deferred income taxes................... 1,511 210 --
In-kind interest expense on note
payable to stockholder................. 97 338 --
Preferred stock accretion and dividends
of subsidiaries........................ -- 306 444
Minority interest....................... -- 234 11
Changes in assets and liabilities, net
of effects from acquisitions:
Accounts receivable.................... (294) (353) (1,673)
Amounts due from franchisees and
licensees............................. (339) (514) (1,000)
Inventories............................ (159) 136 (822)
Prepaid rent and other................. (31) (895) 1,000
Other assets........................... 39 427 1,437
Accounts payable and accrued
liabilities........................... 163 (6,938) 2,116
Store closure reserve.................. (305) (1,666) 5,196
Accrued salaries, wages and benefits... 212 148 1,264
Accrued interest payable............... 1,668 (586) (713)
Sales taxes payable.................... 542 261 (80)
Deferred credits....................... 27 (543) (838)
-------- -------- --------
Net cash provided by operating
activities........................... 7,611 923 8,714
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions and
related costs.......................... (19,508) (12,014) (32,835)
Purchase of property and equipment, net
of effects from acquisitions........... (1,638) (4,678) (8,235)
Issuance of note receivable to PTI
founder................................ -- (500) --
Proceeds from the sale of assets........ 15 122 176
-------- -------- --------
Net cash used in investing
activities........................... (21,131) (17,070) (40,894)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt................................... 3,500 108,250 70,264
Principal payments on long-term debt.... (6,412) (81,009) (41,257)
Proceeds from the issuance of cumulative
redeemable Series A preferred stock.... 23,143 -- --
Payment of debt financing costs......... -- (5,976) (8,870)
Cash contribution from Capricorn........ -- 4,700 --
Cash advance from Capricorn............. -- 1,500 --
Repayment of cash advance to Capricorn.. -- (1,500) --
Principal payments on capital lease
obligations............................ -- (36) (123)
Collection of common stock subscriptions
receivable............................. -- -- 517
Retirement of preferred stock of PTI.... -- -- (85)
-------- -------- --------
Net cash provided by financing
activities........................... 20,231 25,929 20,446
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 6,711 9,782 (11,734)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
THE PERIOD.............................. -- 6,711 16,493
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD.................................. $ 6,711 $ 16,493 $ 4,759
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest was approximately $28, $8,416, and $12,440 for the
period ended December 28, 1996, and for the years ended January 3, 1998 and
January 2, 1999, respectively.
Cash paid for income taxes was approximately $0, $217, and $209 for the
period ended December 28, 1996, and for the years ended January 3, 1998 and
January 2, 1999, respectively.
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, the following net
liabilities were assumed. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired...................................... $ 93,494
Net cash paid...................................................... (19,508)
Notes payable issued............................................... (65,735)
--------
Liabilities assumed.............................................. $ 8,251
========
</TABLE>
On July 25, 1997, certain assets were acquired and certain liabilities were
assumed of H & M Concepts Ltd. Co. by Mrs. Fields' Pretzel Concepts, Inc.
("Pretzel Concepts") as follows. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired....................................... $15,780
Net cash paid....................................................... (5,750)
Notes payable issued................................................ (8,000)
-------
Liabilities assumed............................................... $ 2,030
=======
</TABLE>
On September 2, 1997, 56 percent of the shares of common stock of Pretzel
Time, Inc. ("Pretzel Time") were acquired as follows. Additionally, in
connection with the purchase accounting, certain other accruals were recorded
(see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired....................................... $ 8,311
Net cash paid....................................................... (4,200)
-------
Liabilities assumed............................................... $ 4,111
=======
</TABLE>
During the year ended January 3, 1998, the Company issued 51,667 shares of
vested common stock to directors and officers for common stock subscriptions
receivable totaling $517. During the same period, the Company issued 12,402
shares of common stock to a consultant as settlement for services rendered and
certain other obligations which had previously been accrued.
During the period from the acquisition of the majority ownership of Pretzel
Time (September 2, 1997) to January 2, 1999, Pretzel Time increased its
mandatorily redeemable cumulative preferred stock liquidation preference by
approximately $212, in lieu of paying cash dividends. In addition, for the same
period, Pretzel Time's mandatorily redeemable cumulative preferred stock was
increased by approximately $538 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' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
In August 1998, the Company acquired all of the outstanding capital stock and
subordinated indebtedness of Cookies USA, Inc. ("Cookies USA") for a total
purchase price of approximately $18,400. During August and September 1998, the
Company also entered into agreements with three franchisees of Cookies USA (the
"Great American Franchisees") under which the Company purchased a total of 37
Great American Cookies franchises for a total purchase price of $16,328. The
total purchase price for all of these acquisitions of $34,728 was allocated, on
a preliminary basis, as follows. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired...................................... $ 77,410
Net cash paid...................................................... (27,771)
--------
Liabilities assumed.............................................. $ 49,639
========
</TABLE>
In October 1998, the Company acquired the assets of the Cookie Conglomerate,
Inc. ("Cookie Conglomerate") for a total purchase price of $2,800. The total
purchase price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired........................................ $2,800
Net cash paid........................................................ --
------
Liabilities assumed................................................ $2,800
======
</TABLE>
In November 1998, the Company acquired all of the outstanding stock of
Pretzelmaker Holdings, Inc. ("Pretzelmaker") for $5,419. The total purchase
price was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired....................................... $ 8,519
Net cash paid....................................................... (1,100)
-------
Liabilities assumed............................................... $ 7,419
=======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-11
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Mrs. Fields' Holding Company, Inc. (the "Company"), a Delaware corporation,
was incorporated on July 31, 1996 and is a majority owned subsidiary of
Capricorn Investors II, L.P. ("Capricorn"). Mrs. Fields' Holding has nine
wholly owned subsidiaries: namely, Mrs. Fields' Original Cookies, Inc. and
subsidiaries ("Mrs. Fields"), The Mrs. Fields' Brand, Inc. ("Mrs. Fields'
Brand"), Great American Cookies, Inc. ("Great American"), Pretzel Time, Inc.
("Pretzel Time"), Pretzelmaker Holdings, Inc. ("Pretzelmaker"), Mrs. Fields'
Cookies Australia, Mrs. Fields' Cookies (Canada) Ltd., H&M Canada and
Pretzelmaker of Canada.
The Company primarily operates retail stores which sell freshly baked
cookies, brownies, pretzels and other food products through six specialty
retail chains. As of January 2, 1999, the Company owned and operated 147 Mrs.
Fields Cookies stores, 120 Original Cookie Company stores, 119 Great American
Cookies stores, 77 Hot Sam Pretzels stores, 93 Pretzel Time stores, 9
Pretzelmaker stores in the United States and one Pretzel Time store in Canada.
Additionally, the Company has franchised or licensed 859 stores in the United
States and 113 stores in several other countries. As of January 2, 1999, the
Company owned and operated 437 continuing company-owned stores and 129 stores
which are in the process of being closed or franchised. All of the stores in
the process of being closed or franchised are expected to be closed or
franchised by the end of fiscal year 2000.
During the year ended January 2, 1999, the Company acquired 421 franchisees
through various acquisitions, franchised 83 locations, acquired 33 stores from
franchisees, subsequently refranchised 26 of these stores, and had 78
franchisees discontinue operations.
The Company holds legal title to certain trademarks for the "Mrs. Fields"
name and logo and licenses the use of these trademarks to third parties for the
establishment and operation of Mrs. Fields' cookie and bakery operations and
other merchandising activities. In connection with these licensing activities,
the Company authorizes third-party licensees to use certain business formats,
systems, methods, procedures, designs, layouts, specifications, trade names and
trademarks in the United States and other countries. Additionally, the Company
markets and distributes its products through catalogs, other print media and
mail order.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company experiences its highest revenues in
the fourth quarter. Because the Company's stores are heavily concentrated in
shopping malls, the Company's sales performance is significantly dependent on
the performance of those malls.
Business Combinations
Mrs. Fields Inc. and Affiliates and Original Cookie Company and Affiliates
The Company began operations on September 18, 1996, following the completion
of two simultaneous but separate asset purchase transactions wherein the
Company (i) acquired certain assets and assumed certain liabilities of Mrs.
Fields Inc., Mrs. Fields Development Corporation and Mrs. Fields Cookies in
accordance with two Asset Purchase Agreements dated August 7, 1996, among these
parties and Capricorn, and (ii) acquired certain assets and assumed certain
liabilities of The Original Cookie Company, Incorporated and Hot Sam Company,
Inc. in accordance with an Asset Purchase Agreement dated August 7, 1996, as
amended by the First Amendment dated as of September 17, 1996, among these
parties and Capricorn.
The combined purchase price for the acquired net assets was approximately
$85,243,000. The Company paid net cash of $19,508,000 and issued approximately
$65,735,000 in senior and subordinated notes to the selling shareholders. The
acquisitions were accounted for as purchases. The total purchase price was
allocated to the net assets acquired, based on their estimated fair values. The
organization of the Company and the acquisitions resulted in the recording of
intangible assets of approximately $49,942,000 principally made up of goodwill,
trademarks and organization costs. An additional $17,680,000 of goodwill and
$4,520,000 of deferred
F-12
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $10,921,000 for impaired property and equipment
(see Note 5) at Company-owned stores the Company intends to exit through
closing or franchising. Goodwill and trademarks are amortized using the
straight-line method over 15 years. The $11,300,000 of accruals established at
the date of the acquisitions consisted of $5,060,000 for obligations incident
to store closures (see Note 5), $2,450,000 for contingent legal and lease
obligations that were firmed up before December 28, 1996, $3,135,000 for
transaction and finders' fees and $655,000 for severance and related costs. The
Company terminated all of the Original Cookie Company and Affiliates corporate
employees as planned.
As of January 2, 1999, approximately $2,068,000 of the $2,450,000 accrual for
legal and lease obligations has been utilized. The remaining amount as of
January 2, 1999 of approximately $382,000 is expected to be utilized by the end
of 1999. All of the $3,135,000 accrual established for transaction and finders'
fees and the $655,000 accrual for severance and related costs associated with
the acquisitions were fully utilized for the purposes intended during fiscal
1997.
H & M Concepts Ltd. Co.
On July 25, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of H & M Concepts Ltd. Co. and subsidiaries ("H &
M"). H & M owned and operated stores which engage in retail sales of pretzels,
toppings and beverages under a franchise agreement with Pretzel Time, Inc. The
total consideration of $13,750,000 consisted of (i) $5,750,000 of cash, (ii) a
$4,000,000 principal amount bridge note and (iii) a $4,000,000 principal amount
subordinated note of the Company retained by the sellers (all such debt
collectively referred to as the "H & M Debt"). The acquisition was accounted
for using the purchase method of accounting (based on the estimated fair values
of the net assets acquired) and resulted in recording approximately $9,618,000
of goodwill that is being amortized using the straight-line method over 15
years.
Pretzel Time, Inc.
On September 2, 1997, the Company acquired 56 percent of the shares of common
stock of Pretzel Time for an total cash purchase price of $4,200,000, $750,000
of which was paid to Pretzel Time for working capital purposes, and the balance
of which was paid to the selling shareholders. In connection with the
acquisition, the Company extended a $500,000 loan to the founder of Pretzel
Time who continued to own 44 percent of the shares of common stock of Pretzel
Time. The note bears interest at an annual rate of ten percent (see Note 10).
Pretzel Time is a franchisor of hand rolled soft pretzel outlets located in
North America. The outlets are primarily located in shopping malls. The
acquisition was accounted for using the purchase method of accounting (based on
the estimated fair values of the net assets acquired) and resulted in recording
approximately $5,882,000 of goodwill that is being amortized using the
straight-line method over 15 years. The goodwill recorded was $1,682,000 more
than the purchase price as the Company assumed more liabilities than it
acquired in assets at their fair values. Additionally, severance and legal
accruals were established in accordance with EITF 95-3.
On January 2, 1998, the Company purchased an additional four percent of the
shares of common stock of Pretzel Time from the founder for $300,000 in cash.
The purchase was accounted for using the purchase method of accounting (based
on the estimated fair values of the net assets acquired) and resulted in
recording approximately $311,000 of goodwill. In June 1998, the Company
acquired an additional ten percent of the shares of common stock of Pretzel
Time from the founder for $875,000 in cash. On December 9, 1998, the Company
purchased three shares of Pretzel Time common stock for $500,000 in cash. On
December 30, 1998, the Company completed the acquisition of the remaining
outstanding common stock of Pretzel Time under a stock purchase agreement dated
December 30, 1998, for a purchase price of approximately $4,700,000,
F-13
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$2,500,000 of which was paid in cash on January 5, 1999 and $2,000,000 of which
is payable on or before December 30, 1999. The Company has included the
appropriate percentage of Pretzel Time's results of operations for each
respective period in its consolidated results of operations.
The Mrs. Fields' Brand, Inc.
Prior to November 26, 1997, the Company owned 50.1 percent of the shares of
the common stock of Mrs. Fields' Brand. Mrs. Fields' Brand holds legal title to
certain trademarks for the "Mrs. Fields" name and logo and licenses the use of
these trademarks to third parties for the establishment and operation of Mrs.
Fields' cookie and bakery operations and other merchandising activities. In
connection with these licensing activities, Mrs. Fields' Brand authorizes
third-party licensees to use certain business formats, systems, methods,
procedures, designs, layouts, specifications, trade names and trademarks in the
United States and other countries.
On November 26, 1997, the Company acquired the remaining 49.9 percent of the
shares of the common stock of Mrs. Fields' Brand from Harvard Private Capital
Holdings, Inc. for approximately $2,565,000. The consideration consisted of
$1,065,000 in cash and $1,500,000 in rights to common equity of the Company.
The Company's Board of Directors determined the value of Harvard's rights to
the common equity based on a fair value analysis. This analysis appropriately
considered a discount for lack of controlling interest and marketability as the
Company's common equity is not publicly traded. The acquisition was accounted
for using the purchase method of accounting (based on the estimated fair values
of the net assets acquired) and resulted in recording approximately $2,565,000
of intangible assets (primarily goodwill) that are being amortized using the
straight-line method over 15 years.
Great American Cookie Company, Inc.
On August 24, 1998, the Company acquired all of the outstanding capital stock
and subordinated indebtedness of Cookies USA, Inc., the sole stockholder of
Great American Cookie Company, Inc., for a total purchase price of $18,400,000.
Great American is an operator and franchisor of mall-based specialty retail
cookie outlets and a manufacturer of cookie batter which is distributed to
Great American operated retail stores and sold to franchised retail stores.
Concurrently with the acquisition of Cookies USA, the Company entered into
agreements with two Great American franchisees under which the Company
purchased a total of 29 Great American franchises for a total purchase price of
$14,430,000. The Company acquired the franchises through the acquisition of 100
percent of the capital stock of the two corporations through which the
franchises operated. On September 9, 1998, the Company acquired eight
additional Great American franchised retail stores from a Great American
franchisee, under an asset purchase agreement, for a total purchase price of
$1,898,000. These acquisitions are collectively referred to as the "Great
American Acquisitions."
The Great American Acquisitions have been accounted for using the purchase
method of accounting (based on preliminary estimates of fair values of the net
assets acquired) and resulted in recording approximately $69,390,000 of
goodwill that is being amortized using the straight-line method over 15 years.
Additionally, the Company caused Cookies USA to be merged with and into the
Company and caused the acquired franchisees' corporations or net assets to be
merged with and into Great American. Great American became a wholly owned
subsidiary of Mrs. Fields. The acquired entities' results of operations have
been included with those of the Company since the applicable dates of
acquisition.
The Great American Acquisitions were financed by (i) the net proceeds from
Mrs. Fields issuing $40,000,000 Series C Senior Notes; (ii) the net proceeds
from Mrs. Fields' Holding issuing $55,000,000 senior secured discount notes;
and (iii) existing cash of the Company.
F-14
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 5, 1998, the Company purchased all of the retail cookie and
related business and operations of eleven Great American stores for a total
purchase price of $2,800,000 under an asset purchase agreement among The Cookie
Conglomerate, Inc., The Cookie Conglomerate, LLP and two individuals who were
the partners of Cookie Conglomerate, LLP and the shareholders of Cookie
Conglomerate, Inc. The sellers were franchisees of Great American. The sellers'
rights under franchise agreements and subleases with Great American were
terminated upon closing of the transaction. The acquisition was funded through
borrowings.
Pretzelmaker Holdings, Inc.
On November 19, 1998, the Company purchased all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. under an agreement among the Company,
Pretzelmaker, and the holders of its capital stock. Pretzelmaker is the holding
company for a pretzel retail company. The purchase price was approximately
$5,400,000 and the Company assumed indebtedness, including severance payments,
totaling approximately $1,600,000.
1-800-Cookies
On October 10, 1997, the Company acquired substantially all of the net assets
of R&R Bourbon Street, Inc. dba 1-800-Cookies for $653,000 in cash. The
acquisition was accounted for using the purchase method of accounting (based on
the estimated fair values of the net assets acquired) and resulted in recording
$600,000 of goodwill and $53,000 of other assets. The goodwill is being
amortized using the straight-line method over 15 years.
The following unaudited pro forma information for the period from inception
(September 18, 1996) to December 28, 1996, and for the years ended January 3,
1998 and January 2, 1999, presents the results of operations of the Company
assuming the H & M, Pretzel Time and Mrs. Fields' Brand acquisitions and the
Refinancing, as defined in Note 3, had occurred at the date of inception
(September 18, 1996) and that the Great American Acquisitions, Cookie
Conglomerate acquisition, Pretzelmaker acquisition and related financing had
occurred at December 29, 1996. The results of operations give effect to certain
adjustments, including amortization of intangible assets and interest expense
on acquisition debt. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted or the results which may occur in the
future.
<TABLE>
<CAPTION>
Inception
(September 18, 53 Weeks
1996) to Ended 52 Weeks
December 28, January 3, Ended
1996 1998 January 2, 1999
-------------- ------------ ---------------
(Unaudited)
<S> <C> <C> <C>
Total revenues................ $48,090,000 $200,574,000 $191,246,000
Store closure provision....... -- (538,000) (7,303,000)
Depreciation and
amortization................. (2,356,000) (19,452,000) (25,629,000)
Income (loss) from
operations................... 6,652,000 12,431,000 (5,522,000)
Net income (loss)............. 1,192,000 (7,888,000) (28,087,000)
Basic and diluted net income
(loss) per common share...... 0.39 (3.21) (8.55)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Periods
The Company operates using a 52/53-week year ending near December 31.
F-15
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
2, 1999, the Company had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation. As
of January 2, 1999, the Company had restricted cash of $225,000.
Inventories
Inventories consist of food, beverages and supplies and are stated at the
lower of cost (first-in, first-out method) or market value.
Pre-Opening Costs
Pre-opening costs associated with new Company-owned stores are charged to
expense as incurred. These amounts were not significant for the periods
presented in the accompanying consolidated financial statements. Pre-opening
costs associated with new franchised stores are the responsibility of the
franchisee.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment, fixtures and leasehold improvements are depreciated or
amortized over three to seven years using the straight-line method.
Expenditures that materially increase values or capacities or extend useful
lives of property and equipment are capitalized. Routine maintenance, repairs
and renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are recorded in current operations.
Intangible Assets
Intangible assets consist primarily of goodwill and trademarks and are
amortized using the straight-line method over 15 years. Other intangible assets
such as covenants not to compete are not significant and are being amortized
using the straight-line method over two to five years.
F-16
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Loan Costs
Deferred loan costs totaling $14,846,000 resulted from the sale of
$100,000,000 total principal amount of 10 1/8 percent Series A Senior Notes
(the "Series A Senior Notes") on November 26, 1997, the sale of $55,000,000
total principal amount of 14 percent Senior Discount Notes ("Discount Notes")
on August 24, 1998 and the sale of $40,000,000 total principal amount of 101/8
percent Series C Senior Notes (the "Series C Senior Notes") on August 24, 1998.
These costs are being amortized to interest expense over the approximate seven-
year life of the Series A Notes, the approximate seven year life of the
Discount Notes and the approximate six-year life of the Series C Senior Notes
(see Note 3).
Original Issue Discount and Discount on Senior Notes
The Discount Notes were issued with an original issue discount which is being
amortized to interest expense until the total principal amount of the Discount
Notes is $55,000,000 at December 1, 2002. In addition, the Company issued
common stock warrants to the holders of the Discount Notes. The value of the
warrants has been accounted for as an original issue discount which is being
amortized to interest expense over the approximate seven-year life of the
Discount Notes. The Series C Senior Notes were issued at a discount which is
being amortized to interest expense over their approximate six-year lives.
Long-Lived Assets
The Company reviews for impairment of long-lived assets when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred that indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. The Company assesses impairment of long-lived assets at the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets.
During the year ended January 2, 1999, the Company wrote-down approximately
$4,131,000 of impaired long-lived assets. The write-down included approximately
$2,243,000 of equipment and leasehold improvements at company-owned stores that
the Company intends to close or franchise (see Note 5). These assets are
expected to be disposed of by the end of fiscal year 2000. The write-down also
included approximately $855,000 of equipment and leasehold improvements at ten
company-owned stores that the Company intends to continue to operate through
the end of contractual lease terms. These assets are expected to be disposed of
when the leases expire ranging from June 1999 to December 2008. Additionally,
approximately $1,033,000 of goodwill that had been allocated to the impaired
assets was written-down. The net book value of the assets has been fully
written-down because the carrying amounts exceeded the estimated future cash
flows as determined in accordance with guidance in SFAS 121. During the year
ended January 2, 1999, stores associated with the impaired assets generated
operating losses of approximately $2,351,000. The impairment provision was
included in depreciation and amortization in the accompanying consolidated
statement of operations for the year ended January 2, 1999. No provision was
recorded for estimated future operating losses.
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 accruals are for estimated store lease termination costs (see Note 5).
Revenue Recognition
Revenues generated from company-owned stores are recognized at the point of
sale. Initial franchising and licensing fee revenues are recognized when all
material services or conditions relating to the sale have been
F-17
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
substantially performed or satisfied. Franchise and license royalties, which
are based on a percentage of gross store sales, are recognized as earned.
Revenues from the sale of batter that the Company produces and sells to
franchisees are recognized at the time of shipment and are classified as
franchising revenue. The Company receives rebates or other payments from
suppliers based (directly or indirectly) on sales to franchisees and purchases
by company-owned stores. Rebates related to sales to franchisees are recorded
as franchising revenue when earned. Rebates related to purchases by company-
owned stores are recorded as a reduction to cost of sales when earned.
Leases
The Company has various operating lease commitments on both company-owned and
franchised store locations and equipment. Expenses of operating leases with
escalating payment terms, including leases underlying subleases with
franchisees, are recognized on a straight-line basis over the lives of the
related leases. The Company accrues contingent rental expense on a monthly
basis for those retail stores where contingent rental expense is probable.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred income tax assets or
liabilities are determined based upon the difference between the financial and
income tax bases of assets and liabilities using enacted tax rates expected to
apply when differences are expected to be settled or realized.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign subsidiaries are
translated into U.S. dollars using the applicable balance sheet date exchange
rates, while revenues and expenses are translated using the average exchange
rates for the periods presented. Translation gains or losses are insignificant
for the periods presented.
Fair Value of Financial Instruments
The Company estimates that the total fair market value of the Company's
Series A/B Senior Notes, the Series C Senior Notes and the Discount Notes (see
Note 3) was approximately $101,250,000 and $166,450,000 as of January 3, 1998
and January 2, 1999, respectively. These estimates are based on quoted market
prices. The book values of the Company's other financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and other long-term debt obligations, approximate fair values at
the respective balance sheet dates.
Basic and Diluted Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated based upon the
weighted average number of common shares outstanding during the periods
presented. Diluted net income (loss) per common share is calculated based upon
the weighted average number of common shares outstanding plus the assumed
exercise of all dilutive securities using the treasury stock method. For the
period from inception (September 18, 1996) to December 28, 1996, the diluted
weighted average number of common shares outstanding did not include any
incremental shares from the assumed exercise of dilutive stock options using
the treasury stock method. For all other periods presented, stock options prior
to exercise are not included in the calculation of diluted net loss per common
share because their inclusion would be antidilutive, thereby decreasing the net
loss per common share. The net income (loss) applicable to common shares for
all periods presented was adjusted for cumulative redeemable Series A preferred
stock dividends.
F-18
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999
and is not expected to have a material impact on the Company's consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the prior periods' consolidated
financial statements to conform with the current period presentation.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
------------ ------------
<S> <C> <C>
Series A/B senior unsecured notes, interest at 10
1/8 percent payable semi-annually in arrears on
June 1 and December 1, commencing June 1, 1998,
due December 1, 2004............................. $100,000,000 $100,000,000
Series C senior unsecured notes, interest at 10
1/8 percent payable semi-annually in arrears on
June 1 and December 1, commencing December 1,
1998, due December 1, 2004....................... -- 40,000,000
Discount related to the issuance of $40,000,000
Series C senior unsecured notes, net of
accumulated amortization of $0 and $33,000,
respectively..................................... -- (566,000)
Senior secured discount notes, interest at 14
percent payable semi-annually in arrears on June
1 and December 1, commencing June 1, 2003, due
December 1, 2005, secured by a pledge of all
capital stock of Mrs. Fields..................... -- 55,000,000
Original issue discount related to the issuance of
$55,000,000 senior secured discount notes, net of
accumulated amortization of $0 and $1,674,000,
respectively..................................... -- (25,356,000)
Notes payable to individuals or corporations with
interest terms ranging from non-interest bearing
to 15 percent, due at various dates from 1999
through 2001, requiring monthly payments......... 756,000 10,259,000
------------ ------------
100,756,000 179,337,000
Less current portion.............................. (472,000) (8,046,000)
------------ ------------
$100,284,000 $171,291,000
============ ============
</TABLE>
On August 24, 1998, in connection with the Great American Acquisitions, the
Company issued 55,000 units (the "Units") consisting of 14 percent Senior
Secured Discount Notes due December 1, 2005 (the "Discount Notes") and warrants
to purchase 172,926 shares of the Company common stock (the "Warrants"). Each
Unit consists of $1,000 principal amount at maturity of Discount Notes and one
Warrant to purchase 3.14411 shares of the Company common stock at a price of
$0.001 per share. The issuance price was $561.17 per Unit or a total price of
$30,864,350. The principal amount of the Discount Notes will accrete at a rate
of 14 percent compounded semi-annually to a total principal amount of
$55,000,000 at December 1, 2002.
F-19
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Thereafter, the Discount Notes will accrue interest at the rate of 14 percent
per annum, payable semi-annually on June 1 and December 1 of each year,
commencing June 1, 2003. In connection with the issuance of the Discount Notes,
the Company recorded total original issue discount of $24,135,650.
Additionally, the value allocated to the Warrants of $2,895,000 has been
accounted for as an original issue discount (see Note 1). In accordance with
APB Opinion No. 14, the value allocated to the warrants was based on an
estimate of the relative fair values of the warrants and Senior Secured
Discount Notes at the date of issuance. The Company was assisted by a
nationally recognized investment-banking firm in estimating the fair value of
the warrants.
The Discount Notes are secured by a pledge of all the outstanding capital
stock of Mrs. Fields' Original Cookies and are general obligations of the
Company, and rank senior in right of payment to all existing and future senior
indebtedness of the Company. The Discount Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after December 1, 2002 in
cash at the defined redemption price plus accrued and unpaid interest. In
addition, at any time prior to December 1, 2002, the Discount Notes are
redeemable at the option of the Company, in whole but not in part, in cash at a
redemption price equal to 114 percent of the accreted value (determined at the
date of redemption) with the net cash proceeds of one or more public equity
offerings; provided that such redemption occurs within 60 days of the date of
the closing of any such public equity offering.
The Discount Notes contain 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.
On November 26, 1997, Mrs. Fields issued $100,000,000 total principal amount
of Series A Senior Notes due December 1, 2004 pursuant to an indenture between
Mrs. Fields and the Bank of New York (the "Indenture"). The Series A Senior
Notes were issued pursuant to a private transaction that was not subject to the
registration requirements of the Securities Act of 1933. On June 12, 1998, a
majority of the Series A Senior Notes were exchanged for 10 1/8% Series B
Senior Notes due December 1, 2004, which were registered under the Securities
Act (collectively, the "Series A/B Senior Notes").
On August 24, 1998, Mrs. Fields issued $40,000,000 total principal amount of
Series C Senior Notes due December 1, 2004 in connection with the Great
American Acquisitions. The Series C Senior Notes were issued under the
Indenture which also governs the terms of the Series A/B Senior Notes in a
private transaction that was not subject to the registration requirements of
the Securities Act of 1933. The Series A/B Senior Notes and the Series C Senior
Notes will be collectively referred to as the "Senior Notes." In connection
with the issuance of the Series C Senior Notes, Mrs. Fields recorded a discount
of approximately $600,000. This discount is being amortized to interest expense
over the approximate six-year life of the Series C Senior Notes. The Senior
Notes are general unsecured obligations of the Company, rank senior in right of
payment to all subordinated indebtedness of Mrs. Fields and rank pari passu in
right of payment with all existing and future senior indebtedness of Mrs.
Fields.
The Senior Notes are redeemable at the option of Mrs. Fields, 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, Mrs. Fields may redeem up to a total of 35
percent of the principal amount at a redemption price equal to 110.125 percent
of the principal, plus accrued and unpaid interest.
The Senior Notes contain certain covenants that limit, among other things,
the ability of Mrs. Fields and its subsidiaries to: (i) declare or pay
dividends or make any other payment or distribution on account of
F-20
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mrs. Fields' or any of its subsidiaries' equity interest (including without
limitation, any payment in connection with any merger or consolidation
involving Mrs. Fields); (ii) purchase, redeem or otherwise acquire or retire
for value (including, without limitation, in connection with any merger or
consolidation involving Mrs. Fields) any equity interest of Mrs. Fields or any
direct or indirect parent of Mrs. Fields or other affiliate of Mrs. Fields;
(iii) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any indebtedness that is subordinated to
the Senior Notes, except as payment of interest or principal at stated
maturity; or (iv) make any restricted investments except under conditions
provided for in the Indenture.
The total amount of principal maturities of debt at January 2, 1999 are as
follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................ $ 8,046,000
2000............................................................ 648,000
2001............................................................ 539,000
2002............................................................ 583,000
2003............................................................ 443,000
Thereafter...................................................... 195,000,000
------------
$205,259,000
============
</TABLE>
Line of Credit
On February 28, 1998, the Company entered into an amended and restated line
of credit agreement with a commercial bank which provides for a maximum
commitment of up to $15,000,000 secured by essentially all of the assets of the
Company. The availability under the line of credit was limited by the Company's
Indenture to $4,777,000 as of January 2, 1999. Borrowings under the agreement
bear interest, at the Company's option, at either the bank's prime rate or the
applicable LIBOR rate plus two percent, with interest payable monthly in
arrears. The Company is also obligated to pay the bank a commitment fee in the
amount of one quarter of one percent of the unused portion of the revolving
loan commitment. As of January 2, 1999, the Company had no outstanding
borrowings under the agreement, which expires March 31, 2001. However,
subsequent to year-end the Company has borrowed $3,000,000 on the line of
credit. The agreement requires the Company to maintain certain financial ratios
including a minimum debt service coverage ratio. At January 2, 1999, the
Company was in compliance with the terms of the agreement.
Capital Lease Obligations
Future minimum lease payments for equipment held under capital lease
arrangements as of January 2, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999........................................................... $ 415,000
2000........................................................... 357,000
2001........................................................... 358,000
2002........................................................... 287,000
2003........................................................... 182,000
----------
Total future minimum lease payments.............................. 1,599,000
Less amount representing interest................................ (303,000)
----------
1,296,000
Less current portion............................................. (299,000)
----------
$ 997,000
==========
</TABLE>
F-21
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 3, 1998 and January 2, 1999, total assets held under capital
lease arrangements were approximately $376,000 and $1,024,000 with accumulated
amortization of approximately $59,000 and $108,000, respectively.
4. INCOME TAXES
The components of the provision for income taxes for the period ended
December 28, 1996 and for the years ended January 3, 1998 and January 2, 1999
are as follows:
<TABLE>
<CAPTION>
December 28, 1996 January 3, 1998 January 2, 1999
----------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal................ $ 207,000 $ 70,000 $ --
State.................. 75,000 228,000 245,000
Foreign................ 5,000 57,000 71,000
Deferred:
Federal................ 1,112,000 367,000 (3,651,000)
State.................. 277,000 55,000 (567,000)
Change in valuation
allowance............. 122,000 (122,000) 4,218,000
---------- --------- -----------
Total provision for
income taxes........ $1,798,000 $ 655,000 $ 316,000
========== ========= ===========
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 years ended January
3, 1998 and January 2, 1999:
<CAPTION>
December 28, 1996 January 3, 1998 January 2, 1999
----------------- --------------- ---------------
<S> <C> <C> <C>
Federal statutory income
tax rate................ 34.0% 34.0% (34.0)%
Dividends paid by
subsidiary............ -- 34.5 --
Amortization of non-
deductible goodwill... -- 12.3 6.8
Net operating losses
utilized.............. -- (3.9) --
State income taxes, net
of federal tax
effect................ 5.3 5.3 (5.3)
Non-deductible
interest.............. -- -- 0.8
State franchise minimum
taxes................. -- 44.0 1.2
Foreign taxes.......... -- 12.3 0.3
Change in valuation
allowance............. 3.2 (26.3) 20.3
Other.................. 4.1 29.3 11.4
---------- --------- -----------
Effective income tax
rate.................... 46.6% 141.5% 1.5%
========== ========= ===========
</TABLE>
F-22
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of the Company's deferred income tax assets and
liabilities at January 3, 1998 and January 2, 1999 are as follows:
<TABLE>
<CAPTION>
January 3, 1998 January 2, 1999
--------------- ---------------
<S> <C> <C>
Deferred income tax assets:
Property and equipment reserve............... $ 2,014,000 $ 3,311,000
Store closure reserve........................ 2,202,000 5,845,000
Transaction cost accrual..................... 565,000 514,000
Net operating loss carryforward.............. 4,875,000 12,342,000
Legal reserve................................ 302,000 150,000
Lease accrual................................ 92,000 --
Other reserves............................... 81,000 388,000
Original issue discount interest............. -- 484,000
Non-cash compensation expense................ -- 165,000
Accrued expenses............................. 230,000 534,000
Alternative minimum tax credit carryforward.. 207,000 215,000
----------- ------------
Total deferred income tax assets............ 10,568,000 23,948,000
Valuation allowance.......................... (5,160,000) (16,288,000)
----------- ------------
Deferred income tax assets net of valuation
allowance.................................. 5,408,000 7,660,000
----------- ------------
Deferred income tax liabilities:
Accumulated depreciation and amortization.... (1,548,000) (3,464,000)
Other........................................ (361,000) (697,000)
----------- ------------
Total deferred income tax liabilities....... (1,909,000) (4,161,000)
----------- ------------
Net deferred income tax assets.............. $ 3,499,000 $ 3,499,000
=========== ============
</TABLE>
Management has provided valuation allowances on portions of the deferred
income tax assets arising from the Company's business combinations. The
valuation allowances established in connection with purchase accounting are not
recorded through the provision for income taxes, but rather, as an increase to
goodwill. During the years ended January 3, 1998 and January 2, 1999, valuation
allowances of $800,000 and $6,910,000, respectively, were recorded in
connection with accounting for business combinations. As of January 2, 1999,
the Company had net operating losses of $31,421,000 that can be carried forward
to reduce federal income taxes. If not utilized, the tax net operating loss
carryforwards begin to expire in 2009. As defined in Section 382 of the
Internal Revenue Code, the Company has acquired companies which have had a
greater than 50 percent ownership change. Consequently, certain amounts of
these companies' tax net operating loss carryforwards available to offset
future taxable income in any one year may be limited. The maximum amount of
carryforwards available in a given year is limited to the product of these
companies' fair market value on the date of ownership change and the federal
long-term tax-exempt rate, plus any limited carryforwards not utilized in prior
years. Although realization of the net deferred income tax assets of $3,499,000
is not assured, management believes that it is more likely than not that these
assets will be realized. The amount of net deferred tax assets considered
realizable, however, could be reduced in the near term based on changing
conditions.
5. STORE CLOSURE AND PROPERTY AND EQUIPMENT IMPAIRMENT RESERVES
The Company's management reviews the historical and projected operating
performance of its stores on a periodic basis to identify underperforming
stores for impairment of net property investment or for targeted closing. The
Company's policy is to recognize a loss for that portion of the net property
investment determined
F-23
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to be impaired. Additionally, when a store is identified for targeted closing,
the Company's policy provides for the costs of closing the store, which are
predominantly estimated lease termination costs. Lease termination costs
include both one-time settlement payments and continued contractual payments
over time under the original lease agreements where no settlement can be
resolved with the landlord. As a result, although all stores under the current
exit plans will be exited by at least the end of fiscal year 2000, a portion of
the store closure reserve will remain until all cash payments have been made.
No operating losses are accrued for. If and when a reserve that was established
as part of purchase accounting is not fully utilized, the Company reduces the
reserve to zero and goodwill is adjusted for the corresponding amount.
Mrs. Fields Inc. and Affiliates and Original Cookie Company and Affiliates
In connection with the Mrs. Fields Inc. and Original Cookie Company
acquisitions (see Note 1), the Company formulated a plan to exit stores that
did not meet certain financial and geographical criteria. In general the plan
entailed closing stores that were not profitable and franchising stores that
were profitable but contributed less than $50,000 in store annual cash
contribution for cookie stores and less than $35,000 in annual store cash
contribution for pretzel stores. Management identified 138 stores to be closed
(13 of these stores were closed prior to the acquisition but had continuing
lease obligations) and 64 stores to be franchised. As of January 2, 1999, there
were 23 stores remaining to be closed and 36 stores remaining to be franchised.
Management estimates that implementation of the plan will be substantially
complete by June 30, 2000. The timing to implement the plan was developed based
on discussions and relationships with major shopping mall developers.
At the date of the acquisitions, in accordance with Emerging Issues Task
Force Issue 95-3 ("EITF 95-3"), the Company established a store closure reserve
of $5,060,000 for the 138 stores the Company intended to close. The reserve was
established to provide for estimated early lease termination costs and
penalties. There was no reserve established related to the 64 stores to be
franchised. Management continued to refine the plan for closing the stores
after the date of the acquisitions which entailed further analysis of lease
agreements and meeting with developers to assess timing and estimated lease
termination costs.
Management finalized the store closure plan in early September 1997, within
one year of the date of the acquisitions. At that time, the Company recorded an
additional $1,357,000 to the store closure reserve to reflect the finalized
plan estimates of lease termination costs and adjusted goodwill by a comparable
amount under the provisions of purchase accounting. The increase in the reserve
related solely to the 138 stores originally identified to be closed. During the
year ended January 2, 1999, the Company reassessed the adequacy of the store
closure reserve related to the remaining stores left to be closed and recorded
an additional $1,693,000 to the reserve. The additional $1,693,000 resulted
from management's expectation of higher lease termination costs than the costs
originally anticipated when the plan was finalized. This portion of the store
closure reserve was expensed in the Company's statement of operations for the
fiscal year ended January 2, 1999 as the decision to increase the reserve was
made subsequent to finalization of the original plan. As of January 2, 1999,
other significant changes had been made to this plan.
Pursuant to the exit plan, at the date of the acquisitions, the Company
established an impairment reserve of $10,921,000 against the property and
equipment of the stores the Company planned to exit, in order to record those
assets at net realizable value. The property and equipment of 117 of the total
stores to be closed were recorded at net values of zero. The property and
equipment of 54 of the total stores to be franchised were recorded at the
estimated net realizable amount recoverable through a franchise sale. The
property and equipment of the remainder of the stores to be closed or
franchised had already been reduced to net realizable value prior to the
acquisitions.
During the fiscal year ended January 3, 1998, the Company increased its store
closure reserve by $538,000 for nine continuing company-owned stores that were
closed during fiscal year 1997 and for one continuing company-owned store
targeted for closure. These costs represent lease termination costs which
include both
F-24
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
one-time settlement payments and continued contractual payments over time under
the original lease agreements where no settlement has been reached with the
landlord. The amount also includes certain costs to write-down equipment and
leasehold improvements to their net realizable value. This portion of the store
closure reserve was expensed in the Company's consolidated statement of
operations for the year ended January 3, 1998, as these stores were not
identified for closure as part of any of the Company's store closure plan
associated with the business combinations.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit 35 Mrs. Fields stores that
were not meeting certain financial and geographical criteria. The plan also
committed the Company to exit seven underperforming franchised stores that the
Company determined to disenfranchise as of January 2, 1999. The identified
stores to be exited under this plan are not part of the stores in the process
of being closed in connection with the various business combination exit plans
discussed above. These stores were originally identified as continuing company-
owned stores at the date of acquisition, however, the stores have not performed
as expected. The Company intends to exit the stores primarily through closing
and franchising. In connection with this plan, the Company increased the store
closure reserve by $4,674,000 primarily for costs to be incurred for settling
lease termination costs for these stores. All of the stores identified for
closure are planned to be closed or franchised by the end of fiscal 2000. The
charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
H&M
In connection with the H&M acquisition (see Note 1), the Company formulated a
plan to exit pretzel stores that did not meet certain financial and
geographical criteria. Management identified 11 stores to be closed and 14
stores to be franchised. All of the stores identified for closure are planned
to be closed by the end of fiscal year 1999. The timing to implement the plan
was developed based on discussions and relationships with major shopping mall
developers.
At the date of the acquisition, in accordance with EITF 95-3, the Company
established a store closure reserve of $1,000,000 for the 11 stores the Company
intended to close. The reserve was established to provide for estimated early
lease termination costs and penalties. Additionally, the Company established an
impairment reserve of $2,500,000 against the property and equipment of the
stores the Company planned to exit, in order to record those assets at net
realizable value. As of January 2, 1999, no other significant changes had been
made to this plan.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit four H&M stores that were
not meeting certain financial and geographical criteria. The identified stores
to be exited under this plan were not part of the stores in the process of
being closed in connection with the business combination exit plan discussed
above. These stores were originally identified as continuing company-owned
stores at the date of acquisition, however, the stores have not performed as
expected. The Company intends to exit the stores primarily through closing and
franchising. In connection with this plan, the Company increased the store
closure reserve by $367,000 primarily for costs to be incurred for settling
lease termination costs for these stores. All of the stores identified for
closure are planned to be closed or franchised by the end of fiscal 2000. The
charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
Pretzel Time
In connection with the Pretzel Time acquisition (see Note 1), the Company
formulated a plan to exit pretzel stores that did not meet certain financial
and geographical criteria. Management identified four stores to
F-25
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be closed. All of the stores identified for closure are planned to be closed by
the end of fiscal year 1999. The timing to implement the plan was developed
based on discussions and relationships with major shopping mall developers.
At the date of the acquisition, in accordance with EITF 95-3, the Company
established a store closure reserve of $500,000 for the four stores the Company
intended to close. The reserve was established to provide for estimated early
lease termination costs and penalties. As of January 2, 1999, no other
significant changes had been made to this plan.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit two Pretzel Time stores
that were not meeting certain financial and geographical criteria. The plan
also committed the Company to exit two underperforming franchised stores that
the Company determined to disenfranchise as of January 2, 1999. The identified
stores to be exited under this plan are not part of the stores in the process
of being closed in connection with the business combination exit plan discussed
above. These stores were originally identified as continuing company-owned
stores at the date of acquisition, however, the stores have not performed as
expected. The Company intends to exit the stores primarily through closing and
franchising. In connection with this plan, the Company increased the store
closure reserve by $265,000 primarily for costs to be incurred for settling
lease termination costs for these stores. All of the stores identified for
closure are planned to be closed or franchised by the end of fiscal 2000. The
charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
Great American
In connection with the Great American Acquisitions (see Note 1), the Company
formulated a plan to exit cookie stores that did not meet certain financial and
geographical criteria. Management identified 54 stores to be closed and 11
stores to be franchised. All of the stores identified for closure are planned
to be closed by the end of fiscal year 2000. The timing to implement the plan
was developed based on discussions and relationships with major shopping mall
developers.
At the date of the acquisitions, in accordance with EITF 95-3, the Company
established a store closure reserve of $3,548,000 for the 54 stores the Company
intended to close. The reserve was established to provide for estimated early
lease termination costs and penalties. There was no reserve established related
to the 11 stores to be franchised. The Company established an impairment
reserve of $2,150,000 against the property and equipment of the stores the
Company planned to exit, in order to record those assets at net realizable
value. As of January 2, 1999, no other significant changes had been made to
this plan.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit four underperforming Great
American franchised stores that the Company determined to disenfranchise as of
January 2, 1999. The identified stores to be exited under this plan were not
part of the stores in the process of being closed in connection with the
various business combination exit plans discussed above. These stores were
originally franchised stores at the date of acquisition, however, the stores
have not performed as expected. The Company intends to exit the stores
primarily through closing and franchising. In connection with this plan, the
Company increased the store closure reserve by $306,000 primarily for costs to
be incurred for settling lease termination costs for these stores. All of the
stores identified for closure are planned to be closed or franchised by the end
of fiscal 2000. The charge was included in the store closure provision in the
accompanying consolidated statement of operations for the year ended January 2,
1999.
F-26
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pretzelmaker
In connection with the Pretzelmaker acquisition (see Note 1), the Company
formulated a plan to exit pretzel stores that did not meet certain financial
and geographical criteria. Management identified seven stores to be closed. All
of the stores identified for closure are planned to be closed by the end of
fiscal year
2000. The timing of implementation of the plan was developed based on
discussion and relationships with major shopping mall developers.
At the date of the acquisition, in accordance with EITF 95-3, the Company
established a store closure reserve of $500,000 for the seven stores the
Company intended to close. The reserve was established to provide for estimated
early lease termination costs and penalties. Additionally, the Company
established an impairment reserve of $327,000 against the property and
equipment of the stores the Company planned to exit in order to record those
assets at net realizable value. As of January 2, 1999, no other significant
changes had been made to this plan.
F-27
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Analysis
The following table presents a summary of the activity in the store closure
reserve for the periods indicated for stores to be closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields Inc. and
Original Cookie Co. H&M Pretzel Time Great American
------------------------- ------------------------- ------------------------ -------------------------
Business
Combination Company- Company- Company- Company-
and Owned Stores Owned Stores Owned Stores Owned Stores
Subsequent Unrelated to Business Unrelated to Business Unrelated to Business Unrelated to
Adjustments Acquisition Combination Acquisition Combination Acquisition Combination Acquisition
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception,
September 16,
1996............ $ 5,060,000 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Utilization from
inception
(September 16,
1996) to
December 28,
1996............ (305,000) -- -- -- -- -- --
----------- ---------- ---------- -------- -------- -------- ---------- --------
Balance,
December 28,
1996............ 4,755,000 -- -- -- -- -- -- --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
July 25, 1997... -- -- 1,000,000 -- -- -- -- --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
September 2,
1997............ -- -- -- -- 500,000 -- -- --
Finalization of
store closure
plan for
obligations
related to
stores
originally
identified...... 1,357,000 -- -- -- -- -- -- --
Provision for
continuing
company-owned
stores targeted
for closure..... -- 538,000 -- -- -- -- -- --
Utilization for
the 52 weeks
ended January 3,
1998............ (2,145,000) (538,000) -- -- (1,000) -- -- --
----------- ---------- ---------- -------- -------- -------- ---------- --------
Balance, January
3, 1998......... 3,967,000 -- 1,000,000 -- 499,000 -- -- --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
August 24,
1998............ -- -- -- -- -- -- 3,548,000 --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
November 29,
1998............ -- -- -- -- -- -- -- --
Additional
reserves for
stores
originally
identified for
closure upon
acquisition,
January 2,
1999............ 1,693,000 -- -- -- -- -- -- --
Additional
reserves for
continuing
company-owned
and franchised
stores targeted
for closure,
January 2,
1999............ -- 4,674,000 -- 367,000 -- 264,000 -- 305,000
Utilization for
the 52 weeks
ended January 2,
1999............ (1,932,000) -- (19,000) -- (6,000) -- (149,000) --
----------- ---------- ---------- -------- -------- -------- ---------- --------
Balance, January
2, 1999......... $ 3,728,000 $4,674,000 $ 981,000 $367,000 $493,000 $264,000 $3,399,000 $305,000
=========== ========== ========== ======== ======== ======== ========== ========
<CAPTION>
Pretzelmaker Consolidated
------------ ---------------------------------------
Company-
Business Owned Total
Combination Stores Business
and Unrelated Combinations
Business Subsequent to and Company-
Combination Adjustments Acquisition Owned Stores
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Inception,
September 16,
1996............ $ -- $ 5,060,000 $ -- $ 5,060,000
Utilization from
inception
(September 16,
1996) to
December 28,
1996............ -- (305,000) -- (305,000)
------------ ------------ ------------ -------------
Balance,
December 28,
1996............ -- 4,755,000 -- 4,755,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
July 25, 1997... -- 1,000,000 -- 1,000,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
September 2,
1997............ -- 500,000 -- 500,000
Finalization of
store closure
plan for
obligations
related to
stores
originally
identified...... -- 1,357,000 -- 1,357,000
Provision for
continuing
company-owned
stores targeted
for closure..... -- -- 538,000 538,000
Utilization for
the 52 weeks
ended January 3,
1998............ -- (2,146,000) (538,000) (2,684,000)
------------ ------------ ------------ -------------
Balance, January
3, 1998......... -- 5,466,000 -- 5,466,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
August 24,
1998............ -- 3,548,000 -- 3,548,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
November 29,
1998............ 500,000 500,000 -- 500,000
Additional
reserves for
stores
originally
identified for
closure upon
acquisition,
January 2,
1999............ -- 1,693,000 -- 1,693,000
Additional
reserves for
continuing
company-owned
and franchised
stores targeted
for closure,
January 2,
1999............ -- -- 5,610,000 5,610,000
Utilization for
the 52 weeks
ended January 2,
1999............ -- (2,106,000) -- (2,106,000)
------------ ------------ ------------ -------------
Balance, January
2, 1999......... $500,000 $ 9,101,000 $5,610,000 $14,711,000
============ ============ ============ =============
</TABLE>
F-28
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of activity for stores originally
identified to be closed or franchised in connection with the applicable
business combination for the periods indicated. This table does not include a
summary of activity for stores the Company intends to close or franchise that
were not originally identified in connection with a business combination.
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and
Original Cookie H&M Pretzel Time Great American Pretzelmaker Consolidated
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stores
identified for
closure or
franchise at
inception,
September 18,
1996........... 138 64 -- -- -- -- -- -- -- -- 138 64
Stores closed
prior to
Inception...... (13) -- -- -- -- -- -- -- -- -- (13) --
Stores closed or
franchised from
Inception
(September 18,
1996) to
December 28,
1996........... (17) (3) -- -- -- -- -- -- -- -- (17) (3)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance,
December 28,
1996........... 108 61 -- -- -- -- -- -- -- -- 108 61
Stores
identified for
closure or
franchise upon
acquisition,
July 25, 1997.. -- -- 11 14 -- -- -- -- -- -- 11 14
Stores
identified for
closure or
franchise upon
acquisition,
September 2,
1997........... -- -- -- -- 4 -- -- -- -- -- 4 --
Stores closed or
franchised from
December 28,
1996 to January
3, 1998........ (70) (9) (3) -- -- -- -- -- -- -- (73) (9)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance, January
3, 1998........ 38 52 8 14 4 -- -- -- -- -- 50 66
Stores
identified for
closure or
franchise upon
acquisition,
August 24,
1998........... -- -- -- -- -- -- 54 11 -- -- 54 11
Stores
identified for
closure or
franchise upon
acquisition,
November 19,
1998........... -- -- -- -- -- -- -- -- 7 -- 7 --
Stores closed or
franchised for
the 52 weeks
ended January
2, 1999........ (15) (16) (2) (7) (1) -- (11) -- -- -- (29) (23)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance, January
2, 1999........ 23 36 6 7 3 -- 43 11 7 -- 82 54
=== === === === === === === === === === === ===
</TABLE>
The following table presents a summary of activity for stores the Company
intends to close or franchise that were not originally identified to be closed
or franchised in connection with a business combination:
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and Original Cookie H&M Pretzel Time Great American Consolidated
------------------------ ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
--------- ----------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stores identified for
closure (not included
in the original store
closure plan), during
the 52 weeks ended
January 3, 1998........ 10 -- -- -- -- -- -- -- 10 --
Stores closed or
franchised during the
52 weeks ended January
3, 1998................ (9) -- -- -- -- -- -- -- (9) --
--------- --------- --- --- --- --- --- --- --- ---
Balance, January 3,
1998................... 1 -- -- -- -- -- -- -- 1 --
Stores identified for
closure or franchise
(not included in the
original store closure
plan), January 2,
1999................... 28 14 3 1 3 1 4 -- 38 16
Stores closed or
franchised for the 52
weeks ended January 2,
1999................... (1) -- (1) -- -- -- -- -- (2) --
--------- --------- --- --- --- --- --- --- --- ---
Balance, January 2,
1999................... 28 14 2 1 3 1 4 -- 37 16
========= ========= === === === === === === === ===
</TABLE>
F-29
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Store Closure Reserve Payment Obligations
As of January 2, 1999, the future estimated cash payments under the store
closure reserve are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999......................................................... $ 4,577,000
2000......................................................... 2,546,000
2001......................................................... 2,049,000
2001......................................................... 1,625,000
2003......................................................... 1,376,000
Thereafter................................................... 2,538,000
-----------
$14,711,000
===========
</TABLE>
The following table presents a summary of changes in the property and
equipment impairment reserves that were established in connection with the
applicable business combination for the periods indicated for stores to be
closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields,
Inc. and
Original Great
Cookie Co. H&M American Pretzelmaker Consolidated
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Inception, September 18,
1996................... $10,921,000 $ -- $ -- $ -- $10,921,000
Utilization from
inception (September
18, 1996) to December
28, 1996 related to
stores to be closed.... (854,000) -- -- -- (854,000)
Utilization from
inception (September
18, 1996) to December
28, 1996 related to
stores to be
franchised............. (215,000) -- -- -- (215,000)
----------- ---------- ---------- -------- -----------
Balance, December 28,
1996................... 9,852,000 -- -- -- 9,852,000
To record property and
equipment impairment
upon acquisition,
July 25, 1997.......... -- 2,500,000 -- -- 2,500,000
Utilization from
December 28, 1996 to
January 3, 1998 related
to stores to be
closed................. (3,299,000) (208,000) -- -- (3,507,000)
Utilization from
December 28, 1996 to
January 3, 1998 related
to stores to be
franchised............. (492,000) -- -- -- (492,000)
----------- ---------- ---------- -------- -----------
Balance, January 3,
1998................... 6,061,000 2,292,000 -- -- 8,353,000
To record property and
equipment impairment
upon acquisition,
August 24, 1998........ -- -- 2,150,000 -- 2,150,000
To record property and
equipment impairment
upon acquisition,
September 9, 1998...... -- -- 973,000 -- 973,000
To record property and
equipment impairment
upon acquisition,
November 19, 1998...... -- -- -- 327,000 327,000
Utilization for the 52
weeks ended January 2,
1999 related to stores
to be closed........... (1,782,000) (93,000) (246,000) -- (2,121,000)
Utilization for the 52
weeks ended January 2,
1999 related to stores
to be franchised....... (435,000) (819,000) -- -- (1,254,000)
----------- ---------- ---------- -------- -----------
Balance, January 2,
1999................... $ 3,844,000 $1,380,000 $2,877,000 $327,000 $ 8,428,000
=========== ========== ========== ======== ===========
</TABLE>
F-30
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. CUMULATIVE REDEEMABLE SERIES A PREFERRED STOCK
At its inception, the Company issued $23,143,000 of ten percent cumulative
redeemable Series A preferred stock (the "Preferred Stock") to Capricorn which
amount totaled Capricorn's investment in the Company. The Preferred Stock
consisted of 97 shares, $.01 par value, with a liquidation preference of
approximately $245,000 per share as of December 28, 1996. Capricorn was
entitled to receive, out of funds legally available for the payment of
dividends, cumulative dividends at an annual rate of ten percent accruable on a
daily basis. All accrued but unpaid dividends were compounded on a quarterly
basis at an annual rate of ten percent. During the period ended December 28,
1996 and the year ended January 3, 1998, the Company elected to add dividends
totaling $642,000 and $2,173,000, respectively, to the liquidation preference.
In November 1997, the Preferred Stock, including accrued but unpaid dividends
totaling $2,815,000, was converted to common equity of the Company.
7. MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK OF PRETZEL TIME, INC.
The mandatorily redeemable cumulative preferred stock of Pretzel Time (the
"Pretzel Time Preferred Stock") is nonvoting and the preferred stockholders are
entitled to cumulative preferred dividends of ten percent for three years,
accrued and payable upon redemption. The Pretzel Time Preferred Stock must be
redeemed at $10,000 per share, plus unpaid and accumulated dividends, 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 the accumulated deficit of
Pretzel Time. In the event of a liquidation or sale of Pretzel Time, the
preferred stockholders are entitled to receive payment of $10,000 per share,
plus accumulated dividends.
During the period from the acquisition of a majority ownership in Pretzel
Time (September 2, 1997) to January 2, 1999, Pretzel Time increased the
liquidation preference of the Pretzel Time Preferred Stock by $212,000, in lieu
of paying cash dividends. In addition, the Pretzel Time Preferred Stock was
increased by $538,000, for the accretion required over time to amortize the
original issue discount incurred at the time of issuance. As of January 2,
1999, accrued dividends of $339,000 were unpaid.
During the period from September 2, 1997 to January 2, 1999, Pretzel Time
repurchased 17.5 shares of the Pretzel Time Preferred Stock for an total of
$175,000 in cash, or $10,000 per share, plus accrued dividends totaling
approximately $20,200. As of January 2, 1999, there are 127 shares of Pretzel
Time Preferred Stock issued and outstanding with a total liquidation preference
of approximately $1,495,000.
8. CAPITAL TRANSACTIONS
On June 3, 1998, the Company amended its Restated Certificate of
Incorporation to provide the Company with the authority to issue up to
5,000,000 shares of common stock. In connection therewith, the Company's Board
of Directors approved an effective stock split on existing shares. All common
share information in the accompanying consolidated financial statements has
been retroactively adjusted to reflect the effective stock split.
In November 1997, Capricorn converted its Preferred Stock in the Company
totaling $25,959,000 (including accrued but unpaid dividends of $2,815,000) to
common equity of the Company. No additional shares of common stock of the
Company were issued.
On November 26, 1997, as partial consideration for Harvard's 49.9 percent
interest in Mrs. Fields' Brand, the Company granted Harvard the rights to
approximately four percent, or 127,349 shares, of the Company's common stock.
The shares approximate total value was $1,500,000 after being appropriately
discounted for lack of controlling interest and marketability (see Note 1).
Although as of January 3, 1998, the Company was
F-31
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
obligated to issue the common shares to Harvard, no certificate had been
issued. However, because the Company was obligated to issue the shares as of
January 3, 1998, the Company recorded them as outstanding in the accompanying
consolidated financial statements. On July 17, 1998, the Company issued a
common stock certificate to Harvard for the 127,349 shares.
9. COMMITMENTS AND CONTINGENCIES
Stock Pledged as Collateral
Mrs. Fields' Holding has pledged all of Mrs. Fields' capital stock as
collateral for Mrs. Fields' Holding's 14 percent Senior Secured Discount Notes
due December 1, 2005 (the "Discount Notes"). Mrs. Fields' Holding issued the
Discount Notes on August 24, 1998, in connection with the Great American
Acquisitions (see Note 1). In connection with the issuance of the $55,000,000
principal amount at maturity of Discount Notes, Mrs. Fields' Holding recorded a
total original issue discount of approximately $24,136,000. The principal
amount of the Discount Notes will accrete at a rate of 14 percent compounded
semi-annually to a total principal amount of $55,000,000 at December 1, 2002.
Thereafter, the Discount Notes will accrue interest at the annual rate of 14
percent, payable semi-annually on June 1 and December 1 of each year,
commencing June 1, 2003.
Mrs. Fields' Holding is a holding company and does not have separate
operations from which it can generate cash flows. Under the circumstances, Mrs.
Fields' Holding would likely be dependent on its owners' and subsidiaries cash
flows to make principal and interest payments when due. Interest payments
totaling $7,700,000 per year will commence in 2003. Mrs. Fields may pay
dividends to Mrs. Fields' Holding, in order for Mrs. Fields' Holding to service
the debt, if no default or event of default occurs under the Indenture and
certain fixed charge coverage ratios and consolidated net income tests are met.
The Discount Notes are effectively subordinated to Mrs. Fields' Senior Notes.
Legal Matters
The Company is the subject of certain legal actions, which it considers
routine to its business activities. Management, after consultation with legal
counsel, believes that the potential liability to the Company under any such
actions is adequately accrued for or will not materially affect the Company's
consolidated financial position or results of operations.
Operating Leases
The Company leases retail store facilities, office space and equipment under
long-term noncancelable operating lease agreements with remaining terms of one
to ten years. Certain of the retail store leases provide for contingent rentals
based on gross revenues. Additionally, as part of the Company's franchising
program, certain locations have been subleased to franchisees.
Rent expense was as follows for the periods presented:
<TABLE>
<CAPTION>
Inception
(September 18,
1996) to 53 Weeks Ended 52 Weeks Ended
December 28, 1996 January 3, 1998 January 2, 1999
----------------- --------------- ---------------
<S> <C> <C> <C>
Minimum rentals............... $ 8,216,000 $30,654,000 $ 36,834,000
Contingent rentals............ 105,000 432,000 553,000
Sub-lease rentals............. (2,220,000) (8,756,000) (12,550,000)
----------- ----------- ------------
$ 6,101,000 $22,330,000 $ 24,837,000
=========== =========== ============
</TABLE>
F-32
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 2, 1999, the future minimum lease payments due under operating
leases (including future minimum lease payments for stores in the process of
being closed or franchised), which include required lease payments for those
stores that have been subleased, are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................ $ 37,686,000
2000............................................................ 32,337,000
2001............................................................ 27,066,000
2002............................................................ 23,033,000
2003............................................................ 18,246,000
Thereafter...................................................... 33,504,000
------------
$171,872,000
============
</TABLE>
As of January 2, 1999, the future minimum sublease payments due to the
Company under these leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................. $12,550,000
2000............................................................. 10,676,000
2001............................................................. 8,741,000
2002............................................................. 7,277,000
2003............................................................. 5,716,000
Thereafter....................................................... 8,717,000
-----------
$53,677,000
===========
</TABLE>
Contractual Arrangements
The Company entered into a supply agreement to buy frozen dough products
through 2000. The agreement stipulates minimum annual purchase commitments of
not less than 23,000,000 pounds of the products each year through the end of
the contract. The Company also entered into two supply agreements to buy
chocolate products through August 1999 and January 2000. The agreements
stipulate minimum purchase commitments of which 1.9 million and 1.5 million
pounds, respectively, had not been purchased as of January 2, 1999. The terms
of the frozen dough and chocolate purchase agreements include certain volume
incentives and penalties. Under each, the Company and the supplier may
terminate the supply agreement if the other party defaults on any of the
performance covenants. The Company also entered into several other immaterial
purchase agreements to buy products.
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 and January 2, 1999 were approximately
$550,000 and $295,000, respectively. Under the terms of the agreement, the
Company is required to assume any franchisee obligations which are in default
as defined. As of January 2, 1999, the Company has assumed obligations totaling
approximately $54,000, which are included in capital lease obligations.
The Company recorded deferred credits of approximately $1,204,000 as of
September 18, 1996. The deferred credits represent volume rebates associated
with the assumption of a long-term marketing and supply agreement with a
supplier in connection with the Mrs. Fields Inc. and affiliates and Original
Cookie Company
F-33
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and affiliates business combinations discussed in Note 1. Under terms of the
agreement, the Company is obligated to purchase a minimum amount of product
from the supplier. The supplier periodically prepays rebates to the Company for
anticipated purchases. The Company records the prepayments as deferred credits
and amortizes them ratably as purchases are made from the supplier. This
agreement was amended in January 1997 and an additional $600,000 in deferred
credits were recorded. The amended agreement expires on the later of December
31, 2003 or when the Company has met its revised purchase commitment. In
conjunction with this amendment, certain minimum commitments from the previous
agreement were carried forward and others were forgiven. Additionally, in
November 1997, Pretzel Time entered into a long-term marketing and supply
agreement with a supplier. Under terms of the agreement, the Company is
obligated to purchase a minimum amount of product from the supplier. An
additional $437,000 in deferred credits were recorded under this agreement. The
termination date of this agreement will be the later of December 31, 2003 or
when Pretzel Time has met its purchase commitment. Under these agreements, the
Company recognized approximately $1,393,000, and $812,000 primarily as a
reduction to food cost of sales during the years ended January 3, 1998 and
January 2, 1999.
In 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 these services for 20 additional
days a year for additional pay of $5,000 per day. The compensation increases by
10 percent a year beginning on January 1, 1999. The Consulting Agreement
expires on December 31, 1999. 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.
The Company has entered into employment agreements with five key officers
with terms of two to three years. The agreements are for a total annual base
salary of $1,095,000. If the Company terminates employment without cause, or
the employee terminates employment with good reason, the employee can receive
in severance pay the amount equal to the product of his or her then current
semi-monthly base salary by the greater of the number of semi-monthly periods
from the notice of termination or 36 to 48 semi-monthly periods, plus a portion
of any discretionary bonus that would otherwise have been payable. The
agreements have customary provisions for other benefits and also include
noncompetition clauses.
10. RELATED-PARTY TRANSACTIONS
As of January 3, 1998 and January 2, 1999, the Company had receivables due
from franchisees and licensees, primarily related to prepaid rent which the
Company had paid on behalf of franchisees, totaling approximately $2,176,000
and $6,003,000, respectively. These amounts are included in amounts due from
franchisees and affiliates and are net of allowance for doubtful accounts
totaling $582,000 and $1,078,000, respectively.
The Company paid fees to Korn/Ferry International ("Korn/Ferry") totaling
approximately $157,000 and $70,600, during the years ended January 3, 1998 and
January 2, 1999, respectively. Korn/Ferry is an executive search firm of which
one of the Company's directors is the Chairman.
A director of the Company is a consultant and an advisor to Dillon Read &
Co., Inc. ("Dillon Read"). In 1997, the Company paid to Dillon Read a fee of
approximately $707,000 in connection with the restructuring of the Company in
September 1996. The director's company did not receive a fee from the Company
during the fiscal year ended January 2, 1999. The Company believes that the
arrangements were on terms that could have been obtained from an unaffiliated
third party.
F-34
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 2, 1999, the Company has a loan due from the founder and
minority stockholder of Pretzel Time totaling $567,000. The note bears interest
at an annual rate of ten percent and is payable in monthly installments of
principal and interest beginning January 1998 by setoff of, and to the extent
of, the founder's bonus payments and dividends received by the founder in his
Pretzel Time stock; provided that in any calendar year no more than $100,000
may be so offset. In addition, as of January 2, 1999, the Company is due
approximately $451,000 from the founder in connection with certain lease
payments related to the purchase of Pretzel Time for which the Company is
indemnified. These amounts are recorded in accounts receivable and other assets
in the accompanying consolidated balance sheets.
11. STOCK-BASED COMPENSATION AND INCENTIVE PLANS
Stock Appreciation Rights Plan
During the second quarter of 1997, the Company agreed to issue 12,402 shares
of the Company's common stock to a consultant for consulting services provided
to the Company from the inception of the Company through June 30, 1997 and for
the settlement of obligations under a previously existing stock appreciation
rights plan. At the settlement date, the Company's common stock was valued at
$10 per share as determined by the Board of Directors. During the period from
inception through June 1997, the Company recorded approximately $124,000 of
consulting expense related to these obligations which is included in general
and administrative expenses in the accompanying consolidated statements of
operations and recorded the shares as outstanding in the accompanying
consolidated financial statements. On July 17, 1998, the Company issued a
common stock certificate to the consultant for the 12,402 shares.
Director Stock Purchase Plan
Effective September 18, 1996, the Company established the Mrs. Fields'
Holding Company, Inc. Director Stock Purchase Plan (the "Director Stock
Purchase Plan"). Under the Director Stock Purchase Plan, shares of the
Company's common stock, either restricted or vested, may be issued to directors
of the Company. On January 1, 1997, the directors of the Company were offered
an opportunity to purchase vested shares of the Company's common stock under
the Director Stock Purchase Plan for $10 per share, which was the fair market
value of the Company's stock as of that date as determined by the Board of
Directors. Selected directors participated and subscribed to purchase 51,667
vested shares of common stock. As a result, the Company recorded approximately
$517,000 of common stock subscriptions receivable in the accompanying
consolidated financial statements as of January 3, 1998. During fiscal 1998,
the Company collected all $517,000 of common stock subscriptions receivable.
Additionally, on January 1, 1997, the Company granted to the participating
directors a total of 28,333 restricted shares of the Company's common stock for
no cash consideration. Restricted shares vest 50 percent on January 1, 1999 and
50 percent on January 1, 2000, or earlier, upon a change of control of the
Company or Mrs. Fields. The Company is recognizing compensation cost totaling
approximately $283,000 related to the grant of restricted shares on a straight-
line basis over the vesting period.
The Company recorded the 51,677 vested shares and 28,333 restricted shares to
the directors as outstanding in the accompanying consolidated financial
statements at the time of issuance. On July 17, 1998, the Company issued common
stock certificates to the directors for a total of 51,667 vested shares and
28,333 restricted shares.
Director Stock Option Plan
On September 18, 1996, the Company established the Mrs. Fields' Holding
Company, Inc. Director Stock Option Plan (the "Director Stock Option Plan"). A
committee of the Board of Directors is authorized to administer the Director
Stock Option Plan and has the power, among other things, to grant awards of
options
F-35
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the Company's common stock to outside directors of the Company and its
direct and indirect subsidiaries. Options granted under the Director Stock
Option Plan are non-qualified under section 422 of the Internal Revenue Code.
The Director Stock Option Plan provides for the issuance of time vested
options, which vest 25 percent per year on the anniversaries of the dates on
which they are granted, and vest in full upon a change of control of the
Company or Mrs. Fields. Options expire no later than ten years after the date
the options are granted. A total of 50,000 shares of the Company's common stock
are reserved for issuance under the Director Stock Option Plan.
On January 1, 1997, the Company issued options to purchase 20,100 shares of
common stock with an exercise price of $10 per share to directors under the
Director Stock Option Plan. On January 1, 1998, the Company issued options to
purchase 10,752 shares of common stock with an exercise price of $16.74 to
directors under the Director Stock Option Plan. All options granted were at
prices equal to or greater than the fair market value of the underlying shares
of common stock of the Company at the grant date as valued by the Board of
Directors.
Employee Stock Option Plan
Effective September 18, 1996, the Company established the Mrs. Fields'
Holding Company, Inc. Employee Stock Option Plan (the "Employee Stock Option
Plan"). A committee of the Board of Directors is authorized to administer the
Employee Stock Option Plan and has the power, among other things, to grant
awards of options for the Company's common stock to officers and other
employees of the Company and its direct and indirect subsidiaries. Options
granted under the Employee Stock Option Plan are non-qualified under section
422 of the Internal Revenue Code. The Employee Stock Option Plan provides for
the issuance of three types of options. Performance-vested options are deemed
to be vested 20 percent for fiscal year 1997 and vest an additional 20 percent
per year for each subsequent fiscal year in which there is at least a 110
percent increase in Adjusted EBITDA, as defined, of the Company. Although, in
1998 the Company did not achieve the performance requirement, the Board of
Directors deemed the performance-vested options vested an additional 20 percent
for 1998. Time-vested options vest 25 percent per year on the anniversaries of
the dates on which they are granted, and vest in full upon a change in control
of the Company or Mrs. Fields. Upside options vest upon the earlier to occur of
the expiration of such option and a change of control, based on certain
internal rate of return ("IRR") targets: (i) if IRR through the vesting date is
less than 20 percent, the option will not vest; (ii) if IRR is from 20 percent
to 24.99 percent, the option will vest one-third; (iii) if IRR is from 25
percent to 29.99 percent, the option will vest two-thirds; and (iv) if IRR is
at least 30 percent, the option will vest in full. All options expire no later
than ten years after the date the options are granted. An total of 492,840
shares of the Company's common stock are reserved for issuance under the
Employee Stock Option Plan.
On September 18, 1996, the Company issued performance-vested options to
purchase 106,782 shares of common stock, time-vested options to purchase
114,996 shares of common stock and upside options to purchase 98,568 shares of
common stock to key employees of the Company at exercise prices of $10 per
share. On July 10, 1997, the Company issued performance-vested options to
purchase 8,214 shares of common stock and time-vested options to purchase
16,428 shares of common stock to a key employee of the Company at an exercise
price of $13 per share. All options were granted at exercise prices equal to or
greater than the fair market value of the underlying shares of common stock of
the Company at the grant date as valued by the Board of Directors.
Performance-vested options and upside options are variable plan options and
are accounted for in accordance with APB Opinion No. 25 ("APB No. 25"). A final
measurement of compensation has not taken place with respect to the grants of
such options because the number of options that will ultimately vest is not
F-36
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
known. During the year ended January 2, 1999, the Company recorded compensation
expense of $420,000 with respect to these options in accordance with variable
plan accounting.
Accounting For Stock-Based Compensation Plans
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plans as they relate to employees and directors.
Accordingly, no compensation expense is recognized for its stock-based
compensation and incentive plans related to directors and employees unless the
equity instruments were issued at less than their intrinsic fair market value.
During the period ended December 28, 1996 and the years ended January 3, 1998
and January 2, 1999, the Company recorded compensation expense totaling $0,
$94,000 and $559,000, respectively, related to equity instruments that were
issued at less than their intrinsic fair market value. Had compensation expense
for the Company's stock option plans and other stock-based compensation plans
been determined in accordance with the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's pro forma net income (loss) would
have been as follows:
<TABLE>
<CAPTION>
Inception to 53 Weeks Ended 52 Weeks Ended
December 28, 1996 January 3, 1998 January 2, 1999
----------------- --------------- ---------------
<S> <C> <C> <C>
Net income (loss):
As reported................ $2,124,000 $(624,000) $(21,505,000)
Pro forma.................. 2,106,000 (747,000) (21,598,000)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation expense
may not be representative of that to be expected in future years.
A summary of the status of the Company's stock option plans as of January 3,
1998 and January 2, 1999, and changes during the periods ended on those dates
is presented below:
<TABLE>
<CAPTION>
December 28, 1996 January 3, 1998 January 2, 1999
------------------ ------------------ -----------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Prices Shares Prices Shares Prices
-------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 340,446 $10.00 375,840 $10.39
Granted................. 340,446 10.00 35,394 14.14 -- --
-------- ------ -------- ------ ------- ------
Outstanding at end of
year................... 340,446 10.00 375,840 10.39 375,840 10.39
======== ======== =======
Exercisable at end of
year................... -- 55,815 10.04 119,384 10.31
======== ======== =======
Weighted average fair
value of options
granted................ $ 2.13 $ 3.01 N/A
======== ======== =======
</TABLE>
The following table summarizes information about the stock options
outstanding at January 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------
Number Wtd. Avg. Options
Range of Outstanding at Remaining Exercisable at
Exercise Prices January 2, 1999 Contractual Life January 2, 1999
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
$10.00...................... 340,446 7.7 years 110,261
$13.00...................... 24,642 8.5 years 6,435
$16.74...................... 10,752 9.0 years 2,688
------- -------
$10.00 to $16.74............ 375,840 7.8 years 119,384
======= =======
</TABLE>
F-37
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the period ended December 28, 1996 and the
year ended January 3, 1998: risk-free interest rate of 6.0 percent; expected
dividend yields of zero percent; expected lives of 4 years; no volatility.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors the Mrs. Fields' Original Cookies, Inc. 401(k)
Retirement Savings Plan (the "Plan") for all eligible employees. Under the
terms of the Plan, employees may make contributions to the Plan, a portion of
which is matched by contributions from the Company. The total Company
contributions to the Plan for the years ended January 3, 1998 and January 2,
1999 were approximately $6,800, $97,900 and $171,000, respectively.
13. REPORTABLE SEGMENTS
Operating segments are components of the Company for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This information is reported on the basis that it is used
internally for evaluating segment performance. The Company has two reportable
operating segments; namely, company-owned stores and related activity and
franchising and licensing activity. The segments are determined by revenue
source; direct sales or royalties and license fees. The company-owned stores
segment consists of both cookie and pretzel stores owned and operated by the
Company. The franchising and licensing segment consists of cookie and pretzel
stores, which are owned and operated by third parties who pay the Company an
initial franchise or license fee and monthly royalties based on a percentage of
gross sales and other licensing activity not related to cookie or pretzel
stores. The accounting policies for the segments are discussed in the summary
of significant accounting policies (see Note 2). Sales and transfers between
segments are eliminated in consolidation.
The Company evaluates performance of each segment based on contribution
margin. The Company does not allocate any interest income, interest expense,
depreciation and amortization or assets to its reportable operating segments.
Segment revenue and contribution margin are presented in the following table:
<TABLE>
<CAPTION>
Company- Franchising
owned and
Stores Licensing Total
----------- ----------- -----------
<S> <C> <C> <C>
Period ended December 28, 1996
Revenues................................... $40,849,000 $1,267,000 $42,116,000
Contribution margin........................ 10,761,000 1,267,000 12,028,000
53 weeks ended January 3, 1998
Revenues................................... 127,845,000 6,563,000 134,408,000
Contribution margin........................ 28,985,000 6,563,000 35,548,000
52 weeks ended January 2, 1999
Revenues................................... 140,235,000 14,001,000 154,236,000
Contribution margin........................ 30,337,000 10,414,000 40,751,000
</TABLE>
F-38
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of contribution margin to net income (loss) is as follows:
<TABLE>
<CAPTION>
Period
Ended 53 Weeks Ended 52 Weeks Ended
December January 3, January 2,
28, 1996 1998 1999
----------- -------------- --------------
<S> <C> <C> <C>
Contribution margin................ $12,028,000 $ 35,548,000 $ 40,751,000
General and administrative
expense........................... (4,089,000) (16,436,000) (19,583,000)
Store closure provision............ -- (538,000) (7,303,000)
Depreciation and amortization...... (2,356,000) (10,450,000) (19,867,000)
Interest expense................... (1,661,000) (7,281,000) (14,323,000)
Other expense, net................. (1,798,000) (1,467,000) (1,180,000)
----------- ------------ ------------
Net income (loss).................. $ 2,124,000 $ (624,000) $(21,505,000)
=========== ============ ============
</TABLE>
Geographic segment information is as follows:
<TABLE>
<CAPTION>
Domestic
Domestic International Franchising International
Company- Company- and Franchising
Revenue owned Stores owned Stores Licensing and Licensing
- ------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Period ended December 28,
1996.................... $ 40,849,000 $ -- $1,158,000 $109,000
53 weeks ended January 3,
1998.................... 127,736,000 109,000 6,150,000 413,000
52 weeks ended January 2,
1999.................... 140,018,000 217,000 13,738,000 263,000
</TABLE>
Revenues from international franchising and licensing are sourced from Canada
and Australia with no other countries having material representation. Revenues
from international company-owned stores are immaterial.
There were no customers who accounted for more than 10% of the Company's
total revenue or either segment's revenue.
F-39
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
January July 3,
2, 1999 1999
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,759 $ 4,675
Accounts receivable, net of allowance for doubtful
accounts of $74 and $69, respectively................... 3,208 1,570
Amounts due from franchisees and licensees, net of
allowance for doubtful accounts of $1,078 and $897,
respectively............................................ 6,137 4,808
Inventories.............................................. 5,503 4,913
Prepaid rent and other................................... 4,054 3,852
Deferred income tax assets, current portion.............. 861 861
-------- --------
Total current assets................................... 24,522 20,679
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements................................... 29,914 32,889
Equipment and fixtures................................... 17,108 11,913
Land..................................................... 240 240
-------- --------
47,262 45,042
Less accumulated depreciation and amortization........... (15,465) (15,487)
-------- --------
Net property and equipment............................. 31,797 29,555
-------- --------
DEFERRED INCOME TAX ASSETS, net of current portion......... 2,638 2,638
-------- --------
GOODWILL, net of accumulated amortization of $11,338 and
$16,576, respectively..................................... 146,375 140,987
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated
amortization of $2,615 and $2,924, respectively........... 14,296 13,772
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of
$1,406 and $2,557, respectively........................... 13,440 13,464
-------- --------
OTHER ASSETS............................................... 1,332 414
-------- --------
$234,400 $221,509
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-40
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January July 3,
2, 1999 1999
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft........................................... $ 4,133 $ 2,902
Line of credit........................................... -- 7,000
Current portion of long-term debt........................ 8,046 929
Current portion of capital lease obligations............. 299 444
Accounts payable......................................... 10,723 10,436
Accrued liabilities...................................... 3,597 2,878
Store closure reserve, current portion................... 4,577 4,577
Accrued salaries, wages and benefits..................... 3,155 3,065
Accrued interest payable................................. 1,260 1,371
Sales taxes payable...................................... 962 378
Deferred income.......................................... 318 192
-------- --------
Total current liabilities.............................. 37,070 34,172
LONG-TERM DEBT, net of current portion..................... 171,291 173,542
STORE CLOSURE RESERVE, net of current portion.............. 10,134 8,419
CAPITAL LEASE OBLIGATIONS, net of current portion.......... 997 1,229
-------- --------
Total liabilities...................................... 219,492 217,362
-------- --------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI
(a wholly owned subsidiary), aggregate liquidation
preference of $1,495 and $1,525, respectively............. 1,261 1,440
-------- --------
MINORITY INTEREST.......................................... 119 123
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100 shares authorized
for all series, none issued............................. -- --
Common stock, $.01 par value; 5,000,000 shares authorized
and 3,285,599 shares outstanding........................ 33 33
Warrants to purchase common stock........................ 2,895 2,895
Additional paid-in capital............................... 33,889 35,627
Deferred compensation expense............................ (438) (243)
Accumulated deficit...................................... (22,851) (35,728)
-------- --------
Total stockholders' equity............................. 13,528 2,584
-------- --------
$234,400 $221,509
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-41
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Ended Ended
July 4, July 3,
1998 1999
-------- --------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store and food sales.................................. $58,687 $ 71,915
Franchising, net.......................................... 2,971 11,562
Licensing, net............................................ 683 688
------- --------
Total revenues.......................................... 62,341 84,165
------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs......................... 33,908 41,118
Cost of sales............................................. 15,185 21,856
General and administrative................................ 8,673 10,950
Depreciation and amortization............................. 6,220 11,286
------- --------
Total operating costs and expenses...................... 63,986 85,210
------- --------
Loss from operations.................................. (1,645) (1,045)
------- --------
OTHER INCOME (EXPENSE), net:
Interest expense.......................................... (5,626) (11,364)
Interest income........................................... 421 78
Other expense, net........................................ (144) (110)
------- --------
Total other expense, net................................ (5,349) (11,396)
------- --------
Loss before provision for income taxes, preferred stock
accretion and dividends of subsidiaries and minority
interest................................................. (6,994) (12,441)
PROVISION FOR INCOME TAXES.................................. (14) (210)
------- --------
Loss before preferred stock accretion and dividends of
subsidiaries and minority interest....................... (7,008) (12,651)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF SUBSIDIARIES..... (222) (222)
MINORITY INTEREST........................................... (176) (4)
------- --------
Net loss.................................................. $(7,406) $(12,877)
======= ========
Basic and diluted net loss per common share............... $ (2.25) $ (3.92)
======= ========
Weighted average number of common shares outstanding...... 3,286 3,286
======= ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-42
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Ended Ended
July 4, July 3,
1998 1999
-------- --------
(Unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(7,406) $(12,877)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 6,220 11,286
Amortization of discount on notes.......................... -- 2,474
Amortization of deferred loan costs........................ 427 1,151
Deferred compensation expense.............................. 86 77
Loss on sale of assets..................................... 144 117
Preferred stock accretion and dividends of subsidiaries.... 222 222
Minority interest.......................................... 176 4
Changes in assets and liabilities:
Accounts receivable, net.................................. 387 1,638
Amounts due from franchisees and licensees, net........... 181 1,329
Inventories............................................... 240 590
Prepaid rent and other.................................... 512 202
Other assets.............................................. 261 918
Bank overdraft............................................ -- (1,231)
Accounts payable and accrued liabilities.................. (2,700) (1,006)
Store closure reserve..................................... (946) (1,311)
Accrued salaries, wages and benefits...................... 32 (90)
Accrued interest payable.................................. (171) 111
Sales taxes payable....................................... (562) (584)
Deferred income........................................... (598) (126)
------- --------
Net cash provided by (used in) operating activities...... (3,495) 2,894
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisition expenses..................... (928) (100)
Purchase of property and equipment......................... (3,342) (2,604)
------- --------
Net cash used in investing activities.................... (4,270) (2,704)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt................................ (265) (5,340)
Payment of debt financing costs............................ -- (1,175)
Net borrowings under line of credit........................ -- 7,000
Proceeds from exercise of stock options.................... -- 148
Payments for repurchase of common stock.................... -- (292)
Principal payments on capital lease obligations............ (138) (572)
Reduction in preferred stock............................... (42) (43)
Collection of common stock subscription receivable......... 265 --
------- --------
Net cash used in financing activities.................... (180) (274)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (7,945) (84)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD....... 16,493 4,759
------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD............. $ 8,548 $ 4,675
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................... $ 5,370 $ 7,588
------- --------
Cash paid for income taxes................................. $ 37 $ 166
======= ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-43
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Mrs. Fields' Holding Company, Inc. and subsidiaries ("Mrs.
Fields' Holding") in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q, and accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these condensed
consolidated financial statements reflect all adjustments, which consist only
of normal recurring adjustments, necessary to present fairly the financial
position of Mrs. Fields' Holding as of July 3, 1999 and January 2, 1999, and
the results of their operations and their cash flows for the periods presented
herein. These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year ended January 2, 1999 contained in Mrs. Fields'
Holding's Form 10-K.
The results of operations for the 13 and 26 weeks ended July 3, 1999 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending January 1, 2000.
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's condensed
consolidated financial statements to conform with the current period's
presentation.
(3) PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents a summary of the
consolidated results of operations of Mrs. Fields' Holding assuming the Great
American, Deblan, Chocolate Chip, Karp, Cookie Conglomerate and Pretzelmaker
acquisitions and related financings had occurred at the beginning of the 26
weeks ended July 4, 1998. Pro forma adjustments have been made to give effect
to amortization of goodwill, interest expense on acquisition debt and certain
other adjustments. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions been consummated at the
beginning of the 26 weeks ended July 4, 1998.
<TABLE>
<CAPTION>
26 Weeks Ended
July 4, 1998
--------------
(Unaudited)
<S> <C>
Total revenues............................................. $92,640
Income from operations..................................... 521
Net loss................................................... (8,169)
</TABLE>
(4) STORE CLOSURE AND PROPERTY AND EQUIPMENT IMPAIRMENT RESERVES
The Company's management reviews the historical and projected operating
performance of its stores on a periodic basis to identify underperforming
stores for impairment of net property investment or for targeted closing. The
Company's policy is to recognize a loss for that portion of the net property
investment determined to be impaired. Additionally, when a store is identified
for targeted closing, the Company's policy provides for the costs of closing
the store, which are predominantly estimated lease termination costs. Lease
termination costs include both one-time settlement payments and continued
contractual payments over time under the original lease agreements where no
settlement can be resolved with the landlord. As a result, although all stores
under the current exit plans will be exited by at least the end of fiscal year
2000, a portion of the store closure reserve will remain until all cash
payments have been made. No operating losses are accrued for. If and when a
F-44
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
reserve that was established as part of purchase accounting is not fully
utilized, the Company reduces the reserve to zero and goodwill is adjusted for
the corresponding amount. During the 26 weeks ended July 3, 1999, there were no
significant changes to the Company's store closure plans.
F-45
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following table presents a summary of the activity in the store closure
reserve during the 26 weeks ended July 3, 1999:
<TABLE>
<CAPTION>
Mrs. Fields Inc. and
Original Cookie Co. H&M Pretzel Time Great American
------------------------- ------------------------ ------------------------ -------------------------
Business
Combination Company- Company- Company- Company-
and Owned Stores Owned Stores Owned Stores Owned Stores
Subsequent Unrelated to Business Unrelated to Business Unrelated to Business Unrelated to
Adjustments Acquisition Combination Acquisition Combination Acquisition Combinations Acquisition
----------- ------------ ----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
2, 1999......... $3,728,000 $4,674,000 $981,000 $367,000 $493,000 $264,000 $3,399,000 $305,000
Utilization for
the 26 weeks
ended July 3,
1999............ (813,000) (504,000) -- (43,000) -- (67,000) (288,000) --
---------- ---------- -------- -------- -------- -------- ---------- --------
Balance, July 3,
1999............ $2,915,000 $4,170,000 $981,000 $324,000 $493,000 $197,000 $3,111,000 $305,000
========== ========== ======== ======== ======== ======== ========== ========
<CAPTION>
Pretzelmaker Consolidated
------------ ---------------------------------------
Company-
Business Owned Total
Combination Stores Business
and Unrelated Combinations
Business Subsequent to and Company-
Combination Adjustments Acquisition Owned Stores
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, January
2, 1999......... $500,000 $9,101,000 $5,610,000 $14,711,000
Utilization for
the 26 weeks
ended July 3,
1999............ -- (1,101,000) (614,000) (1,715,000)
------------ ------------ ------------ -------------
Balance, July 3,
1999............ $500,000 $8,000,000 $4,996,000 $12,996,000
============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and
Original Cookie H&M Pretzel Time Great American Pretzelmaker Consolidated
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
2, 1999......... 23 36 6 7 3 -- 43 11 7 -- 82 54
Stores closed or
franchised for
the 26 weeks
ended July 3,
1999............ (13) (13) (4) (4) (3) -- (21) (1) (4) -- (45) (18)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance, July 3,
1999 ........... 10 23 2 3 -- -- 22 10 3 -- 37 36
=== === === === === === === === === === === ===
</TABLE>
The following table presents a summary of activity for stores originally
identified to be closed or franchised in connection with the applicable
business combination for the 26 weeks ended July 3, 1999. Specifically, this
table does not include a summary of activity for stores the company intends to
close or franchise that were not originally identified in connection with a
business combination.
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and Original Cookie H&M Pretzel Time Great American Consolidated
------------------------ ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
--------- ----------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 2,
1999.................... 28 14 2 1 3 1 4 -- 37 16
Stores closed or
franchised during the 26
weeks ended July 3,
1999.................... (19) (5) (2) -- -- (1) (1) -- (22) (6)
--------- --------- --- --- --- --- --- --- --- ---
Balance, July 3, 1999 .. 9 9 -- 1 3 -- 3 -- 15 10
========= ========= === === === === === === === ===
</TABLE>
The following table presents a summary of activity for stores the Company
intends to close or franchise that were not originally identified to be closed
or franchised in connection with a business combination for the 26 weeks ended
July 3, 1999:
F-46
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following table presents a summary of changes in the property and
equipment impairment reserves that were established in connection with the
applicable business combination for the 26 weeks ended July 3, 1999 for stores
to be closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields,
Inc. and
Original Great
Cookie Co. H&M American Pretzelmaker Consolidated
------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 2,
1999................... $ 3,844,000 $1,380,000 $ 2,877,000 $327,000 $ 8,428,000
Utilization for the 26
weeks ended July 3,
1999 related to stores
to be closed........... (1,080,000) (405,000) (1,112,000) (157,000) (2,754,000)
Utilization for the 26
weeks ended July 3,
1999 related to stores
to be franchised....... (660,000) (332,000) (5,000) -- (997,000)
----------- ---------- ----------- --------- -----------
Balance, July 3, 1999... $ 2,104,000 $ 643,000 $ 1,760,000 $ 170,000 $ 4,677,000
=========== ========== =========== ========= ===========
</TABLE>
(5) REPORTABLE SEGMENTS
Management evaluates performance at Mrs. Fields' Holding using two reportable
operating segments; namely, (1) company-owned stores and related activity and
(2) franchising and licensing activity. The segments are determined by revenue
source; direct sales or royalties and license fees. The company-owned stores
segment consists of both cookie and pretzel stores owned and operated by Mrs.
Fields' Holding. The franchising and licensing segment consists of cookie and
pretzel stores, which are owned and operated by third parties who pay Mrs.
Fields' Holding an initial franchise fee and monthly royalties based on a
percentage of gross sales and other licensing activity not related to cookie or
pretzel stores. Sales and transfers between segments are eliminated in
consolidation.
Mrs. Fields' Holding evaluates performance of each segment based on
contribution margin. Mrs. Fields' Holding does not allocate any interest
income, interest expense, depreciation and amortization or assets to its
reportable operating segments. Segment revenue and contribution margin are
presented in the following table.
<TABLE>
<CAPTION>
26 weeks ended July 4,
1998 Company-owned Stores Franchising and Licensing Total
- ---------------------- -------------------- ------------------------- -------
<S> <C> <C> <C>
Total revenues.......... $58,687 $ 3,654 $62,341
Contribution margin..... 9,594 3,654 13,248
<CAPTION>
26 weeks ended July 3,
1999
- ----------------------
<S> <C> <C> <C>
Total revenues.......... $71,915 $12,250 $84,165
Contribution margin..... 13,404 7,787 21,191
</TABLE>
The reconciliation of contribution margin to net loss is as follows:
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
July 4, 1998 July 3, 1999
-------------- --------------
<S> <C> <C>
Contribution margin............................... $13,248 $ 21,191
General and administrative expense................ (8,673) (10,950)
Depreciation and amortization..................... (6,220) (11,286)
Interest expense.................................. (5,626) (11,364)
Other income (expense), net....................... (135) (468)
------- --------
Net loss.......................................... $(7,406) $(12,877)
======= ========
</TABLE>
F-47
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Geographic segment information is as follows:
<TABLE>
<CAPTION>
International Domestic International
Domestic Company- Company-owned Franchising and Franchising
Total revenues owned Stores Stores Licensing and Licensing
-------------- ----------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
26 weeks ended July 4,
1998................... 58,609 78 3,467 187
26 weeks ended July 3,
1999................... 71,894 21 12,050 200
</TABLE>
Revenues from international franchising and licensing are generated from
Canada and Australia with no other countries having material representation.
Revenues from international company-owned stores are immaterial. As of July 3,
1999, there are no remaining international company-owned stores.
There were no customers who accounted for more than 10% of Mrs. Fields'
Holding total revenues or either segment's revenues.
(6) RELATED PARTY TRANSACTIONS
On May, 27, 1999, Mrs. Fields' Holding entered into an agreement with
Capricorn Investors II, L.P. ("Capricorn"), the majority shareholder of Mrs.
Fields' Holding, in which Capricorn agreed to make a contribution to Mrs.
Fields' Holding of $2,000,000 by assuming a contract payment from Mrs. Fields
due in the future. The consideration for this debt assumptions has not been
determined, but may include the issuance of 101,419 shares of Mrs. Fields'
Holding's common stock or an economically equivalent transactions as permitted
under the debt instruments of Mrs. Fields' Holding, or no consideration. As of
July 3, 1999, a final determination of the consideration had not been made.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields' Original Cookies, Inc.:
We have audited the accompanying consolidated balance sheets of Mrs. Fields'
Original Cookies, Inc. (a Delaware corporation) and subsidiaries as of January
3, 1998 and January 2, 1999, 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 each of the two years in the
period ended January 2, 1999. 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 consolidated financial position
of Mrs. Fields' Original Cookies, Inc. and subsidiaries as of January 3, 1998
and January 2, 1999, and the consolidated results of their operations and their
cash flows for the period from inception (September 18, 1996) to December 28,
1996 and for each of the two years in the period ended January 2, 1999 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Salt Lake City, Utah
April 1, 1999
F-49
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 16,287 $ 4,751
Accounts receivable, net of allowance for doubtful
accounts of $32 and $74, respectively................ 1,535 3,208
Amounts due from franchisees and licensees, net of
allowance for doubtful accounts of $582 and $1,078,
respectively......................................... 2,176 6,003
Inventories........................................... 3,100 5,503
Prepaid rent and other................................ 2,960 4,017
Deferred income tax assets............................ 2,765 861
-------- --------
Total current assets................................ 28,823 24,343
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements................................ 21,099 29,914
Equipment and fixtures................................ 14,100 17,108
Land.................................................. 128 240
-------- --------
35,327 47,262
Less accumulated depreciation and amortization........ (6,125) (15,465)
-------- --------
Net property and equipment.......................... 29,202 31,797
-------- --------
DEFERRED INCOME TAX ASSETS.............................. 734 2,638
-------- --------
GOODWILL, net of accumulated amortization of $4,980 and
$11,231, respectively.................................. 68,501 145,782
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated
amortization of $1,409 and $2,615, respectively........ 15,193 14,296
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of
$70 and $1,320, respectively........................... 5,906 11,718
-------- --------
OTHER ASSETS............................................ 1,325 1,332
-------- --------
$149,684 $231,906
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-50
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt..................... $ 472 $ 8,046
Current portion of capital lease obligations.......... 142 299
Accounts payable...................................... 3,805 10,723
Bank overdraft........................................ -- 4,133
Accrued liabilities................................... 2,826 3,597
Current portion of store closure reserve.............. 3,664 4,577
Accrued salaries, wages and benefits.................. 1,891 3,155
Accrued interest payable.............................. 1,082 1,260
Sales taxes payable................................... 937 962
Deferred credits...................................... 871 318
-------- --------
Total current liabilities........................... 15,690 37,070
LONG-TERM DEBT, net of current portion and discount..... 100,284 141,647
STORE CLOSURE RESERVE, net of current portion........... 1,802 10,134
CAPITAL LEASE OBLIGATIONS, net of current portion....... 183 997
-------- --------
Total liabilities................................... 117,959 189,848
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 7 and 8)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of
Pretzel Time (a wholly owned subsidiary), aggregate
liquidation preference of $1,437 and $1,495,
respectively........................................... 902 1,261
-------- --------
MINORITY INTEREST....................................... 58 119
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized
and 400 shares outstanding........................... -- --
Additional paid-in capital............................ 30,843 59,899
Accumulated deficit................................... (78) (19,221)
-------- --------
Total stockholder's equity.......................... 30,765 40,678
-------- --------
$149,684 $231,906
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-51
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Inception 53 52
(September 18, Weeks Weeks
1996) to Ended Ended
December 28, January 3, January 2,
1996 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Net store and food sales................ $40,849 $127,845 $140,235
Franchising, net........................ 503 4,535 12,464
Licensing, net.......................... 764 2,028 1,537
------- -------- --------
Total revenues........................ 42,116 134,408 154,236
------- -------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs....... 19,492 66,832 75,003
Cost of sales........................... 10,596 32,028 38,482
General and administrative.............. 4,035 16,192 19,017
Store closure provision................. -- 538 7,303
Depreciation and amortization........... 2,344 10,403 19,820
------- -------- --------
Total operating costs and expenses.... 36,467 125,993 159,625
------- -------- --------
Income (loss) from operations....... 5,649 8,415 (5,389)
------- -------- --------
OTHER INCOME (EXPENSE), net:
Interest expense........................ (1,867) (7,830) (13,197)
Interest income......................... 74 246 623
Other expense........................... -- (368) (409)
------- -------- --------
Total other expense, net.............. (1,793) (7,952) (12,983)
------- -------- --------
Income (loss) before provision for
income taxes, preferred stock accretion
and dividends of subsidiaries and
minority interest...................... 3,856 463 (18,372)
PROVISION FOR INCOME TAXES................ (1,798) (655) (316)
------- -------- --------
Income (loss) before preferred stock
accretion and dividends of subsidiaries
and minority interest.................. 2,058 (192) (18,688)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF
SUBSIDIARIES............................. (97) (644) (444)
MINORITY INTEREST......................... -- (138) (11)
------- -------- --------
Net income (loss)..................... $ 1,961 $ (974) $(19,143)
======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-52
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------- 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 Pretzel Time... -- -- 4,200 -- 4,200
Parent contribution of note
receivable due from Pretzel
Time's minority stockholder
and founder.................. -- -- 500 -- 500
Parent contribution of
investment in Mrs. Fields'
Brand........................ -- -- 6,500 -- 6,500
Conversion to equity of note
payable to parent............ -- -- 4,643 -- 4,643
Dividend paid to parent....... -- -- -- (1,065) (1,065)
Net loss...................... -- -- -- (974) (974)
--- ---- ------- -------- -------
BALANCE, January 3, 1998........ 400 -- 30,843 (78) 30,765
Parent equity infusion........ -- -- 29,056 -- 29,056
Net loss...................... -- -- -- (19,143) (19,143)
--- ---- ------- -------- -------
BALANCE, January 2, 1999........ 400 $-- $59,899 $(19,221) $40,678
=== ==== ======= ======== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-53
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Inception
(September 18, 53 Weeks 52 Weeks
1996) to Ended Ended
December 28, January 3, January 2,
1996 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 1,961 $ (974) $(19,143)
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 19,820
Amortization of discount on notes........ -- -- 32
Amortization of deferred loan costs...... -- -- 1,250
Loss on disposition of assets............ -- 368 409
Deferred income taxes.................... 1,511 210 --
In-kind interest expense on note payable
to stockholder.......................... 97 338 --
Preferred stock accretion and dividends
of subsidiaries......................... 97 644 444
Minority interest........................ -- 234 11
Changes in assets and liabilities, net
of effects from acquisitions:
Accounts receivable..................... (294) (353) (1,673)
Amounts due from franchisees and
licensees.............................. (339) (514) (866)
Inventories............................. (159) 136 (822)
Prepaid rent and other.................. (31) (895) 932
Other assets............................ 39 427 1,437
Accounts payable and accrued
liabilities............................ 239 (6,651) 2,769
Store closure reserve................... (305) (1,666) 5,196
Accrued salaries, wages and benefits.... 212 80 1,264
Accrued interest payable................ 1,668 (586) (713)
Sales taxes payable..................... 542 261 (80)
Deferred credits........................ 27 (543) (838)
-------- -------- --------
Net cash provided by operating
activities............................ 7,609 919 9,429
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions and
related costs........................... (19,508) (10,949) (32,835)
Purchase of property and equipment, net
of effects from acquisitions............ (1,638) (4,678) (8,235)
Proceeds from the sale of assets......... 15 122 176
-------- -------- --------
Net cash used in investing activities.. (21,131) (15,505) (40,894)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt.................................... -- 108,250 39,400
Principal payments on long-term debt..... (1,769) (77,009) (41,257)
Payment of debt financing costs.......... -- (5,976) (7,062)
Cash advance from Mrs. Fields' Holding... -- 1,500 --
Repayment of cash advance to Mrs. Fields'
Holding................................. -- (1,500) --
Payment of cash dividend to Mrs. Fields'
Holding................................. -- (1,065) --
Equity infusion from Mrs. Fields'
Holding................................. -- -- 29,056
Principal payments on capital lease
obligations............................. -- (36) (123)
Proceeds from the issuance of common
stock................................... 15,000 -- --
Proceeds from the issuance of mandatorily
redeemable cumulative preferred stock of
subsidiary.............................. 3,500 -- --
Reduction in preferred stock of Pretzel
Time.................................... -- -- (85)
Proceeds from the issuance of note
payable to related party................ 3,500 -- --
-------- -------- --------
Net cash provided by financing
activities............................ 20,231 24,164 19,929
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 6,709 9,578 (11,536)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
THE PERIOD............................... -- 6,709 16,287
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD................................... $ 6,709 $ 16,287 $ 4,751
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-54
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest was approximately $28, $8,416, and $12,440 for the
period ended December 28, 1996, and for the years ended January 3, 1998 and
January 2, 1999, respectively.
Cash paid for income taxes was approximately $0, $217, and $209 for the
period ended December 28, 1996, and for the years ended January 3, 1998 and
January 2, 1999, respectively.
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, the following net
liabilities were assumed. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired.................................... $ 93,494
Net cash paid.................................................... (19,508)
Notes payable issued............................................. (65,735)
--------
Liabilities assumed............................................ $ 8,251
========
On November 26, 1997, Mrs. Fields' Holding Company, Inc. ("Mrs. Fields'
Holding") converted to common equity of the Company $4,643 total principal
amount of convertible subordinated notes and contributed to the Company all of
the common equity of Mrs. Fields' Brands after converting its preferred stock
interests totaling $3,935 to common equity.
On July 25, 1997, certain assets were acquired and certain liabilities were
assumed of H & M Concepts Ltd. Co. by Mrs. Fields' Pretzel Concepts, Inc.
("Pretzel Concepts") as follows. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
Fair value of assets acquired.................................... $ 15,780
Net cash paid.................................................... (5,750)
Notes payable issued............................................. (8,000)
--------
Liabilities assumed............................................ $ 2,030
========
On September 2, 1997, 56 percent of the shares of common stock of Pretzel
Time, Inc. ("Pretzel Time") were acquired by Mrs. Fields' Holding as follows.
Additionally, in connection with the purchase accounting, certain other
accruals were recorded (see Note 1).
Fair value of assets acquired.................................... $ 8,311
Net cash paid.................................................... (4,200)
--------
Liabilities assumed............................................ $ 4,111
========
</TABLE>
On November 26, 1997, Mrs. Fields' Holding contributed all of the assets and
liabilities of Pretzel Concepts, Mrs. Fields' Holding's 56 percent of the
shares of common stock of Pretzel Time and a $500 note receivable from Pretzel
Time's founder and minority stockholder to the Company. Mrs. Fields' Holding
also contributed all of the common stock of Mrs. Fields' Brands to Mrs. Fields.
F-55
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
During the period from the acquisition of the majority ownership of Pretzel
Time (September 2, 1997) to January 2, 1999, Pretzel Time increased its
mandatorily redeemable cumulative preferred stock liquidation preference by
approximately $212, in lieu of paying cash dividends. In addition, for the same
period, Pretzel Time's mandatorily redeemable cumulative preferred stock was
increased by approximately $538 for the accretion required over time to
amortize the original issue discount.
In August 1998, the Company acquired all of the outstanding capital stock and
subordinated indebtedness of Cookies USA, Inc. ("Cookies USA") for a total
purchase price of approximately $18,400. During August and September 1998, the
Company also entered into agreements with three franchisees of Cookies USA (the
"Great American Franchisees") under which the Company purchased a total of 37
Great American Cookies franchises for a total purchase price of $16,328. The
total purchase price for all of these acquisitions of $34,728 was allocated, on
a preliminary basis, as follows. Additionally, in connection with the purchase
accounting, certain other accruals were recorded (see Note 1).
<TABLE>
<S> <C>
Fair value of assets acquired.................................... $ 77,410
Net cash paid.................................................... (27,771)
--------
Liabilities assumed............................................ $ 49,639
========
In October 1998, the Company acquired the assets of the Cookie Conglomerate,
Inc. ("Cookie Conglomerate") for a total purchase price of $2,800. The total
purchase price was allocated as follows:
Fair value of assets acquired.................................... $ 2,800
Net cash paid.................................................... --
--------
Liabilities assumed............................................ $ 2,800
========
In November 1998, the Company acquired all of the outstanding stock of
Pretzelmaker Holdings, Inc. ("Pretzelmaker") for $5,419. The total purchase
price was allocated as follows:
Fair value of assets acquired.................................... $ 8,519
Net cash paid.................................................... (1,100)
--------
Liabilities assumed............................................ $ 7,419
========
</TABLE>
F-56
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Mrs. Fields' Original Cookies, Inc. (the "Company"), a Delaware corporation,
is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc. Mrs. Fields'
Holding is a majority owned subsidiary of Capricorn Investors II, L.P.
("Capricorn"). The Company has eight wholly owned operating subsidiaries;
namely, Great American Cookie Company, Inc., The Mrs. Fields' Brand, Inc.,
Pretzel Time, Inc., Pretzelmaker Holdings, Inc., Mrs. Fields' Cookies
Australia, Mrs. Fields' Cookies (Canada) Ltd., H & M Canada and Pretzelmaker of
Canada; and three partially owned subsidiaries.
The Company primarily operates retail stores which sell freshly baked
cookies, brownies, pretzels and other food products through six specialty
retail chains. As of January 2, 1999, the Company owned and operated 147 Mrs.
Fields Cookies stores, 120 Original Cookie Company stores, 119 Great American
Cookies stores, 77 Hot Sam Pretzels stores, 93 Pretzel Time stores, 9
Pretzelmaker stores in the United States and one Pretzel Time store in Canada.
Additionally, the Company has franchised or licensed 859 stores in the United
States and 113 stores in several other countries. As of January 2, 1999, the
Company owned and operated 437 core stores and 129 stores which are in the
process of being closed or franchised. All of the stores in the process of
being closed or franchised are expected to be closed or franchised by the end
of fiscal year 2000.
During the year ended January 2, 1999, the Company acquired 421 franchisees
through various acquisitions, franchised 83 locations, acquired 33 stores from
franchisees, subsequently refranchised 26 of these stores, and had 78
franchisees discontinue operations.
The Company holds legal title to certain trademarks for the "Mrs. Fields"
name and logo and licenses the uses of these trademarks to third parties for
the establishment and operation of Mrs. Fields' cookie and bakery operations
and other merchandising activities. In connection with these licensing
activities, the Company authorizes third-party licensees to use certain
business formats, systems, methods, procedures, designs, layouts,
specifications, trade names and trademarks in the United States and other
countries. Additionally, the Company markets and distributes its products
through catalogs, other print media and mail order.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company experiences its highest revenues in
the fourth quarter. Because the Company's stores are heavily concentrated in
shopping malls, the Company's sales performance is significantly dependent on
the performance of those malls.
Business Combinations
Mrs. Fields, Inc. and Affiliates and Original Cookie Company and Affiliates
The Company began operations on September 18, 1996, following the completion
of two simultaneous but separate asset purchase transactions wherein the
Company (i) acquired certain assets and assumed certain liabilities of Mrs.
Fields Inc., Mrs. Fields Development Corporation and Mrs. Fields Cookies in
accordance with two Asset Purchase Agreements dated August 7, 1996, among these
parties and Capricorn, and (ii) acquired certain assets and assumed certain
liabilities of The Original Cookie Company, Incorporated and Hot Sam Company,
Inc. in accordance with an Asset Purchase Agreement dated August 7, 1996, as
amended by the First Amendment dated as of September 17, 1996, among these
parties and Capricorn.
The combined purchase price for the acquired net assets was approximately
$85,243,000. The Company paid net cash of $19,508,000 and issued approximately
$65,735,000 in senior and subordinated notes to the selling shareholders. The
acquisitions were accounted for as purchases. The total purchase price was
allocated to the net assets acquired, based on their estimated fair values. The
organization of the Company and the
F-57
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisitions resulted in the recording of intangible assets of approximately
$49,942,000 principally made up of goodwill, trademarks and organization costs.
An additional $17,680,000 of goodwill and $4,520,000 of deferred income tax
assets (net of valuation allowances) were recorded in connection with the
Company recording certain other accruals totaling $11,300,000 and providing
reserves totaling $10,921,000 for impaired property and equipment (see Note 5)
at Company-owned stores the Company intends to exit through closing or
franchising. Goodwill and trademarks are amortized using the straight-line
method over 15 years. The $11,300,000 of accruals established at the date of
the acquisitions consisted of $5,060,000 for obligations incident to store
closures (see Note 5), $2,450,000 for contingent legal and lease obligations
that were firmed up before December 28, 1996, $3,135,000 for transaction and
finders' fees and $655,000 for severance and related costs. The Company
terminated all of the Original Cookie Company and Affiliates corporate
employees as planned.
As of January 2, 1999, approximately $2,068,000 of the $2,450,000 accrual for
legal and lease obligations has been utilized. The remaining amount as of
January 2, 1999 of approximately $382,000 is expected to be utilized by the end
of 1999. All of the $3,135,000 accrual established for transaction and finders'
fees and the $655,000 accrual for severance and related costs associated with
the acquisitions were fully utilized for the purposes intended during fiscal
1997.
H & M Concepts Ltd. Co.
On July 25, 1997, Mrs. Fields' Pretzel Concepts, Inc., a wholly owned
subsidiary of Mrs. Fields' Holding, acquired substantially all of the assets
and assumed certain liabilities of H & M Concepts Ltd. Co. and subsidiaries ("H
& M"). H & M owned and operated stores which engage in retail sales of
pretzels, toppings and beverages under a franchise agreement with Pretzel Time,
Inc. The total consideration of $13,750,000 consisted of (i) $5,750,000 of
cash, financed through an advance from Mrs. Fields' Holding of $1,500,000 and a
$4,250,000 bank loan to Pretzel Concepts, (ii) a $4,000,000 principal amount
bridge note of Pretzel Concepts and (iii) a $4,000,000 principal amount
subordinated note of Mrs. Fields' Holding retained by the sellers (all such
debt collectively referred to as the "H & M Debt"). The acquisition was
accounted for using the purchase method of accounting (based on the estimated
fair values of the net assets acquired) and resulted in recording approximately
$9,618,000 of goodwill that is being amortized using the straight-line method
over 15 years.
Effective November 26, 1997, Mrs. Fields' Holding contributed all of the
assets and liabilities of Pretzel Concepts to the Company and, in consideration
thereof, the Company assumed the H & M Debt, including all accrued but unpaid
interest. Pretzel Concepts and the Company merged on the same date with the
Company being the surviving entity. The contribution was accounted for in a
manner similar to that of pooling-of-interests accounting. There was no step-up
in the historical basis of Pretzel Concepts' assets or liabilities. Beginning
with July 25, 1997, the Company has included Pretzel Concepts' results of
operations in the Company's consolidated results of operations.
Pretzel Time, Inc.
On September 2, 1997, Mrs. Fields' Holding acquired 56 percent of the shares
of common stock of Pretzel Time for a total cash purchase price of $4,200,000,
$750,000 of which was paid to Pretzel Time for working capital purposes, and
the balance of which was paid to the selling shareholders. In connection with
the acquisition, Mrs. Fields' Holding extended a $500,000 loan to the founder
of Pretzel Time who continued to own 44 percent of the shares of common stock
of Pretzel Time. The note bears interest at an annual rate of ten percent (see
Note 8). Pretzel Time is a franchisor of hand rolled soft pretzel outlets
located in North America. The outlets are primarily located in shopping malls.
The acquisition was accounted for using the purchase method of accounting
(based on the estimated fair values of the net assets acquired) and resulted in
recording
F-58
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately $5,882,000 of goodwill that is being amortized using the
straight-line method over 15 years. The goodwill recorded was $1,682,000 more
than the purchase price as the Company assumed more liabilities than it
acquired in assets at their fair values. Additionally, severance and legal
accruals were established in accordance with EITF 95-3.
Effective November 26, 1997, Mrs. Fields' Holding contributed its 56 percent
of the shares of common stock of Pretzel Time to the Company. Mrs. Fields'
Holding also contributed to the Company the $500,000 note due from Pretzel
Time's founder and minority stockholder. The contribution was accounted for in
a manner similar to that of pooling-of-interests accounting. There was no step-
up in the book basis of Pretzel Time's assets or liabilities.
On January 2, 1998, the Company purchased an additional four percent of the
shares of common stock of Pretzel Time from the founder for $300,000 in cash.
The purchase was accounted for using the purchase method of accounting (based
on the estimated fair values of the net assets acquired) and resulted in
recording approximately $311,000 of goodwill. In June 1998, the Company
acquired an additional ten percent of the shares of common stock of Pretzel
Time from the founder for $875,000 in cash. On December 9, 1998, Mrs. Fields
purchased three shares of Pretzel Time common stock for $500,000 in cash. On
December 30, 1998, Mrs. Fields completed the acquisition of the remaining
outstanding common stock of Pretzel Time under a stock purchase agreement dated
December 30, 1998, for a purchase price of approximately $4,700,000, $2,500,000
of which was paid in cash on January 5, 1999 and $2,000,000 of which is payable
on or before December 30, 1999. The Company has included the appropriate
percentage of Pretzel Time's results of operations for each respective period
in its consolidated results of operations.
The Mrs. Fields' Brand, Inc.
Prior to November 26, 1997, Mrs. Fields' Holding owned 50.1 percent of the
shares of the common stock of Mrs. Fields' Brand. Mrs. Fields' Brand holds
legal title to certain trademarks for the "Mrs. Fields" name and logo and
licenses the use of these trademarks to third parties for the establishment and
operation of Mrs. Fields' cookie and bakery operations and other merchandising
activities. In connection with these licensing activities, Mrs. Fields' Brand
authorizes third-party licensees to use certain business formats, systems,
methods, procedures, designs, layouts, specifications, trade names and
trademarks in the United States and other countries.
On November 26, 1997, Mrs. Fields' Holding acquired the remaining 49.9
percent of the shares of the common stock of Mrs. Fields' Brand from Harvard
Private Capital Holdings, Inc. for approximately $2,565,000. The consideration
consisted of $1,065,000 in cash and $1,500,000 in rights to common equity of
Mrs. Fields' Holding. Mrs. Fields' Holding's Board of Directors determined the
value of Harvard's rights to the common equity based on a fair value analysis.
This analysis appropriately considered a discount for lack of controlling
interest and marketability as Mrs. Fields' Holding's common equity is not
publicly traded. The acquisition was accounted for using the purchase method of
accounting (based on the estimated fair values of the net assets acquired) and
resulted in recording approximately $2,565,000 of intangible assets (primarily
goodwill) that are being amortized using the straight-line method over 15
years.
Effective November 26, 1997, Mrs. Fields' Holding contributed all of the
common stock of Mrs. Fields' Brand to the Company. As a result of this capital
contribution, Mrs. Fields' Brand became a wholly owned subsidiary of the
Company. The contribution was accounted for in a manner similar to that of
pooling-of-interests accounting. There was no step-up in the book basis of Mrs.
Fields' Brand's assets or liabilities. Although the Company owned 50.1 percent
of Mrs. Fields' Brand until November 25, 1997, the Company has included 100
percent of Mrs. Fields' Brand's results of operations with the Company's
consolidated results of operations for all periods presented as a result of
Mrs. Fields' Brand incurring net losses for these periods.
F-59
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Great American Cookie Company, Inc.
On August 24, 1998, the Company acquired all of the outstanding capital stock
and subordinated indebtedness of Cookies USA, Inc., the sole stockholder of
Great American Cookie Company, Inc., for a total purchase price of $18,400,000.
Great American is an operator and franchisor of mall-based specialty retail
cookie outlets and a manufacturer of cookie batter which is distributed to
Great American operated retail stores and sold to franchised retail stores.
Concurrently with the acquisition of Cookies USA, the Company entered into
agreements with two Great American franchisees under which the Company
purchased a total of 29 Great American franchises for a total purchase price of
$14,430,000. The Company acquired the franchises through the acquisition of 100
percent of the capital stock of the two corporations through which the
franchises operated. On September 9, 1998, the Company acquired eight
additional Great American franchised retail stores from a Great American
franchisee, under an asset purchase agreement, for a total purchase price of
$1,898,000. These acquisitions will be collectively referred to as the "Great
American Acquisitions."
The Great American Acquisitions have been accounted for using the purchase
method of accounting (based on preliminary estimates of fair values of the net
assets acquired) and resulted in recording approximately $69,390,000 of
goodwill that is being amortized using the straight-line method over 15 years.
Additionally, the Company caused Cookies USA to be merged with and into the
Company and caused the acquired franchisees corporations and/or net assets to
be merged with and into Great American. Great American became a wholly owned
subsidiary of the Company. The acquired entities' results of operations have
been included with those of the Company since the applicable dates of
acquisition.
The Great American Acquisitions were financed by (i) the net proceeds from
the Company issuing $40,000,000 Series C Senior Notes; (ii) the contribution of
the net proceeds totaling $29,056,000 from a Mrs. Fields' Holding offering to
the Company; and (iii) existing cash of the Company.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and
related business and operations of eleven Great American stores for a total
purchase price of $2,800,000 under an asset purchase agreement among The Cookie
Conglomerate, Inc., The Cookie Conglomerate, LLP and two individuals who were
the partners of Cookie Conglomerate, LLP and the shareholders of Cookie
Conglomerate, Inc. The sellers were franchisees of Great American. The sellers'
rights under franchise agreements and subleases with Great American were
terminated upon closing of the transaction. The acquisition was funded through
borrowings.
Pretzelmaker Holdings, Inc.
On November 19, 1998, Mrs. Fields purchased all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. under an agreement among Mrs. Fields,
Pretzelmaker, and the holders of its capital stock. Pretzelmaker is the holding
company for a pretzel retail company. The purchase price was approximately
$5,400,000 and Mrs. Fields assumed indebtedness, including severance payments,
totaling approximately $1,600,000.
1-800-Cookies
On October 10, 1997, the Company acquired substantially all of the net assets
of R&R Bourbon Street, Inc. dba 1-800-Cookies for $653,000 in cash. The
acquisition was accounted for using the purchase method of accounting (based on
the estimated fair values of the net assets acquired) and resulted in recording
$600,000 of goodwill and $53,000 of other assets. The goodwill is being
amortized using the straight-line method over 15 years.
F-60
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Acquisition Information (Unaudited)
The following unaudited pro forma information for the period from inception
(September 18, 1996) to December 28, 1996, and for the years ended January 3,
1998 and January 2, 1999, presents the results of operations of the Company
assuming the H & M, Pretzel Time and Mrs. Fields' Brand acquisitions and the
Refinancing, as defined in Note 3, had occurred at the date of inception
(September 18, 1996) and that the Great American Acquisitions, Cookie
Conglomerate acquisition, Pretzelmaker acquisition and related financing had
occurred at December 29, 1996. The results of operations give effect to certain
adjustments, including amortization of intangible assets and interest expense
on acquisition debt. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted or the results which may occur in the
future.
<TABLE>
<CAPTION>
Inception
(September 18, 1996)
to December 28, 53 Weeks Ended 52 Weeks Ended
(Unaudited) 1996 January 3, 1998 January 2, 1999
- ----------- -------------------- --------------- ---------------
<S> <C> <C> <C>
Total revenues........... $48,090,000 $200,574,000 $191,246,000
Store closure provision.. -- (538,000) (7,303,000)
Depreciation and
amortization............ (2,344,000) (19,405,000) (25,582,000)
Income (loss) from
operations.............. 6,718,000 12,738,000 (4,909,000)
Net income (loss)........ 1,029,000 (3,638,000) (22,471,000)
</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
2, 1999, the Company had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation. As
of January 2, 1999, the Company had restricted cash of $225,000.
F-61
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories consist of food, beverages and supplies and are stated at the
lower of cost (first-in, first-out method) or market value.
Pre-Opening Costs
Pre-opening costs associated with new Company-owned stores are charged to
expense as incurred. These amounts were not significant for the periods
presented in the accompanying consolidated financial statements. Pre-opening
costs associated with new franchised stores are the responsibility of the
franchisee.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment, fixtures and leasehold improvements are depreciated or
amortized over three to seven years using the straight-line method.
Expenditures that materially increase values or capacities or extend useful
lives of property and equipment are capitalized. Routine maintenance, repairs
and renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are recorded in current operations.
Intangible Assets
Intangible assets consist primarily of goodwill and trademarks and are
amortized using the straight-line method over 15 years. Other intangible assets
such as covenants not to compete are not significant and are being amortized
using the straight-line method over two to five years.
Deferred Loan Costs
Deferred loan costs totaling $13,038,000 resulted from the sale of
$100,000,000 total principal amount of 10 1/8 percent Series A Senior Notes
(the "Series A Senior Notes") on November 26, 1997 and the sale of $40,000,000
total principal amount of 10 1/8 percent Series C Senior Notes (the "Series C
Senior Notes") on August 24, 1998. These costs are being amortized to interest
expense over the approximate seven-year life of the Series A Notes and the
approximate six-year life of the Series C Senior Notes (see Note 3).
Discount on Series C Senior Notes
The Series C Senior Notes were issued at a discount which is being amortized
to interest expense over the approximate six-year life of the related notes.
Long-Lived Assets
The Company reviews for impairment of long-lived assets when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred that indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. The Company assesses impairment of long-lived assets at the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets.
During the year ended January 2, 1999, the Company wrote-down approximately
$4,131,000 of impaired long-lived assets. The write-down included approximately
$2,243,000 of equipment and leasehold
F-62
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
improvements at company-owned stores that the Company intends to close or
franchise (see Note 5). These assets are expected to be disposed of by the end
of fiscal year 2000. The write-down also included approximately $855,000 of
equipment and leasehold improvements at ten company-owned stores that the
Company intends to continue to operate through the end of contractual lease
terms. These assets are expected to be disposed of when the leases expire
ranging from June 1999 to December 2008. Additionally,
approximately $1,033,000 of goodwill that had been allocated to the impaired
assets was written-down. The net book value of the assets has been fully
written-down because the carrying amounts exceeded the estimated future cash
flows as determined in accordance with guidance in SFAS 121. During the year
ended January 2, 1999, stores associated with the impaired assets generated
operating losses of approximately $2,351,000. The impairment provision was
included in depreciation and amortization in the accompanying consolidated
statement of operations for the year ended January 2, 1999. No provision was
recorded for estimated future operating losses.
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 accruals are for estimated store lease termination costs (see Note 5).
Revenue Recognition
Revenues generated from company-owned stores are recognized at the point of
sale. Initial franchising and licensing fee revenues are recognized when all
material services or conditions relating to the sale have been substantially
performed or satisfied. Franchise and license royalties, which are based on a
percentage of gross store sales, are recognized as earned. Revenues from the
sale of batter that the Company produces and sales to franchisees are
recognized at the time of shipment and are classified in franchising revenue.
The Company receives rebates or other payments from suppliers based (directly
or indirectly) on sales to franchisees and company-owned stores. Rebates
related to franchisees are recorded as franchising revenue when earned. Rebates
related to company-owned stores are recorded as a reduction to cost of sales
when earned.
Leases
The Company has various operating lease commitments on both company-owned and
franchised store locations and equipment. Expenses of operating leases with
escalating payment terms, including leases underlying subleases with
franchisees, are recognized on a straight-line basis over the lives of the
related leases. The Company accrues contingent rental expense on a monthly
basis for those retail stores where contingent rental expense is probable.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred income tax assets or
liabilities are determined based upon the difference between the financial and
income tax bases of assets and liabilities using enacted tax rates expected to
apply when differences are expected to be settled or realized.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign subsidiaries are
translated into U.S. dollars using the applicable balance sheet date exchange
rates, while revenues and expenses are translated using the average exchange
rates for the periods presented. Translation gains or losses are insignificant
for the periods presented.
F-63
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The Company estimates that the total fair market value of its Series A/B
Senior Notes and Series C Senior Notes (see Note 3) was approximately
$101,250,000 and $135,100,000 as of January 3, 1998 and January 2, 1999,
respectively. These estimates are based on quoted market prices. The book
values of the Company's other financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
other long-term debt obligations, approximate fair values at the respective
balance sheet dates.
Recent Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999
and is not expected to have a material impact on the Company's consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the prior periods' consolidated
financial statements to conform with the current period presentation.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
------------ ------------
<S> <C> <C>
Series A/B senior unsecured notes, interest at 10
1/8 percent payable semi-annually in arrears on
June 1 and December 1, commencing June 1, 1998,
due December 1, 2004............................. $100,000,000 $100,000,000
Series C senior unsecured notes, interest at 10
1/8 percent payable semi-Annually in arrears on
June 1 and December 1, commencing December 1,
1998, due December 1, 2004....................... -- 40,000,000
Discount related to the issuance of $40,000,000
Series C senior unsecured notes, net of
accumulated amortization of $0 and $33,000,
respectively..................................... -- (566,000)
Notes payable to individuals or corporations with
interest terms ranging from non-interest bearing
to 15 percent, due at various dates from 1999
through 2001, requiring monthly payments......... 756,000 10,259,000
------------ ------------
100,756,000 149,693,000
Less current portion.............................. (472,000) (8,046,000)
------------ ------------
$100,284,000 $141,647,000
============ ============
</TABLE>
On November 26, 1997, the Company issued $100,000,000 total principal amount
of Series A Senior Notes due December 1, 2004 pursuant to an indenture between
the Company and the Bank of New York (the "Indenture"). The Series A Senior
Notes were issued pursuant to a private transaction that was not subject to the
registration requirements of the Securities Act of 1933. On June 12, 1998, a
majority of the Series A Senior Notes were exchanged for 10 1/8% Series B
Senior Notes due December 1, 2004 (collectively, the "Series A/B Senior
Notes"), which were registered under the Securities Act.
F-64
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 24, 1998, the Company issued $40,000,000 total principal amount of
Series C Senior Notes due December 1, 2004 in connection with the Great
American Acquisitions. The Series C Senior Notes were issued under the
Indenture which also governs the terms of the Series A/B Senior Notes in a
private transaction that was not subject to the registration requirements of
the Securities Act. The Series A/B Senior Notes and the Series C Senior Notes
will be collectively referred to as the "Senior Notes."
In connection with the issuance of the Series C Senior Notes, the Company
recorded a discount of approximately $600,000. This discount is being amortized
to interest expense over the approximate six-year life of the Series C Senior
Notes.
The Senior Notes are general unsecured obligations of the Company, rank
senior in right of payment to all subordinated indebtedness of the Company and
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company.
The Senior Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after December 1, 2001 in cash at redemption prices
defined in the Indenture, plus accrued and unpaid interest. In addition, at any
time prior to December 1, 2001, the Company may redeem up to a total of 35
percent of the principal amount at a redemption price equal to 110.125 percent
of the principal, plus accrued and unpaid interest.
The Senior Notes contain certain covenants that limit, among other things,
the ability of the Company and its subsidiaries to: (i) declare or pay
dividends or make any other payment or distribution on account of the Company's
or any of its subsidiaries' equity interest (including without limitation, any
payment in connection with any merger or consolidation involving the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
the Company) any equity interest of the Company or any direct or indirect
parent of the Company or other affiliate of the Company; (iii) make any payment
on or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any indebtedness that is subordinated to the Senior Notes,
except as payment of interest or principal at stated maturity; or (iv) make any
restricted investments except under conditions provided for in the Indenture.
The total amount of principal maturities of debt at January 2, 1999 are as
follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................ $ 8,046,000
2000............................................................ 648,000
2001............................................................ 539,000
2002............................................................ 583,000
2003............................................................ 443,000
Thereafter...................................................... 140,000,000
------------
$150,259,000
============
</TABLE>
Line of Credit
On February 28, 1998, the Company entered into an amended and restated line
of credit agreement with a commercial bank which provides for a maximum
commitment of up to $15,000,000 secured by essentially all of the assets of the
Company. The availability under the line of credit was limited by the Company's
Indenture to $4,777,000 as of January 2, 1999. Borrowings under the agreement
bear interest, at the Company's option, at either the bank's prime rate or the
applicable LIBOR rate plus two percent, with interest payable monthly in
F-65
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
arrears. The Company is also obligated to pay the bank a commitment fee in the
amount of one quarter of one percent of the unused portion of the revolving
loan commitment. As of January 2, 1999, the Company had no outstanding
borrowings under the agreement, which expires March 31, 2001. The agreement
requires the Company to maintain certain financial ratios including a minimum
debt service coverage ratio. At January 2, 1999, the Company was in compliance
with the terms of the agreement.
Capital Lease Obligations
Future minimum lease payments for equipment held under capital lease
arrangements as of January 2, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................. $ 415,000
2000............................................................. 357,000
2001............................................................. 358,000
2002............................................................. 287,000
2003............................................................. 182,000
----------
Total future minimum lease payments............................ 1,599,000
Less amount representing interest................................ (303,000)
----------
1,296,000
Less current portion........................................... (299,000)
----------
$ 997,000
==========
</TABLE>
As of January 3, 1998 and January 2, 1999, total assets held under capital
lease arrangements were approximately $376,000 and $1,024,000 with accumulated
amortization of approximately $59,000 and $108,000, respectively.
4. INCOME TAXES
The components of the provision for income taxes for the period ended
December 28, 1996, and for the years ended January 3, 1998 and January 2, 1999
are as follows:
<TABLE>
<CAPTION>
December 28, January 3, January 2,
1996 1998 1999
------------ ---------- -----------
<S> <C> <C> <C>
Current:
Federal................... $ 207,000 $ 70,000 $ --
State..................... 75,000 228,000 245,000
Foreign................... 5,000 57,000 71,000
Deferred:
Federal................... 1,112,000 367,000 (3,021,000)
State..................... 277,000 55,000 (469,000)
Change in valuation
allowance................ 122,000 (122,000) 3,490,000
---------- --------- -----------
Total provision for
income taxes........... $1,798,000 $ 655,000 $ 316,000
========== ========= ===========
</TABLE>
F-66
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 years ended January
3, 1998 and January 2, 1999:
<TABLE>
<CAPTION>
December 28, January 3, January 2,
1996 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Federal statutory income tax rate....... 34.0% 34.0% (34.0)%
Dividends paid by subsidiary.......... -- 34.5 --
Amortization of non-deductible
goodwill............................. -- 12.3 7.7
Net operating losses utilized......... -- (3.9) --
State income taxes, net of federal tax
effect............................... 5.3 5.3 (5.3)
State franchise minimum taxes......... -- 44.0 1.3
Foreign taxes......................... -- 12.3 0.4
Change in valuation allowance......... 3.2 (26.3) 19.0
Other................................. 4.1 29.3 12.6
---- ----- -----
Effective income tax rate............... 46.6% 141.5% 1.7 %
==== ===== =====
</TABLE>
The significant components of the Company's deferred income tax assets and
liabilities at January 3, 1998 and January 2, 1999 are as follows:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
----------- ------------
<S> <C> <C>
Deferred income tax assets:
Property and equipment reserve.................... $ 2,014,000 $ 3,311,000
Store closure reserve............................. 2,202,000 5,845,000
Transaction cost accrual.......................... 565,000 514,000
Net operating loss carryforward................... 4,875,000 12,268,000
Legal reserve..................................... 302,000 150,000
Lease accrual..................................... 92,000 --
Other reserves.................................... 81,000 388,000
Accrued expenses.................................. 230,000 529,000
Alternative minimum tax credit carryforward....... 207,000 215,000
----------- ------------
Total deferred income tax assets................ 10,568,000 23,220,000
Valuation allowance............................... (5,160,000) (15,560,000)
----------- ------------
Deferred income tax assets net of valuation
allowance...................................... 5,408,000 7,660,000
----------- ------------
Deferred income tax liabilities:
Accumulated depreciation and amortization......... (1,548,000) (3,464,000)
Other............................................. (361,000) (697,000)
----------- ------------
Total deferred income tax liabilities........... (1,909,000) (4,161,000)
----------- ------------
Net deferred income tax assets.................. $ 3,499,000 $ 3,499,000
=========== ============
</TABLE>
Management has provided valuation allowances on portions of the deferred
income tax assets arising from the Company's business combinations. The
valuation allowances established in connection with purchase accounting are not
recorded through the provision for income taxes, but rather, as an increase to
goodwill. During the years ended January 3, 1998 and January 2, 1999, valuation
allowances of $800,000 and $6,910,000, respectively, were recorded in
connection with accounting for business combinations. As of January 2, 1999,
the Company had net operating losses of $31,232,000 that can be carried forward
to reduce
F-67
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
federal income taxes. If not utilized, the tax net operating loss carryforwards
begin to expire in 2009. As defined in Section 382 of the Internal Revenue
Code, the Company has acquired companies which have had a greater than 50
percent ownership change. Consequently, a certain amount of these companies'
tax net operating loss carryforwards available to offset future taxable income
in any one year may be limited. The maximum amount of carryforwards available
in a given year is limited to the product of these companies' value on the date
of ownership change and the federal long-term tax-exempt rate, plus any limited
carryforwards not utilized in prior years. Although realization of the net
deferred income tax assets of $3,499,000 is not assured, management believes
that it is more likely than not that these assets will be realized. The amount
of net deferred tax assets considered realizable, however, could be reduced in
the near term based on changing conditions.
5. STORE CLOSURE AND PROPERTY AND EQUIPMENT IMPAIRMENT RESERVES
The Company's management reviews the historical and projected operating
performance of its stores on a periodic basis to identify underperforming
stores for impairment of net property investment or for targeted closing. The
Company's policy is to recognize a loss for that portion of the net property
investment determined to be impaired. Additionally, when a store is identified
for targeted closing, the Company's policy provides for the costs of closing
the store, which are predominantly estimated lease termination costs. Lease
termination costs include both one-time settlement payments and continued
contractual payments over time under the original lease agreements where no
settlement can be resolved with the landlord. As a result, although all stores
under the current exit plans will be exited by at least the end of fiscal year
2000, a portion of the store closure reserve will remain until all cash
payments have been made. No operating losses are accrued for. If and when a
reserve that was established as part of purchase accounting is not fully
utilized, the Company reduces the reserve to zero and goodwill is adjusted for
the corresponding amount.
Mrs. Fields Inc. and Affiliates and Original Cookie Company and Affiliates
In connection with the Mrs. Fields Inc. and Original Cookie Company
acquisitions (see Note 1), the Company formulated a plan to exit stores that
did not meet certain financial and geographical criteria. In general the plan
entailed closing stores that were not profitable and franchising stores that
were profitable but contributed less than $50,000 in store annual cash
contribution for cookie stores and less than $35,000 in annual store cash
contribution for pretzel stores. Management identified 138 stores to be closed
(13 of these stores were closed prior to the acquisition but had continuing
lease obligations) and 64 stores to be franchised. As of January 2, 1999, there
were 23 stores remaining to be closed and 36 stores remaining to be franchised.
Management estimates that implementation of the plan will be substantially
complete by June 30, 2000. The timing to implement the plan was developed based
on discussions and relationships with major shopping mall developers.
At the date of the acquisitions, in accordance with Emerging Issues Task
Force Issue 95-3 ("EITF 95-3"), the Company established a store closure reserve
of $5,060,000 for the 138 stores the Company intended to close. The reserve was
established to provide for estimated early lease termination costs and
penalties. There was no reserve established related to the 64 stores to be
franchised. Management continued to refine the plan for closing the stores
after the date of the acquisitions which entailed further analysis of lease
agreements and meeting with developers to assess timing and estimated lease
termination costs.
Management finalized the store closure plan in early September 1997, within
one year of the date of the acquisitions. At that time, the Company recorded an
additional $1,357,000 to the store closure reserve to reflect the finalized
plan estimates of lease termination costs and adjusted goodwill by a comparable
amount under the provisions of purchase accounting. The increase in the reserve
related solely to the 138 stores originally identified to be closed. During the
year ended January 2, 1999, the Company reassessed the adequacy of the store
closure reserve related to the remaining stores left to be closed and recorded
an additional $1,693,000 to the reserve. The additional $1,693,000 resulted
from management's expectation of higher lease termination
F-68
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
costs than the costs originally anticipated when the plan was finalized. This
portion of the store closure reserve was expensed in the Company's statement of
operations for the fiscal year ended January 2, 1999 as the decision to
increase the reserve was made subsequent to finalization of the original plan.
As of January 2, 1999, no other significant changes had been made to this plan.
Pursuant to the exit plan, at the date of the acquisitions, the Company
established an impairment reserve of $10,921,000 against the property and
equipment of the stores the Company planned to exit, in order to record those
assets at net realizable value. The property and equipment of 117 of the total
stores to be closed were recorded at net values of zero. The property and
equipment of 54 of the total stores to be franchised were recorded at the
estimated net realizable amount recoverable through a franchise sale. The
property and equipment of the remainder of the stores to be closed or
franchised had already been reduced to net realizable value prior to the
acquisitions.
During the fiscal year ended January 3, 1998, the Company increased its store
closure reserve by $538,000 for nine continuing company-owned stores that were
closed during fiscal year 1997 and for one continuing company-owned store
targeted for closure. These costs represent lease termination costs which
include both one-time settlement payments and continued contractual payments
over time under the original lease agreements where no settlement has been
reached with the landlord. The amount also includes certain costs to write-down
equipment and leasehold improvements to their net realizable value. This
portion of the store closure reserve was expensed in the Company's consolidated
statement of operations for the year ended January 3, 1998, as these stores
were not identified for closure as part of any of the Company's store closure
plan associated with the business combinations.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit 35 Mrs. Fields stores that
were not meeting certain financial and geographical criteria. The plan also
committed the Company to exit seven underperforming franchised stores that the
Company determined to disenfranchise as of January 2, 1999. The identified
stores to be exited under this plan are not part of the stores in the process
of being closed in connection with the business combination exit plan discussed
above. These stores were originally identified as continuing company-owned
stores at the date of acquisition, however, the stores have not performed as
expected. The Company intends to exit the stores primarily through closing and
franchising. In connection with this plan, the Company increased the store
closure reserve by $4,674,000 primarily for costs to be incurred for settling
lease termination costs for these stores. All of the stores identified for
closure are planned to be closed or franchised by the end of fiscal 2000. The
charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
H&M
In connection with the H&M acquisition (see Note 1), the Company formulated a
plan to exit pretzel stores that did not meet certain financial and
geographical criteria. Management identified 11 stores to be closed and 14
stores to be franchised. All of the stores identified for closure are planned
to be closed by the end of fiscal year 1999. The timing to implement the plan
was developed based on discussions and relationships with major shopping mall
developers.
At the date of the acquisition, in accordance with EITF 95-3, the Company
established a store closure reserve of $1,000,000 for the 11 stores the Company
intended to close. The reserve was established to provide for estimated early
lease termination costs and penalties. Additionally, the Company established an
impairment reserve of $2,500,000 against the property and equipment of the
stores the Company planned to exit, in order to record those assets at net
realizable value. As of January 2, 1999, no other significant changes had been
made to this plan.
F-69
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit four H&M stores that were
not meeting certain financial and geographical criteria. The identified stores
to be exited under this plan were not part of the stores in the process of
being closed in connection with the business combination exit plan discussed
above. These stores were originally identified as continuing company-owned
stores at the date of acquisition, however, the stores have not performed as
expected. The Company intends to exit the stores primarily through closing and
franchising. In connection with this plan, the Company increased the store
closure reserve by $367,000 primarily for costs to be incurred for settling
lease termination costs for these stores. All of the stores identified for
closure are planned to be closed or franchised by the end of fiscal 2000. The
charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
Pretzel Time
In connection with the Pretzel Time acquisition (see Note 1), the Company
formulated a plan to exit pretzel stores that did not meet certain financial
and geographical criteria. Management identified four stores to be closed. All
of the stores identified for closure are planned to be closed by the end of
fiscal year 1999. The timing to implement the plan was developed based on
discussions and relationships with major shopping mall developers.
At the date of the acquisition, in accordance with EITF 95-3, the Company
established a store closure reserve of $500,000 for the four stores the Company
intended to close. The reserve was established to provide for estimated early
lease termination costs and penalties. As of January 2, 1999, no other
significant changes had been made to this plan.
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit two Pretzel Time stores
that were not meeting certain financial and geographical criteria. The plan
also committed the Company to exit two underperforming franchised stores that
the Company determined to disenfranchise as of January 2, 1999. The identified
stores to be exited under this plan are not part of the stores in the process
of being closed in connection with the business combination exit plan discussed
above. These stores were originally identified as continuing company-owned
stores at the date of acquisition, however, the stores have not performed as
expected. The Company intends to exit the stores primarily through closing and
franchising. In connection with this plan, the Company increased the store
closure reserve by $265,000 primarily for costs to be incurred for settling
lease termination costs for these stores. All of the stores identified for
closure are planned to be closed or franchised by the end of fiscal 2000. The
charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
Great American
In connection with the Great American Acquisitions (see Note 1), the Company
formulated a plan to exit cookie stores that did not meet certain financial and
geographical criteria. Management identified 54 stores to be closed and 11
stores to be franchised. All of the stores identified for closure are planned
to be closed by the end of fiscal year 2000. The timing to implement the plan
was developed based on discussions and relationships with major shopping mall
developers.
At the date of the acquisitions, in accordance with EITF 95-3, the Company
established a store closure reserve of $3,548,000 for the 54 stores the Company
intended to close. The reserve was established to provide for estimated early
lease termination costs and penalties. There was no reserve established related
to the 11 stores to be franchised. The Company established an impairment
reserve of $2,150,000 against the property and equipment of the stores the
Company planned to exit, in order to record those assets at net realizable
value. As of January 2, 1999, no other significant changes had been made to
this plan.
F-70
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the fourth quarter of fiscal year 1998, the Company's management
approved and committed the Company to a plan to exit four underperforming Great
American franchised stores that the Company determined to disenfranchise as of
January 2, 1999. The identified stores to be exited under this plan were not
part of the stores in the process of being closed in connection with the
business combination exit plan discussed above. These stores were originally
franchised stores at the date of acquisition, however, the stores have not
performed as expected. The Company intends to exit the stores primarily through
closing and franchising. In connection with this plan, the Company increased
the store closure reserve by $306,000 primarily for costs to be incurred for
settling lease termination costs for these stores. All of the stores identified
for closure are planned to be closed or franchised by the end of fiscal 2000.
The charge was included in the store closure provision in the accompanying
consolidated statement of operations for the year ended January 2, 1999.
Pretzelmaker
In connection with the Pretzelmaker acquisition (see Note 1), the Company
formulated a plan to exit pretzel stores that did not meet certain financial
and geographical criteria. Management identified seven stores to be closed. All
of the stores identified for closure are planned to be closed by the end of
fiscal year 2000. The timing of implementation of the plan was developed based
on discussion and relationships with major shopping mall developers.
At the date of the acquisition, in accordance with EITF 95-3, the Company
established a store closure reserve of $500,000 for the seven stores the
Company intended to close. The reserve was established to provide for estimated
early lease termination costs and penalties. Additionally, the Company
established an impairment reserve of $327,000 against the property and
equipment of the stores the Company planned to exit in order to record those
assets at net realizable value. As of January 2, 1999, no other significant
changes had been made to this plan.
F-71
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Analysis
The following table presents a summary of the activity in the store closure
reserve for the periods indicated for stores to be closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields Inc. and
Original Cookie Co. H&M Pretzel Time Great American
------------------------- ------------------------- ------------------------ -------------------------
Business
Combination Company- Company- Company- Company-
and Owned Stores Owned Stores Owned Stores Owned Stores
Subsequent Unrelated to Business Unrelated to Business Unrelated to Business Unrelated to
Adjustments Acquisition Combination Acquisition Combination Acquisition Combination Acquisition
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception,
September 16,
1996............ $ 5,060,000 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Utilization from
inception
(September 16,
1996) to
December 28,
1996............ (305,000) -- -- -- -- -- --
----------- ---------- ---------- -------- -------- -------- ---------- --------
Balance,
December 28,
1996............ 4,755,000 -- -- -- -- -- -- --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
July 25, 1997... -- -- 1,000,000 -- -- -- -- --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
September 2,
1997............ -- -- -- -- 500,000 -- -- --
Finalization of
store closure
plan for
obligations
related to
stores
originally
identified...... 1,357,000 -- -- -- -- -- -- --
Provision for
continuing
company-owned
stores targeted
for closure..... -- 538,000 -- -- -- -- -- --
Utilization for
the 52 weeks
ended January 3,
1998............ (2,145,000) (538,000) -- -- (1,000) -- -- --
----------- ---------- ---------- -------- -------- -------- ---------- --------
Balance, January
3, 1998......... 3,967,000 -- 1,000,000 -- 499,000 -- -- --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
August 24,
1998............ -- -- -- -- -- -- 3,548,000 --
To record
obligations
related to
stores
identified for
closure upon
acquisition,
November 29,
1998............ -- -- -- -- -- -- -- --
Additional
reserves for
stores
originally
identified for
closure upon
acquisition,
January 2,
1999............ 1,693,000 -- -- -- -- -- -- --
Additional
reserves for
continuing
company-owned
and franchised
stores targeted
for closure,
January 2,
1999............ -- 4,674,000 -- 367,000 -- 264,000 -- 305,000
Utilization for
the 52 weeks
ended January 2,
1999............ (1,932,000) -- (19,000) -- (6,000) -- (149,000) --
----------- ---------- ---------- -------- -------- -------- ---------- --------
Balance, January
2, 1999......... $ 3,728,000 $4,674,000 $ 981,000 $367,000 $493,000 $264,000 $3,399,000 $305,000
=========== ========== ========== ======== ======== ======== ========== ========
<CAPTION>
Pretzelmaker Consolidated
------------ ---------------------------------------
Company-
Business Owned Total
Combination Stores Business
and Unrelated Combinations
Business Subsequent to and Company-
Combination Adjustments Acquisition Owned Stores
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Inception,
September 16,
1996............ $ -- $ 5,060,000 $ -- $ 5,060,000
Utilization from
inception
(September 16,
1996) to
December 28,
1996............ -- (305,000) -- (305,000)
------------ ------------ ------------ -------------
Balance,
December 28,
1996............ -- 4,755,000 -- 4,755,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
July 25, 1997... -- 1,000,000 -- 1,000,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
September 2,
1997............ -- 500,000 -- 500,000
Finalization of
store closure
plan for
obligations
related to
stores
originally
identified...... -- 1,357,000 -- 1,357,000
Provision for
continuing
company-owned
stores targeted
for closure..... -- -- 538,000 538,000
Utilization for
the 52 weeks
ended January 3,
1998............ -- (2,146,000) (538,000) (2,684,000)
------------ ------------ ------------ -------------
Balance, January
3, 1998......... -- 5,466,000 -- 5,466,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
August 24,
1998............ -- 3,548,000 -- 3,548,000
To record
obligations
related to
stores
identified for
closure upon
acquisition,
November 29,
1998............ 500,000 500,000 -- 500,000
Additional
reserves for
stores
originally
identified for
closure upon
acquisition,
January 2,
1999............ -- 1,693,000 -- 1,693,000
Additional
reserves for
continuing
company-owned
and franchised
stores targeted
for closure,
January 2,
1999............ -- -- 5,610,000 5,610,000
Utilization for
the 52 weeks
ended January 2,
1999............ -- (2,106,000) -- (2,106,000)
------------ ------------ ------------ -------------
Balance, January
2, 1999......... $500,000 $ 9,101,000 $5,610,000 $14,711,000
============ ============ ============ =============
</TABLE>
F-72
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of activity for stores originally
identified to be closed or franchised in connection with the applicable
business combination for the periods indicated. This table does not include a
summary of activity for stores the Company intends to close or franchise that
were not originally identified in connection with a business combination.
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and
Original Cookie H&M Pretzel Time Great American Pretzelmaker Consolidated
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stores
identified for
closure or
franchise at
inception,
September 18,
1996........... 138 64 -- -- -- -- -- -- -- -- 138 64
Stores closed
prior to
Inception...... (13) -- -- -- -- -- -- -- -- -- (13) --
Stores closed or
franchised from
Inception
(September 18,
1996) to
December 28,
1996........... (17) (3) -- -- -- -- -- -- -- -- (17) (3)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance,
December 28,
1996........... 108 61 -- -- -- -- -- -- -- -- 108 61
Stores
identified for
closure or
franchise upon
acquisition,
July 25, 1997.. -- -- 11 14 -- -- -- -- -- -- 11 14
Stores
identified for
closure or
franchise upon
acquisition,
September 2,
1997........... -- -- -- -- 4 -- -- -- -- -- 4 --
Stores closed or
franchised from
December 28,
1996 to January
3, 1998........ (70) (9) (3) -- -- -- -- -- -- -- (73) (9)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance, January
3, 1998........ 38 52 8 14 4 -- -- -- -- -- 50 66
Stores
identified for
closure or
franchise upon
acquisition,
August 24,
1998........... -- -- -- -- -- -- 54 11 -- -- 54 11
Stores
identified for
closure or
franchise upon
acquisition,
November 19,
1998........... -- -- -- -- -- -- -- -- 7 -- 7 --
Stores closed or
franchised for
the 52 weeks
ended January
2, 1999........ (15) (16) (2) (7) (1) -- (11) -- -- -- (29) (23)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance, January
2, 1999........ 23 36 6 7 3 -- 43 11 7 -- 82 54
=== === === === === === === === === === === ===
</TABLE>
F-73
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of activity for stores the Company
intends to close or franchise that were not originally identified to be closed
or franchised in connection with a business combination:
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and Original Cookie H&M Pretzel Time Great American Consolidated
------------------------ ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
--------- ----------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stores identified for
closure (not
included in the
original store
closure plan), during
the 52
weeks ended January 3,
1998................... 10 -- -- -- -- -- -- -- 10 --
Stores closed or
franchised during the
52 weeks ended January
3, 1998................ (9) -- -- -- -- -- -- -- (9) --
--------- --------- --- --- --- --- --- --- --- ---
Balance, January 3,
1998................... 1 -- -- -- -- -- -- -- 1 --
Stores identified for
closure or
franchise (not included
in the
original store closure
plan),
January 2, 1999........ 28 14 3 1 3 1 4 -- 38 16
Stores closed or
franchised for the 52
weeks ended January 2,
1999................... (1) -- (1) -- -- -- -- -- (2) --
--------- --------- --- --- --- --- --- --- --- ---
Balance, January 2,
1999................... 28 14 2 1 3 1 4 -- 37 16
========= ========= === === === === === === === ===
</TABLE>
Store Closure Reserve Payment Obligations
As of January 2, 1999, the future estimated cash payments under the store
closure reserve are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999......................................................... $4,577,000
2000......................................................... 2,546,000
2001......................................................... 2,049,000
2002......................................................... 1,625,000
2003......................................................... 1,376,000
Thereafter................................................... 2,538,000
-----------
$14,711,000
===========
</TABLE>
F-74
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents a summary of changes in the property and
equipment impairment reserves that were established in connection with the
applicable business combination for the periods indicated for stores to be
closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields,
Inc. and
Original Great
Cookie Co. H&M American Pretzelmaker Consolidated
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Inception, September 18,
1996................... $10,921,000 $ -- $ -- $ -- $10,921,000
Utilization from
inception (September
18, 1996) to December
28, 1996 related to
stores to be closed.... (854,000) -- -- -- (854,000)
Utilization from
inception (September
18, 1996) to December
28, 1996 related to
stores to be
franchised............. (215,000) -- -- -- (215,000)
----------- ---------- ---------- -------- -----------
Balance, December 28,
1996................... 9,852,000 -- -- -- 9,852,000
To record property and
equipment impairment
upon
acquisition, July 25,
1997................... -- 2,500,000 -- -- 2,500,000
Utilization from
December 28, 1996 to
January 3, 1998
related to stores to be
closed................. (3,299,000) (208,000) -- -- (3,507,000)
Utilization from
December 28, 1996 to
January 3, 1998
related to stores to be
franchised............. (492,000) -- -- -- (492,000)
----------- ---------- ---------- -------- -----------
Balance, January 3,
1998................... 6,061,000 2,292,000 -- -- 8,353,000
To record property and
equipment impairment
upon
acquisition, August 24,
1998................... -- -- 2,150,000 -- 2,150,000
To record property and
equipment impairment
upon
acquisition, September
9, 1998................ -- -- 973,000 -- 973,000
To record property and
equipment impairment
upon
acquisition, November
19, 1998............... -- -- -- 327,000 327,000
Utilization for the 52
weeks ended January 2,
1999 related to stores
to be closed........... (1,782,000) (93,000) (246,000) -- (2,121,000)
Utilization for the 52
weeks ended January 2,
1999 related to stores
to be franchised....... (435,000) (819,000) -- -- (1,254,000)
----------- ---------- ---------- -------- -----------
Balance, January 2,
1999................... $ 3,844,000 $1,380,000 $2,877,000 $327,000 $ 8,428,000
=========== ========== ========== ======== ===========
</TABLE>
F-75
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK OF PRETZEL TIME, INC.
The mandatorily redeemable cumulative preferred stock of Pretzel Time (the
"Pretzel Time Preferred Stock") is nonvoting and the preferred stockholders are
entitled to cumulative preferred dividends of ten percent for three years,
accrued and payable upon redemption. The Pretzel Time Preferred Stock must be
redeemed at $10,000 per share, plus unpaid and accumulated dividends, 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 the accumulated deficit of
Pretzel Time. In the event of a liquidation or sale of Pretzel Time, the
preferred stockholders are entitled to receive payment of $10,000 per share,
plus accumulated dividends.
During the period from the acquisition of a majority ownership in Pretzel
Time (September 2, 1997) to January 2, 1999, Pretzel Time increased the
liquidation preference of the Pretzel Time Preferred Stock by $212,000, in lieu
of paying cash dividends. In addition, the Pretzel Time Preferred Stock was
increased by $538,000, for the accretion required over time to amortize the
original issue discount incurred at the time of issuance. As of January 2,
1999, accrued dividends of $339,000, were unpaid.
During the period from September 2, 1997 to January 2, 1999, Pretzel Time
repurchased 17.5 shares of the Pretzel Time Preferred Stock for an total of
$175,000 in cash, or $10,000 per share, plus accrued dividends totaling
approximately $20,200. As of January 2, 1999, there are 127 shares of Pretzel
Time Preferred Stock issued and outstanding with a total liquidation preference
of approximately $1,495,000.
7. COMMITMENTS AND CONTINGENCIES
Stock Pledged as Collateral
Mrs. Fields' Holding has pledged all of the Company's capital stock as
collateral for Mrs. Fields' Holding's 14 percent Senior Secured Discount Notes
due December 1, 2005 (the " Mrs. Fields' Holding Discount Notes"). Mrs. Fields'
Holding issued the Mrs. Fields' Holding Discount Notes on August 24, 1998, in
connection with the Great American Acquisitions and the Mrs. Fields' Holding
Equity Infusion (see Note 1). In connection with the issuance of the
$55,000,000 principal amount at maturity of Mrs. Fields' Holding Discount
Notes, Mrs. Fields' Holding recorded an total original issue discount of
approximately $24,136,000. The principal amount of the Mrs. Fields' Holding
Discount Notes will accrete at a rate of 14 percent compounded semi-annually to
a total principal amount of $55,000,000 at December 1, 2002. Thereafter, the
Mrs. Fields' Holding Discount Notes will accrue interest at the annual rate of
14 percent, payable semi-annually on June 1 and December 1 of each year,
commencing June 1, 2003.
Mrs. Fields' Holding is a holding company and does not have separate
operations from which it can generate cash flows. Under the circumstances, Mrs.
Fields' Holding would likely be dependent on its owners' and the Company's cash
flows to make principal and interest payments when due. Interest payments
totaling $7,700,000 per year will commence in 2003. The Company has not
guaranteed, nor is it obligated to make principal or interest payments related
to the Mrs. Fields' Holding Discount Notes. However, in accordance with the
Company's Indenture, the Company may pay dividends to Mrs. Fields' Holding, in
order for Mrs. Fields' Holding to service the debt, if no default or event of
default occurs under the Indenture and certain fixed charge coverage ratios and
consolidated net income tests are met. The Mrs. Fields' Holding Discount Notes
are effectively subordinated to the Company's Senior Notes.
Legal Matters
The Company is the subject of certain legal actions, which it considers
routine to its business activities. Management, after consultation with legal
counsel, believes that the potential liability to the Company under any such
actions is adequately accrued for or will not materially affect the Company's
consolidated financial position or results of operations.
F-76
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Leases
The Company leases retail store facilities, office space and equipment under
long-term noncancelable operating lease agreements with remaining terms of one
to ten years. Certain of the retail store leases provide for contingent rentals
based on gross revenues. Additionally, as part of the Company's franchising
program, certain locations have been subleased to franchisees.
Rent expense was as follows for the periods presented:
<TABLE>
<CAPTION>
Inception
(September 18, 53 Weeks 52 Weeks
1996) to Ended Ended
December 28, January 3, January 2,
1996 1998 1999
-------------- ----------- ------------
<S> <C> <C> <C>
Minimum rentals....................... $ 8,216,000 $30,654,000 $ 36,834,000
Contingent rentals.................... 105,000 432,000 553,000
Sub-lease rentals..................... (2,220,000) (8,756,000) (12,550,000)
----------- ----------- ------------
$ 6,101,000 $22,330,000 $ 24,837,000
=========== =========== ============
</TABLE>
As of January 2, 1999, the future minimum lease payments due under operating
leases (including future minimum lease payments for stores in the process of
being closed or franchised), which include required lease payments for those
stores that have been subleased, are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................ $ 37,686,000
2000............................................................ 32,337,000
2001............................................................ 27,066,000
2002............................................................ 23,033,000
2003............................................................ 18,246,000
Thereafter...................................................... 33,504,000
------------
$171,872,000
============
As of January 2, 1999, the future minimum sublease payments due to the
Company under these leases are as follows:
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................................ $ 12,550,000
2000............................................................ 10,676,000
2001............................................................ 8,741,000
2002............................................................ 7,277,000
2003............................................................ 5,716,000
Thereafter...................................................... 8,717,000
------------
$ 53,677,000
============
</TABLE>
Contractual Arrangements
The Company entered into a supply agreement to buy frozen dough products
through 2000. The agreement stipulates minimum annual purchase commitments of
not less than 23,000,000 pounds of the products each year through the end of
the contract. The Company also entered into two supply agreements to buy
chocolate products through August 1999 and January 2000. The agreements
stipulate minimum purchase commitments of
F-77
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which 1.9 million and 1.5 million pounds, respectively, had not been purchased
as of January 2, 1999. The terms the frozen dough and chocolate purchase
agreements include certain volume incentives and penalties. Under each, the
Company and the supplier may terminate the supply agreement if the other party
defaults on any of the performance covenants. The Company also entered into
several other immaterial purchase agreements to buy products.
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 and January 2, 1999 were approximately
$550,000 and $295,000, respectively. Under the terms of the agreement, the
Company is required to assume any franchisee obligations which are in default
as defined. As of January 2, 1999, the Company has assumed obligations totaling
approximately $54,000, respectively, which are included in capital lease
obligations.
The Company recorded deferred credits of approximately $1,204,000 as of
September 18, 1996. The deferred credits represent volume rebates associated
with the assumption of a long-term marketing and supply agreement with a
supplier in connection with the Mrs. Fields Inc. and affiliates and Original
Cookie Company and affiliates business combinations discussed in Note 1. Under
terms of the agreement, the Company is obligated to purchase a minimum amount
of product from the supplier. The supplier periodically prepays rebates to the
Company for anticipated purchases. The Company records the prepayments as
deferred credits and amortizes them ratably as purchases are made from the
supplier. This agreement was amended in January 1997 and an additional $600,000
in deferred credits were recorded. The amended agreement expires on the later
of December 31, 2003 or when the Company has met its revised purchase
commitment. In conjunction with this amendment, certain minimum commitments
from the previous agreement were carried forward and others were forgiven.
Additionally, in November 1997, Pretzel Time entered into a long-term marketing
and supply agreement with a supplier. Under terms of the agreement, the Company
is obligated to purchase a minimum amount of product from the supplier. An
additional $437,000 in deferred credits were recorded under this agreement. The
termination date of this agreement will be the later of December 31, 2003 or
when Pretzel Time has met its purchase commitment. Under these agreements, the
Company recognized approximately $1,393,000, and $812,000 primarily as a
reduction to food cost of sales during the years ended January 3, 1998 and
January 2, 1999.
In 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 these services for 20 additional
days a year for additional pay of $5,000 per day. The compensation increases by
10 percent a year beginning on January 1, 1999. The Consulting Agreement
expires on December 31, 1999. 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.
The Company has entered into employment agreements with five key officers
with terms of two to three years. The agreements are for a total annual base
salary of $1,095,000. If the Company terminates employment without cause, or
the employee terminates employment with good reason, the employee can receive
in severance pay the amount equal to the product of his or her then current
semi-monthly base salary by the greater of the number of semi-monthly periods
from the notice of termination or 36 to 48 semi-monthly periods, plus a portion
of any discretionary bonus that would otherwise have been payable. The
agreements have customary provisions for other benefits and also include
noncompetition clauses.
F-78
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. RELATED-PARTY TRANSACTIONS
As of January 3, 1998 and January 2, 1999, the Company had receivables due
from franchisees and licensees, primarily related to prepaid rent which the
Company had paid on behalf of franchisees, totaling approximately $2,176,000
and $6,003,000, respectively. These amounts are included in amounts due from
franchisees and affiliates and are net of allowance for doubtful accounts
totaling $582,000 and $1,078,000, respectively.
As of January 3, 1998 and January 2, 1999, the Company had net payables of
approximately $105,000 and $150,000, respectively, due to Mrs. Fields' Holding.
The amounts due to or from Mrs. Fields' Holding are recorded in prepaid rent
and other in the accompanying consolidated balance sheets.
During the years ended January 3, 1998 and January 2, 1999, the Company
accrued approximately $441,000 and $0, respectively, of interest expense due to
Mrs. Fields' Holding related to the convertible subordinated notes Mrs. Fields'
Holding purchased. As part of the Refinancing, Mrs. Fields' Holding converted
all of the $4,643,000 convertible subordinated notes to equity and the notes
were cancelled (see Note 3).
The Company paid fees to Korn/Ferry International ("Korn/Ferry") totaling
approximately $157,000 and $70,600, during the years ended January 3, 1998 and
January 2, 1999, respectively. Korn/Ferry is an executive search firm of which
one of the Company's directors is the Chairman.
A director of the Company is a consultant and an advisor to Dillon Read &
Co., Inc. ("Dillon Read"). In 1997, the Company paid to Dillon Read a fee of
approximately $707,000 in connection with the restructuring of the Company in
September 1996. The director's company did not receive a fee from the Company
during the fiscal year ended January 2, 1999. The Company believes that the
arrangements were on terms that could have been obtained from an unaffiliated
third party.
As of January 2, 1999, the Company has a loan due from the founder and
minority stockholder of Pretzel Time totaling $567,000. The note bears interest
at an annual rate of ten percent and is payable in monthly installments of
principal and interest beginning January 1998 by setoff of, and to the extent
of, the founder's bonus payments and dividends received by the founder in his
Pretzel Time stock; provided that in any calendar year no more than $100,000
may be so offset. In addition, as of January 2, 1999, the Company is due
approximately $451,000 from the founder in connection with certain lease
payments related to the purchase of Pretzel Time for which the Company is
indemnified. These amounts are recorded in accounts receivable and other assets
in the accompanying consolidated balance sheets.
The Company and Mrs. Fields' Holding expect to enter into a tax-sharing
arrangement but as of the date of these financial statements no such agreement
has been finalized.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors the Mrs. Fields' Original Cookies, Inc. 401(k)
Retirement Savings Plan (the "Plan") for all eligible employees. Under the
terms of the Plan, employees may make contributions to the Plan, a portion of
which is matched by contributions from the Company. The total Company
contributions to the Plan for the years ended January 3, 1998 and January 2,
1999 were approximately $97,900 and $171,000, respectively.
F-79
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. REPORTABLE SEGMENTS
Operating segments are components of the Company for which separate financial
information is available that is evaluated regularly by the Chief Operating
decision maker in deciding how to allocate resources and in assessing
performance. This information is reported on the basis that it is used
internally for evaluating segment performance. Mrs. Fields has two reportable
operating segments; namely, company-owned stores and related activity and
franchising and licensing activity. The segments are determined by revenue
source; direct sales or royalties and license fees. The company-owned stores
segment consists of both cookie and pretzel stores owned and operated by Mrs.
Fields. The franchising and licensing segment consists of cookie and pretzel
stores, which are owned and operated by third parties who pay Mrs. Fields an
initial franchise or license fee and monthly royalties based on a percentage of
gross sales and other licensing activity not related to cookie or pretzel
stores. The accounting policies for the segments are discussed in the summary
of significant accounting policies (see Note 2). Sales and transfers between
segments are eliminated in consolidation.
Mrs. Fields evaluates performance of each segment based on contribution
margin. Mrs. Fields does not allocate any interest income, interest expense,
depreciation and amortization or assets to its reportable operating segments.
Segment revenue and contribution margin are presented in the following table.
<TABLE>
<CAPTION>
Company-owned Franchising and
Stores Licensing Total
------------- --------------- -----------
<S> <C> <C> <C>
Period ended December 28, 1996
Revenue.............................. $40,849,000 $1,267,000 $42,116,000
Contribution Margin.................. 10,761,000 1,267,000 12,028,000
Year ended January 3, 1998
Revenue.............................. 127,845,000 6,563,000 134,408,000
Contribution Margin.................. 28,985,000 6,563,000 35,548,000
Year ended January 2, 1999
Revenue.............................. 140,235,000 14,001,000 154,236,000
Contribution Margin.................. 30,337,000 10,414,000 40,751,000
</TABLE>
The reconciliation of contribution margin to net income (loss) is as follows:
<TABLE>
<CAPTION>
Period Ended
December 28, 1996 Fiscal 1997 Fiscal 1998
----------------- ------------ ------------
<S> <C> <C> <C>
Contribution margin............. $12,028,000 $ 35,548,000 $ 40,751,000
General and administrative
expense........................ (4,035,000) (16,192,000) (19,017,000)
Store closure provision......... -- (538,000) (7,303,000)
Depreciation and amortization... (2,344,000) (10,403,000) (19,820,000)
Interest expense................ (1,793,000) (7,584,000) (12,574,000)
Other expense, net.............. (1,895,000) (1,805,000) (1,180,000)
----------- ------------ ------------
Net income (loss)............... $ 1,961,000 $ (974,000) $(19,143,000)
=========== ============ ============
</TABLE>
Geographic segment information is as follows:
<TABLE>
<CAPTION>
Domestic International Domestic International
Company-owned Company-owned Franchising Franchising
Stores Stores and Licensing and Licensing
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
Period ended December
28, 1996............... $ 40,849,000 $ -- $ 1,158,000 $109,000
Fiscal 1997............. 127,736,000 109,000 6,150,000 413,000
Fiscal 1998............. 140,018,000 217,000 13,738,000 263,000
</TABLE>
F-80
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues from international franchising and licensing are secured from Canada
and Australia with no other countries having material representation. Revenues
from international company-owned stores are immaterial.
There were no customers who accounted for more than 10% of Mrs. Fields' total
revenue or either segment's revenue.
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's obligation related to its $140,000,000 total principal amount
of Senior Notes due 2004 (see Note 3) is fully and unconditionally guaranteed
on a joint and several basis and on a senior basis by four of the Company's
wholly owned subsidiaries (the "Guarantors"). These guarantees are general
unsecured obligations of the Guarantors, rank senior in right of payment to all
subordinated indebtedness of the Guarantors and rank pari passu in right of
payment with all existing and future senior indebtedness of the Guarantors.
There are no restrictions on the Company's ability to obtain cash dividends or
other distributions of funds from the Guarantors, except those imposed by
applicable law. The following supplemental financial information sets forth, on
a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for Mrs. Fields' Original Cookies, Inc. (the "Parent
Company"), Great American Cookie Company, Inc., The Mrs. Fields' Brand, Inc.,
Pretzelmaker Holdings, Inc., which are Guarantors, and Pretzel Time, Inc.,
which will become a Guarantor (collectively, the "Guarantor Subsidiaries") and
Mrs. Fields' Cookies Australia, Mrs. Fields' Cookies (Canada) Ltd., H & M
Canada and Pretzelmaker of Canada, and three partially owned subsidiaries,
(collectively, the "Non-guarantor Subsidiaries"). The Company has not presented
separate financial statements and other disclosures concerning the Guarantor
Subsidiaries because management has determined that such information is not
material to investors.
F-81
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) TO DECEMBER 28, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES............ $41,557 $ 559 $-- $-- $42,116
------- ----- ---- ---- -------
OPERATING COSTS AND
EXPENSES:
Selling and store
occupancy costs...... 19,492 -- -- -- 19,492
Cost of sales......... 10,596 -- -- -- 10,596
General and
administrative....... 3,871 146 18 -- 4,035
Depreciation and
amortization......... 2,027 317 -- -- 2,344
------- ----- ---- ---- -------
Total operating
costs and
expenses........... 35,986 463 18 -- 36,467
------- ----- ---- ---- -------
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, preferred
stock accretion and
dividends of
subsidiaries 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 loss 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-82
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) TO DECEMBER 28, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES.. $ 6,990 $ 589 $ 30 $-- $ 7,609
-------- ------- ---- ---- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Net cash paid for
acquisitions and
related expenses.... (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 the
issuance of common
stock............... 15,000 -- -- -- 15,000
Proceeds from the
issuance of
mandatorily
redeemable
cumulative preferred
stock of
subsidiary.......... -- 3,500 -- -- 3,500
Proceeds from the
issuance of note
payable............. -- 3,500 -- -- 3,500
Principal payments on
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 period............. -- -- -- -- --
-------- ------- ---- ---- --------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 6,091 $ 588 $ 30 $-- $ 6,709
======== ======= ==== ==== ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Interest paid........ $ 28 $ -- $-- $-- $ 28
</TABLE>
F-83
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 1998
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 14,270 $ 725 $1,292 $ -- $ 16,287
Accounts receivable,
net.................. 1,388 -- 147 -- 1,535
Amounts due from (to)
franchisees and
licensees, net....... 1,517 659 -- -- 2,176
Inventories........... 3,094 -- 6 -- 3,100
Other current assets.. 6,593 (615) (253) -- 5,725
-------- ------- ------ -------- --------
Total current
assets............. 26,862 769 1,192 -- 28,823
PROPERTY AND EQUIPMENT,
net.................... 28,907 1 294 -- 29,202
INTANGIBLES, net........ 59,928 17,725 6,041 -- 83,694
INVESTMENT IN
SUBSIDIARIES........... 23,089 -- -- (23,089) --
OTHER ASSETS............ 7,902 -- 63 -- 7,965
-------- ------- ------ -------- --------
$146,688 $18,495 $7,590 $(23,089) $149,684
-------- ------- ------ -------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of
long-term debt and
capital lease
obligations.......... $ -- $ -- $ 614 $ -- $ 614
Accounts payable...... 3,621 36 148 -- 3,805
Accrued liabilities... 10,499 25 747 -- 11,271
-------- ------- ------ -------- --------
Total current
liabilities........ 14,120 61 1,509 -- 15,690
LONG-TERM DEBT AND
CAPITAL
LEASE OBLIGATIONS, net
of current portion..... 100,000 -- 467 -- 100,467
OTHER ACCRUED
LIABILITIES............ 1,802 -- -- -- 1,802
MANDATORILY REDEEMABLE
CUMULATIVE PREFERRED
STOCK.................. -- -- 902 -- 902
MINORITY INTEREST....... -- -- -- 58 58
STOCKHOLDER'S EQUITY.... 30,766 18,434 4,712 (23,147) 30,765
-------- ------- ------ -------- --------
$146,688 $18,495 $7,590 $(23,089) $149,684
======== ======= ====== ======== ========
</TABLE>
F-84
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES............ $125,991 $ 2,004 $7,077 $ (664) $134,408
-------- ------- ------ ------ --------
OPERATING COSTS AND
EXPENSES:
Selling and store
occupancy costs...... 63,765 -- 3,731 (664) 66,832
Cost of sales......... 31,173 -- 855 -- 32,028
General and
administrative....... 14,215 1,066 911 -- 16,192
Store closure
provision............ 538 -- -- -- 538
Depreciation and
amortization......... 8,745 1,125 533 -- 10,403
-------- ------- ------ ------ --------
Total operating
costs and
expenses........... 118,436 2,191 6,030 (664) 125,993
-------- ------- ------ ------ --------
Income (loss) from
operations......... 7,555 (187) 1,047 -- 8,415
INTEREST EXPENSE AND
OTHER, net............. (6,329) (1,230) (393) -- (7,952)
-------- ------- ------ ------ --------
Income (loss) before
provision for income
taxes, preferred
stock accretion and
dividends of
subsidiaries and
equity in net loss of
consolidated
subsidiaries......... 1,226 (1,417) 654 -- 463
PROVISION FOR INCOME
TAXES.................. (535) (25) (95) -- (655)
-------- ------- ------ ------ --------
Income (loss) before
preferred stock
accretion and
dividends of
subsidiaries and
equity in net loss of
consolidated
subsidiaries......... 691 (1,442) 559 -- (192)
PREFERRED STOCK
ACCRETION AND DIVIDENDS
OF SUBSIDIARIES........ -- (338) (306) -- (644)
EQUITY IN NET LOSS OF
CONSOLIDATED
SUBSIDIARIES........... (1,665) -- -- 1,527 (138)
-------- ------- ------ ------ --------
NET INCOME (LOSS)....... $ (974) $(1,780) $ 253 $1,527 $ (974)
======== ======= ====== ====== ========
</TABLE>
F-85
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 3, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH (USED IN)
PROVIDED BY OPERATING
ACTIVITIES............. $ (766) $387 $1,298 $-- $ 919
------- ---- ------ ---- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Net cash paid for
acquisitions and
related expenses..... (10,949) -- -- -- (10,949)
Purchase of property
and equipment, net... (4,556) -- -- -- (4,556)
------- ---- ------ ---- -------
Net cash used in
investing
activities......... (15,505) -- -- -- (15,505)
------- ---- ------ ---- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of long-term debt.... 108,250 -- -- -- 108,250
Principal payments on
long-term debt and
capital lease
obligations.......... (76,759) (250) (36) -- (77,045)
Payment of debt
financing costs...... (5,976) -- -- -- (5,976)
Payment of cash
dividend to Mrs.
Fields' Holding...... (1,065) -- -- -- (1,065)
------- ---- ------ ---- -------
Net cash provided by
(used in) financing
activities......... 24,450 (250) (36) -- 24,164
------- ---- ------ ---- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS....... 8,179 137 1,262 -- 9,578
CASH AND CASH
EQUIVALENTS, beginning
of year................ 6,091 588 30 -- 6,709
------- ---- ------ ---- -------
CASH AND CASH
EQUIVALENTS, end of
year................... $14,270 $725 $1,292 $-- $16,287
======= ==== ====== ==== =======
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Interest paid....... $ 7,607 $789 $ 20 $-- $ 8,416
Taxes paid.......... 181 25 11 -- 217
</TABLE>
F-86
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 1999
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 3,539 $ 1,134 $ 78 $ -- $ 4,751
Accounts receivable,
net.................. 2,860 304 44 -- 3,208
Amounts due from
franchisees and
licensees, net....... 1,297 4,706 -- -- 6,003
Inventories........... 4,631 863 9 -- 5,503
Other current assets
and amounts due from
(to) affiliates,
net.................. 39,368 (33,898) (592) -- 4,878
-------- ------- ---- -------- --------
Total current
assets............. 51,695 (26,891) (461) -- 24,343
PROPERTY AND EQUIPMENT,
net.................... 29,900 1,654 243 -- 31,797
INTANGIBLES, net........ 75,875 95,601 320 -- 171,796
INVESTMENT IN
SUBSIDIARIES........... 66,484 -- -- (66,484) --
OTHER ASSETS............ 3,688 252 30 -- 3,970
-------- ------- ---- -------- --------
$227,642 $70,616 $132 $(66,484) $231,906
======== ======= ==== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of
long-term debt and
capital lease
obligations.......... $ 7,141 $ 1,204 $-- $ -- $ 8,345
Accounts payable...... 14,223 564 69 -- 14,856
Accrued liabilities... 10,956 2,895 18 -- 13,869
-------- ------- ---- -------- --------
Total current
liabilities........ 32,320 4,663 87 -- 37,070
LONG-TERM DEBT AND
CAPITAL LEASE
OBLIGATIONS, net of
current portion........ 142,367 216 61 -- 142,644
OTHER ACCRUED
LIABILITIES............ 10,134 -- -- -- 10,134
MANDATORILY REDEEMABLE
CUMULATIVE PREFERRED
STOCK.................. -- 1,261 -- -- 1,261
MINORITY INTEREST....... -- -- -- 119 119
STOCKHOLDERS' EQUITY.... 42,821 64,476 (16) (66,603) 40,678
-------- ------- ---- -------- --------
$227,642 $70,616 $132 $(66,484) $231,906
======== ======= ==== ======== ========
</TABLE>
F-87
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED JANUARY 2, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES........... $144,057 $13,939 $377 $(4,137) $154,236
-------- ------- ---- ------- --------
OPERATING COSTS AND
EXPENSES:
Selling and store
occupancy costs..... 76,437 -- 334 (1,768) 75,003
Cost of sales........ 37,165 3,587 99 (2,369) 38,482
General and
administrative...... 21,213 5,107 -- -- 26,320
Depreciation and
amortization........ 16,624 3,196 -- -- 19,820
-------- ------- ---- ------- --------
Total operating
costs and
expenses.......... 151,439 11,890 433 (4,137) 159,625
-------- ------- ---- ------- --------
(Loss) income from
operations.......... (7,382) 2,049 (56) -- (5,389)
INTEREST EXPENSE AND
OTHER, net............ (13,064) 81 -- -- (12,983)
-------- ------- ---- ------- --------
(Loss) income before
provision for income
taxes, preferred
stock accretion and
dividends of
subsidiaries and
equity in net loss
of consolidated
subsidiaries........ (20,446) 2,130 (56) -- (18,372)
PROVISION FOR INCOME
TAXES................. (197) (119) -- -- (316)
-------- ------- ---- ------- --------
(Loss) income before
preferred stock
accretion and
dividends of
subsidiaries and
equity in net loss
of consolidated
subsidiaries........ (20,643) 2,011 (56) -- (18,688)
PREFERRED STOCK
ACCRETION AND
DIVIDENDS OF
SUBSIDIARIES.......... -- (444) -- -- (444)
EQUITY IN NET LOSS OF
CONSOLIDATED
SUBSIDIARIES.......... 1,500 -- -- (1,511) (11)
-------- ------- ---- ------- --------
NET (LOSS) INCOME...... $(19,143) $ 1,567 $(56) $(1,511) $(19,143)
======== ======= ==== ======= ========
</TABLE>
F-88
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 52 WEEKS ENDED JANUARY 2, 1999
(Dollars In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............. $(23,820) $ 33,382 $(133) $-- $ 9,429
-------- -------- ----- ---- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Net cash paid for
acquisitions and
related expenses..... (39,873) 7,038 -- -- (32,835)
Purchase of property
and equipment, net... (8,228) (7) -- -- (8,235)
Proceeds for asset
sales................ 176 -- -- -- 176
-------- -------- ----- ---- -------
Net cash (used in)
provided by
investing
activities......... (47,925) 7,031 -- -- (40,894)
-------- -------- ----- ---- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-
term debt............ 39,400 -- -- -- 39,400
Payment of debt
financing costs...... (7,062) -- -- -- (7,062)
Equity infusion from
Mrs. Fields'
Holding.............. 29,056 -- -- -- 29,056
Principal payments on
long-term debt and
capital lease
obligations.......... (257) (41,000) -- -- (41,257)
Capital lease
repayments........... (123) -- -- -- (123)
Reduction in preferred
stock of Pretzel
Time................. -- (85) -- -- (85)
-------- -------- ----- ---- -------
Net cash provided by
(used in) financing
activities......... 61,014 (41,085) -- -- 19,929
-------- -------- ----- ---- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS....... (10,731) (672) (133) -- (11,536)
CASH AND CASH EQUIVA-
LENTS, beginning of pe-
riod................... 14,270 1,806 211 -- 16,287
-------- -------- ----- ---- -------
CASH AND CASH EQUIVA-
LENTS, end of Period... $ 3,539 $ 1,134 $ 78 $-- $ 4,751
======== ======== ===== ==== =======
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMA-
TION:
Interest paid......... $ 12,405 $ 35 $ -- $-- $12,440
Taxes paid............ 141 68 -- -- 209
</TABLE>
F-89
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
January 2, July 3,
1999 1999
---------- -------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 4,751 $ 4,645
Accounts receivable, net of allowance for doubtful
accounts of $74 and $69, respectively.................. 3,208 1,570
Amounts due from franchisees and licensees, net of
allowance for doubtful accounts of $1,078 and $897
respectively........................................... 6,003 4,808
Inventories............................................. 5,503 4,913
Prepaid rent and other.................................. 4,017 3,868
Deferred income tax assets, current portion............. 861 861
-------- --------
Total current assets.................................. 24,343 20,665
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................. 29,914 32,889
Equipment and fixtures.................................. 17,108 11,913
Land.................................................... 240 240
-------- --------
47,262 45,042
Less accumulated depreciation and amortization.......... (15,465) (15,487)
-------- --------
Net property and equipment............................ 31,797 29,555
-------- --------
DEFERRED INCOME TAX ASSETS, net of current portion........ 2,638 2,638
-------- --------
GOODWILL, net of accumulated amortization of $11,231 and
$16,446, respectively.................................... 145,782 140,417
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated
amortization of $2,615 and $3,239, respectively.......... 14,296 13,772
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of
$1,320 and $2,341, respectively.......................... 11,718 11,852
-------- --------
OTHER ASSETS.............................................. 1,332 414
-------- --------
$231,906 $219,313
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-90
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
January July 3,
2, 1999 1999
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft........................................... $ 4,133 $ 2,902
Current portion of long-term debt........................ 8,046 929
Current portion of capital lease obligations............. 299 444
Line of credit........................................... -- 7,000
Accounts payable......................................... 10,723 10,436
Accrued liabilities...................................... 3,597 2,878
Current portion of store closure reserve................. 4,577 4,577
Accrued salaries, wages and benefits..................... 3,155 3,065
Accrued interest payable................................. 1,260 1,298
Sales taxes payable...................................... 962 378
Deferred income.......................................... 318 192
-------- --------
Total current liabilities.............................. 37,070 34,099
LONG-TERM DEBT, net of current portion..................... 141,647 141,424
STORE CLOSURE RESERVE, net of current portion.............. 10,134 8,419
CAPITAL LEASE OBLIGATIONS, net of current portion.......... 997 1,229
-------- --------
Total liabilities...................................... 189,848 185,171
-------- --------
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of PTI (a
wholly owned subsidiary), aggregate liquidation preference
of $1,495 and $1,525, respectively........................ 1,261 1,440
-------- --------
MINORITY INTEREST.......................................... 119 123
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized and
400 shares outstanding.................................. -- --
Additional paid-in capital............................... 59,899 61,899
Accumulated deficit...................................... (19,221) (29,320)
-------- --------
Total stockholder's equity............................. 40,678 32,579
-------- --------
$231,906 $219,313
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-91
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
July 4, 1998 July 3, 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES:
Net store and food sales....................... $58,687 $ 71,915
Franchising, net............................... 2,971 11,562
Licensing, net................................. 683 688
------- --------
Total revenues............................... 62,341 84,165
------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs.............. 33,908 41,118
Cost of sales.................................. 15,185 21,856
General and administrative..................... 8,587 10,873
Depreciation and amortization.................. 6,197 11,263
------- --------
Total operating costs and expenses........... 63,877 85,110
------- --------
Loss from operations........................... (1,536) (945)
------- --------
OTHER INCOME (EXPENSE), net:
Interest expense............................... (5,626) (8,686)
Interest income................................ 417 78
Other expense.................................. (144) (110)
------- --------
Total other expense, net..................... (5,353) (8,718)
------- --------
Loss before provision for income taxes,
preferred stock accretion and dividends of
subsidiaries and minority interest............ (6,889) (9,663)
PROVISION FOR INCOME TAXES....................... (14) (210)
------- --------
Loss before preferred stock accretion and
dividends of subsidiaries and minority
interest...................................... (6,903) (9,873)
PREFERRED STOCK ACCRETION AND DIVIDENDS OF
SUBSIDIARIES.................................... (222) (222)
MINORITY INTEREST................................ (176) (4)
------- --------
Net loss....................................... $(7,301) $(10,099)
======= ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-92
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
July 4, 1998 July 3, 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(7,301) $(10,099)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 6,197 11,263
Amortization of deferred loan costs............ 427 1,021
Loss on sale of assets......................... 144 117
Preferred stock accretion and dividends of
subsidiaries.................................. 222 222
Minority interest.............................. 176 4
Changes in assets and liabilities:
Accounts receivable, net...................... 387 1,638
Amounts due from franchisees and licensees,
net.......................................... 181 1,195
Inventories................................... 240 590
Prepaid rent and other........................ 523 149
Other assets.................................. 261 918
Accounts payable and accrued liabilities...... (2,518) (1,006)
Bank overdraft................................ -- (1,231)
Store closure reserve......................... (946) (1,311)
Accrued salaries, wages and benefits.......... 32 (90)
Accrued interest payable...................... (171) 38
Sales taxes payable........................... (562) (584)
Deferred income............................... (598) (126)
------- --------
Net cash provided by (used in) operating
activities.................................. (3,306) 2,708
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisition expenses.......... (928) (100)
Purchase of property and equipment.............. (3,342) (2,604)
------- --------
Net cash used in investing activities........ (4,270) (2,704)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt..................... -- (5,340)
Payment of debt financing costs................. -- (1,155)
Borrowings under line of credit................. -- 7,000
Collection of common stock subscriptions
receivable..................................... (265) --
Principal payments on capital lease
obligations.................................... (138) (572)
Reduction in preferred stock.................... (42) (43)
------- --------
Net cash used in financing activities........ (445) (110)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (8,021) (106)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD.......................................... 16,287 4,751
------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD... $ 8,266 $ 4,645
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................... $ 5,370 $ 7,588
======= ========
Cash paid for income taxes..................... $ 36 $ 164
======= ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-93
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Mrs. Fields' Original Cookies, Inc. and subsidiaries ("Mrs.
Fields") in accordance with the rules and regulations of the Securities and
Exchange Commission for Form 10-Q, and accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, these condensed consolidated financial statements
reflect all adjustments, which consist only of normal recurring adjustments
necessary to present fairly the financial position of Mrs. Fields as of July 3,
1999 and January 2, 1999, and the results of its operations and its cash flows
as of and for the periods presented herein. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
January 2, 1999 contained in Mrs. Fields' Annual Report on Form 10-K.
The results of operations for the 26 weeks ended July 3, 1999 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending January 1, 2000. Loss per share is not presented as Mrs.
Fields is wholly owned by Mrs. Fields' Holding Company, Inc. ("Mrs. Fields'
Holding") and therefore, its shares are not publicly traded.
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's condensed
consolidated financial statements to conform with the current period's
presentation.
(3) PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents a summary of the
consolidated results of operations of Mrs. Fields assuming the Great American,
Deblan, Chocolate Chip, Karp, Cookie Conglomerate and Pretzelmaker acquisitions
and related financings had occurred at the beginning of the 26 weeks ended July
4, 1998. Pro forma adjustments have been made to give effect to amortization of
goodwill, interest expense on acquisition debt and certain other adjustments.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which actually would
have resulted had the acquisitions been consummated at the beginning of the 26
weeks ended July 4, 1998.
<TABLE>
<CAPTION>
26 Weeks Ended
July 4, 1998
--------------
(Unaudited)
<S> <C>
Total revenues........................................... $92,640
Income from operations................................... 630
Net loss................................................. (8,064)
</TABLE>
(4) STORE CLOSURE AND PROPERTY AND EQUIPMENT IMPAIRMENT RESERVES
The Company's management reviews the historical and projected operating
performance of its stores on a periodic basis to identify underperforming
stores for impairment of net property investment or for targeted closing. The
Company's policy is to recognize a loss for that portion of the net property
investment determined to be impaired. Additionally, when a store is identified
for targeted closing, the Company's policy provides for the costs of closing
the store, which are predominantly estimated lease termination costs. Lease
termination costs include both one-time settlement payments and continued
contractual payments over time under the original lease agreements where no
settlement can be resolved with the landlord. As a result, although all stores
under the current exit plans will be exited by at least the end of fiscal year
2000, a portion of the store closure
F-94
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
reserve will remain until all cash payments have been made. No operating losses
are accrued for. If and when a reserve that was established as part of purchase
accounting is not fully utilized, the Company reduces the reserve to zero and
goodwill is adjusted for the corresponding amount. During the 26 weeks ended
July 3, 1999, there were no significant changes to the Company's store closure
plans.
F-95
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following table presents a summary of the activity in the store closure
reserve during the 26 weeks ended July 3, 1999:
<TABLE>
<CAPTION>
Mrs. Fields Inc. and
Original Cookie Co. H&M Pretzel Time Great American
------------------------- ------------------------ ------------------------ -------------------------
Business
Combination Company- Company- Company- Company-
and Owned Stores Owned Stores Owned Stores Owned Stores
Subsequent Unrelated to Business Unrelated to Business Unrelated to Business Unrelated to
Adjustments Acquisition Combination Acquisition Combination Acquisition Combinations Acquisition
----------- ------------ ----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
2, 1999......... $3,728,000 $4,674,000 $981,000 $367,000 $493,000 $264,000 $3,399,000 $305,000
Utilization for
the 26 weeks
ended July 3,
1999............ (813,000) (504,000) -- (43,000) -- (67,000) (288,000) --
---------- ---------- -------- -------- -------- -------- ---------- --------
Balance, July 3,
1999............ $2,915,000 $4,170,000 $981,000 $324,000 $493,000 $197,000 $3,111,000 $305,000
========== ========== ======== ======== ======== ======== ========== ========
<CAPTION>
Pretzelmaker Consolidated
------------ ---------------------------------------
Company-
Business Owned Total
Combination Stores Business
and Unrelated Combinations
Business Subsequent to and Company-
Combination Adjustments Acquisition Owned Stores
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, January
2, 1999......... $500,000 $9,101,000 $5,610,000 $14,711,000
Utilization for
the 26 weeks
ended July 3,
1999............ -- (1,101,000) (614,000) (1,715,000)
------------ ------------ ------------ -------------
Balance, July 3,
1999............ $500,000 $8,000,000 $4,996,000 $12,996,000
============ ============ ============ =============
</TABLE>
F-96
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following table presents a summary of activity for stores originally
identified to be closed or franchised in connection with the applicable
business combination for the 26 weeks ended July 3, 1999. Specifically, this
table does not include a summary of activity for stores the company intends to
close or franchise that were not originally identified in connection with a
business combination.
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and
Original Cookie H&M Pretzel Time Great American Pretzelmaker Consolidated
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
2, 1999........ 23 36 6 7 3 -- 43 11 7 -- 82 54
Stores closed or
franchised for
the 26 weeks
ended July 3,
1999........... (13) (13) (4) (4) (3) -- (21) (1) (4) -- (45) (18)
--- --- --- --- --- --- --- --- --- --- --- ---
Balance, July 3,
1999 .......... 10 23 2 3 -- -- 22 10 3 -- 37 36
=== === === === === === === === === === === ===
</TABLE>
The following table presents a summary of activity for stores the Company
intends to close or franchise that were not originally identified to be closed
or franchised in connection with a business combination:
<TABLE>
<CAPTION>
Mrs. Fields Inc.
and Original Cookie H&M Pretzel Time Great American Consolidated
------------------------ ----------------- ----------------- ----------------- -----------------
To Be To Be To Be To Be To Be To Be To Be To Be To Be To Be
Closed Franchised Closed Franchised Closed Franchised Closed Franchised Closed Franchised
--------- ----------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 2,
1999................... 28 14 2 1 3 1 4 -- 37 16
Stores closed or
franchised during the
26 weeks ended July 3,
1999................... (19) (5) (2) -- -- (1) (1) -- (22) (6)
--------- --------- --- --- --- --- --- --- --- ---
Balance, July 3, 1999... 9 9 -- 1 3 -- 3 -- 15 10
========= ========= === === === === === === === ===
</TABLE>
The following table presents a summary of changes in the property and
equipment impairment reserves that were established in connection with the
applicable business combination for the 26 weeks ended July 3, 1999 for stores
to be closed and franchised:
<TABLE>
<CAPTION>
Mrs. Fields,
Inc. and
Original Great
Cookie Co. H&M American Pretzelmaker Consolidated
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 2,
1999................... $3,844,000 $1,380,000 $2,877,000 $327,000 $8,428,000
Utilization for the 26
weeks ended July 3,
1999 related to stores
to be closed........... (1,080,000) (405,000) (1,112,000) (157,000) (2,754,000)
Utilization for the 26
weeks ended July 3,
1999 related to stores
to be franchised....... (660,000) (332,000) (5,000) -- (997,000)
---------- ---------- ---------- -------- ----------
Balance, July 3, 1999... $2,104,000 $ 643,000 $1,760,000 $170,000 $4,677,000
========== ========== ========== ======== ==========
</TABLE>
(5) REPORTABLE SEGMENTS
Management evaluates performance at Mrs. Fields using two reportable
operating segments, namely, (1) company-owned stores and related activity and
(2) franchising and licensing activity. The segments are determined by revenue
source; direct sales or royalties and license fees. The company-owned stores
segment consists of both cookie and pretzel stores owned and operated by Mrs.
Fields. The franchising and licensing segment consists of cookie and pretzel
stores, which are owned and operated by third parties who pay Mrs. Fields an
initial franchise fee and monthly royalties based on a percentage of gross
sales and other licensing activity not related to cookie or pretzel stores.
Sales and transfers between segments are eliminated in consolidation.
F-97
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Mrs. Fields evaluates performance of each segment based on contribution
margin. Mrs. Fields does not allocate any interest income, interest expense,
depreciation and amortization or assets to its reportable operating segments.
Segment revenue and contribution margin are presented in the following table.
<TABLE>
<CAPTION>
Company- Franchising
owned and
Stores Licensing Total
-------- ----------- -------
<S> <C> <C> <C>
26 weeks ended July 4, 1998
Total revenues................................. $58,687 $ 3,654 $62,341
Contribution margin............................ 9,594 3,654 13,248
26 weeks ended July 3, 1999
Total revenues................................. $71,915 $12,250 $84,165
Contribution margin............................ 13,404 7,787 21,191
</TABLE>
The reconciliation of contribution margin to net loss is as follows:
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
July 4, 1998 July 3, 1999
-------------- --------------
<S> <C> <C>
Contribution margin............................ $13,248 $ 21,191
General and administrative expense............. (8,587) (10,873)
Depreciation and amortization.................. (6,197) (11,263)
Interest expense............................... (5,626) (8,686)
Other income (expense), net.................... (139) (468)
------- --------
Net loss....................................... $(7,301) $(10,099)
======= ========
</TABLE>
Geographic segment information is as follows:
<TABLE>
<CAPTION>
Domestic Domestic
Company- International Franchising International
owned Company-owned and Franchising
Total revenues Stores Stores Licensing and Licensing
-------------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
26 weeks ended July 4,
1998..................... $58,609 $78 $ 3,467 $187
26 weeks ended July 3,
1999..................... 71,894 21 12,050 200
</TABLE>
Revenues from international franchising and licensing are generated from
Canada and Australia with no other countries having material representation.
Revenues from international company-owned stores are immaterial. As of July 3,
1999, there are no remaining international company-owned stores.
There were no customers who accounted for more than 10% of Mrs. Fields' total
revenues or either segment's revenues.
(6) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Mrs. Fields' obligation related to its $140,000,000 aggregate principal
amount of 10 1/8 percent Series A, B and C Senior Notes due 2004 is fully and
unconditionally guaranteed (the "Guarantee") on a senior basis by four of Mrs.
Fields' wholly owned subsidiaries. The Guarantee is a general unsecured
obligation of The Mrs. Fields' Brand, Inc., Great American Cookies, Inc.,
Pretzel Time, Inc. and Pretzelmaker Holdings, Inc. (the "Guarantors"), rank
senior in right of payment to all subordinated indebtedness of the Guarantors
and rank equal in right of payment with all existing and future senior
indebtedness of the Guarantors. There are no restrictions on Mrs. Fields'
ability to obtain cash dividends or other distributions of funds from the
Guarantors,
F-98
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
except those imposed by applicable law. The following supplemental financial
information sets forth, on a condensed consolidating basis, balance sheets,
statements of operations and statements of cash flows for Mrs. Fields' Original
Cookies, Inc. (the "Parent Company"), the Guarantor Subsidiaries and the Non-
guarantor Subsidiaries (which include Mrs. Fields' Cookies Australia, Mrs.
Fields' Cookies (Canada) Ltd., Pretzelmaker Canada, H & M Canada, and Fairfield
Foods, Inc. and three partially owned subsidiaries). Mrs. Fields has not
presented separate financial statements and other disclosures concerning the
Guarantors because management has determined that such information is not
material.
(7) SUBSEQUENT EVENT
On September 1, 1999, the Preferred Shareholders of Pretzel Time, Inc. agreed
to extend the payment to retire the preferred stock to January 2000.
F-99
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 3, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 2,636 $ 1,892 $ 117 $ -- $ 4,645
Accounts receivable,
net.................. 1,558 -- 12 -- 1,570
Amounts due from
franchisees and
licensees, net....... 996 3,812 -- -- 4,808
Inventories........... 3,957 950 6 -- 4,913
Other current assets
and amounts due from
(to) affiliates,
net.................. 24,017 (18,561) (727) -- 4,729
-------- -------- ----- -------- --------
Total current
assets............. 33,164 (11,907) (592) -- 20,665
PROPERTY AND EQUIPMENT,
net.................... 27,923 1,462 170 -- 29,555
INTANGIBLES, net........ 80,878 84,865 298 -- 166,041
INVESTMENT IN
SUBSIDIARIES........... 64,984 -- -- (64,984) --
OTHER ASSETS............ 2,895 125 32 -- 3,052
-------- -------- ----- -------- --------
$209,844 $ 74,545 $ (92) $(64,984) $219,313
======== ======== ===== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of
long-term debt and
capital lease
obligations.......... $ 8,105 $ 268 $ -- $ -- $ 8,373
Accounts payable...... 11,724 1,636 (22) -- 13,338
Accrued liabilities... 10,458 1,930 -- -- 12,388
-------- -------- ----- -------- --------
Total current
liabilities........ 30,287 3,834 (22) -- 34,099
LONG-TERM DEBT AND
CAPITAL LEASE
OBLIGATIONS, net of
current portion........ 142,539 114 -- -- 142,653
OTHER ACCRUED
LIABILITIES............ 8,419 -- -- -- 8,419
MANDATORILY REDEEMABLE
CUMULATIVE PREFERRED
STOCK.................. -- 1,440 -- -- 1,440
MINORITY INTEREST....... -- -- 4 119 123
STOCKHOLDER'S EQUITY
(DEFICIT).............. 28,599 69,157 (74) (65,103) 32,579
-------- -------- ----- -------- --------
$209,844 $ 74,545 $ (92) $(64,984) $219,313
======== ======== ===== ======== ========
</TABLE>
F-100
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 26 WEEKS ENDED JULY 3, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES.......... $ 74,365 $12,764 $104 $(3,068) $ 84,165
-------- ------- ---- ------- --------
OPERATING COSTS AND
EXPENSES:
Selling and store
occupancy costs...... 41,634 -- 120 (636) 41,118
Cost of sales......... 19,787 4,463 38 (2,432) 21,856
General and
administrative....... 10,819 54 -- -- 10,873
Depreciation and
amortization......... 7,967 3,296 -- -- 11,263
-------- ------- ---- ------- --------
Total operating
costs and
expenses........... 80,207 7,813 158 (3,068) 85,110
-------- ------- ---- ------- --------
(Loss) income from
operations......... (5,842) 4,951 (54) -- (945)
INTEREST EXPENSE AND
OTHER, net............. (8,638) (80) -- -- (8,718)
-------- ------- ---- ------- --------
(Loss) income before
provision for income
taxes and equity in
net loss of
consolidated
subsidiaries......... (14,480) 4,871 (54) -- (9,663)
PROVISION FOR INCOME
TAXES.................. (210) -- -- -- (210)
-------- ------- ---- ------- --------
(Loss) income before
preferred stock
accretion and
dividends of
subsidiaries and
equity in net loss of
consolidated
subsidiaries......... (14,690) 4,871 (54) -- (9,873)
PREFERRED STOCK
ACCRETION AND DIVIDENDS
OF SUBSIDIARIES........ -- (222) -- -- (222)
EQUITY IN NET LOSS OF
CONSOLIDATED
SUBSIDIARIES........... 4,595 -- -- (4,599) (4)
-------- ------- ---- ------- --------
NET (LOSS) INCOME....... $(10,095) $ 4,649 $(54) $(4,599) $(10,099)
======== ======= ==== ======= ========
</TABLE>
F-101
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 3, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES............ $ 1,138 $1,531 $ 39 $-- $ 2,708
------- ------ ---- ---- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition
expenses............ (100) -- -- -- (100)
Purchase of property
and equipment, net.. (2,520) (84) -- -- (2,604)
------- ------ ---- ---- -------
Net cash used in
investing
activities........ (2,620) (84) -- -- (2,704)
------- ------ ---- ---- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Reduction of long-
term debt and
capital lease
obligations......... (5,291) (621) -- -- (5,912)
Payment of debt
financing fees...... (1,130) (25) -- -- (1,155)
Reduction in
preferred stock..... -- (43) -- -- (43)
Proceeds from line of
credit.............. 7,000 -- -- -- 7,000
------- ------ ---- ---- -------
Net cash used in
financing
activities........ 579 (689) -- -- (110)
------- ------ ---- ---- -------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... (903) 758 39 -- (106)
CASH AND CASH
EQUIVALENTS, beginning
of the period......... 3,539 1,134 78 -- 4,751
------- ------ ---- ---- -------
CASH AND CASH
EQUIVALENTS, end of
the period............ $ 2,636 $1,892 $117 $-- $ 4,645
======= ====== ==== ==== =======
</TABLE>
F-102
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 3,539 $ 1,134 $ 78 $ -- $ 4,751
Accounts receivable,
net.................. 2,860 304 44 -- 3,208
Amounts due from
franchisees and
licensees, net....... 1,297 4,706 -- -- 6,003
Inventories........... 4,631 863 9 -- 5,503
Other current assets
and amounts due from
(to) affiliates,
net.................. 39,368 (33,898) (592) -- 4,878
--------- -------- ----- -------- --------
Total current
assets............. 51,695 (26,891) (461) -- 24,343
PROPERTY AND EQUIPMENT,
net.................... 29,900 1,654 243 -- 31,797
INTANGIBLES, net........ 75,875 95,601 320 -- 171,796
INVESTMENT IN
SUBSIDIARIES........... 66,484 -- -- (66,484) --
OTHER ASSETS............ 3,688 252 30 -- 3,970
--------- -------- ----- -------- --------
$ 227,642 $ 70,616 $ 132 $(66,484) $231,906
========= ======== ===== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of
long-term debt and
capital lease
obligations.......... $ 7,141 $ 1,204 $ -- $ -- $ 8,345
Accounts payable...... 14,223 564 69 -- 14,856
Accrued liabilities... 10,956 2,895 18 -- 13,869
--------- -------- ----- -------- --------
Total current
liabilities........ 32,320 4,663 87 -- 37,070
LONG-TERM DEBT AND
CAPITAL LEASE
OBLIGATIONS, net of
current portion........ 142,367 216 61 -- 142,644
OTHER ACCRUED
LIABILITIES............ 10,134 -- -- -- 10,134
MANDATORILY REDEEMABLE
CUMULATIVE PREFERRED
STOCK.................. -- 1,261 -- -- 1,261
MINORITY INTEREST....... -- -- -- 119 119
STOCKHOLDER'S EQUITY
(DEFICIT).............. 42,821 64,476 (16) (66,603) 40,678
--------- -------- ----- -------- --------
$227,642 $ 70,616 $ 132 $(66,484) $231,906
========= ======== ===== ======== ========
</TABLE>
F-103
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 26 WEEKS ENDED JULY 4, 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES............ $60,370 $ 683 $1,867 $(579) $62,341
------- ------ ------ ----- -------
OPERATING COSTS AND
EXPENSES:
Selling and store
occupancy costs...... 34,309 -- 178 (579) 33,908
Food cost of sales.... 15,142 -- 43 -- 15,185
General and
administrative....... 7,261 554 772 -- 8,587
Depreciation and
amortization......... 5,331 640 226 -- 6,197
------- ------ ------ ----- -------
Total operating
costs and
expenses........... 62,043 1,194 1,219 (579) 63,877
------- ------ ------ ----- -------
(Loss) income from
operations......... (1,673) (511) 648 -- (1,536)
INTEREST EXPENSE AND
OTHER, net............. (5,372) 14 5 -- (5,353)
------- ------ ------ ----- -------
(Loss) income before
provision for income
taxes and equity in
net loss of
consolidated
subsidiaries......... (7,045) (497) 653 -- (6,889)
PROVISION FOR INCOME
TAXES.................. (14) -- -- -- (14)
------- ------ ------ ----- -------
(Loss) income before
preferred stock
accretion and
dividends of
subsidiaries and
equity in net loss of
consolidated
subsidiaries......... (7,059) (497) 653 -- (6,903)
PREFERRED STOCK
ACCRETION AND DIVIDENDS
OF SUBSIDIARIES........ -- -- (222) -- (222)
EQUITY IN NET (LOSS)
INCOME OF CONSOLIDATED
SUBSIDIARIES........... (242) -- (176) 242 (176)
------- ------ ------ ----- -------
NET (LOSS) INCOME....... $(7,301) $ (497) $ 255 $ 242 $(7,301)
======= ====== ====== ===== =======
</TABLE>
F-104
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 4, 1998
(dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH USED IN
OPERATING ACTIVITIES.. $(2,824) $(379) $ (103) $-- $(3,306)
------- ----- ------ ---- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Net cash paid for
acquisitions........ (928) -- -- -- (928)
Purchase of property
and equipment, net.. (3,335) -- (7) -- (3,342)
------- ----- ------ ---- -------
Net cash used in
investing
activities........ (4,263) -- (7) -- (4,270)
------- ----- ------ ---- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Reduction of long-
term debt and
capital lease
obligations......... (138) -- (265) -- (403)
Reduction in
preferred stock..... -- -- (42) -- (42)
------- ----- ------ ---- -------
Net cash used in
financing
activities........ (138) -- (307) -- (445)
------- ----- ------ ---- -------
NET DECREASE IN CASH
AND CASH EQUIVALENTS.. (7,225) (379) (417) -- (8,021)
CASH AND CASH
EQUIVALENTS, beginning
of period............. 14,270 725 1,292 -- 16,287
------- ----- ------ ---- -------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 7,045 $ 346 $ 875 $-- $ 8,266
======= ===== ====== ==== =======
</TABLE>
F-105
<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.
Arthur Andersen LLP
Salt Lake City, Utah
June 27, 1997
F-106
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Mrs. Fields Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Mrs. Fields Inc. and subsidiaries for
the year ended December 30, 1995. 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, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Mrs. Fields Inc.
and subsidiaries for the year ended December 30, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Salt Lake City, Utah
February 9, 1996
F-107
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
September 17,
1996
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 1,883
Accounts receivable, net of allowance for doubtful accounts of
$269.......................................................... 1,611
Inventories.................................................... 1,296
Prepaid rent................................................... 420
Other prepaid expenses......................................... 1,042
--------
Total current assets......................................... 6,252
--------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements......................................... 23,223
Equipment and fixtures......................................... 18,422
--------
41,645
Less accumulated depreciation and amortization................. (29,409)
--------
Net property and equipment................................... 12,236
--------
DEPOSITS......................................................... 656
--------
Total assets..................................................... $ 19,144
========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-108
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
(Dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September 17,
1996
-------------
<S> <C>
CURRENT LIABILITIES:
Notes payable.................................................. $ 18,352
Premium on restructured debt................................... 2,872
Accounts payable............................................... 3,708
Accrued liabilities............................................ 1,329
Current portion of store closure reserve....................... 1,270
Current portion of deferred credits............................ 425
---------
Total current liabilities.................................... 27,956
STORE CLOSURE RESERVE, net of current portion.................... 294
DEFERRED CREDITS, net of current portion......................... 1,212
---------
Total liabilities............................................ 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 $24,834, including $4,834 of unrecorded
dividends in arrears.......................................... 20,000
---------
STOCKHOLDERS' DEFICIT:
Cumulative preferred stock, $.001 par value; 21,885,000 shares
authorized and issued, involuntary liquidation preference of
$32,085, including $10,200 of unrecorded dividends in
arrears....................................................... 22
Common stock, $.001 par value; 200,000,000 shares authorized
and outstanding............................................... 200
Additional paid-in capital..................................... 83,863
Accumulated deficit............................................ (114,371)
Cumulative translation adjustment.............................. (32)
---------
Total stockholders' deficit.................................. (30,318)
---------
Total liabilities and stockholders' deficit.................. $ 19,144
=========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet
F-109
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Period Ended
December 30, September 17,
1995 1996
------------ -------------
<S> <C> <C>
REVENUES:
Net store sales.................................... $59,956 $29,674
Net franchising.................................... 1,870 1,793
Net licensing...................................... 2,031 892
Net other.......................................... 2,092 1,101
------- -------
Total revenues................................... 65,949 33,460
------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs.................. 36,965 17,782
Food cost of sales................................. 13,373 6,525
General and administrative......................... 12,612 7,984
Depreciation and amortization...................... 3,525 1,911
Provision for store closure costs.................. 3,000 1,000
------- -------
Total operating costs and expenses............... 69,475 35,202
------- -------
Loss from operations............................. (3,526) (1,742)
INTEREST EXPENSE..................................... (51) (80)
(LOSS) GAIN ON SALE OF ASSETS........................ 1,450 (277)
------- -------
Loss before provision for income taxes........... (2,127) (2,099)
PROVISION FOR INCOME TAXES........................... (241) (205)
------- -------
Net loss......................................... $(2,368) $(2,304)
======= =======
</TABLE>
The accompany notes to consolidated financial statements are an integral part
of these statements.
F-110
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollars in Thousands)
<TABLE>
<CAPTION>
Cumulative
Preferred Stock Common Stock Additional Cumulative
----------------- ------------------ Paid-in Accumulated Translation
Shares Amount Shares Amount Capital Deficit Adjustment Total
---------- ------ ----------- ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1995................... 21,885,000 $22 200,000,000 $200 $83,863 $(109,699) $195 $(25,419)
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (230) (230)
Net loss............... -- -- -- -- -- (2,368) -- (2,368)
---------- --- ----------- ---- ------- --------- ---- --------
BALANCE, December 30,
1995................... 21,885,000 22 200,000,000 200 83,863 (112,067) (35) (28,017)
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 3 3
Net loss............... -- -- -- -- -- (2,304) -- (2,304)
---------- --- ----------- ---- ------- --------- ---- --------
BALANCE, September 17,
1996................... 21,885,000 $22 200,000,000 $200 $83,863 $(114,371) $(32) $(30,318)
========== === =========== ==== ======= ========= ==== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-111
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended Period Ended
December 30, September 17,
1995 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(2,368) $(2,304)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 3,525 1,911
Amortization of premium on restructured debt.... -- (1,541)
In-kind expense on note payable................. (1,610) 1,598
Provision for store closure costs............... 3,000 1,000
Net loss (gain) on asset sales, disposals and
store closures................................. (1,450) 277
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable.... (163) 2,039
Decrease in inventories....................... 853 267
Increase in prepaid rent...................... -- (420)
Increase in other prepaid expenses............ (337) (673)
Increase in deposits.......................... -- (15)
Decrease in accounts payable and accrued
liabilities.................................. (5,821) (194)
Decrease in store closure reserve............. -- (1,696)
Decrease in deferred credits.................. (107) (696)
------- -------
Net cash used in operating activities....... (4,478) (447)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (4,146) (1,054)
Proceeds from the sale of assets.................. 6,672 669
------- -------
Net cash provided by (used in) investing
activities................................. 2,526 (385)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable............... (145) (58)
Payments for debt restructuring................... (40) --
------- -------
Net cash used in financing activities....... (185) (58)
------- -------
EFFECT OF FOREIGN EXCHANGE RATES.................... -- 3
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS........... (2,137) (887)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD............................................. 4,907 2,770
------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD...... $ 2,770 $ 1,883
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-112
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest was approximately $1,661 and $24 for the year ended
December 30, 1995 and for the period ended September 17, 1996, respectively.
Cash paid for income taxes was approximately $128 and $39 for the year ended
December 30, 1995 and for the period ended September 17, 1996, respectively.
Supplemental Disclosure of Noncash Investing and Financing Activities:
During the year ended December 30, 1995 and the period ended September 17,
1996, the Company, in accordance with the Amended and Restated Restructuring
Agreement, entered into the following noncash financing activities:
. 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 of its premium on restructured debt as a reduction to interest
expense during the year ended December 30, 1995.
. 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 year ended December 30, 1995 and for the period ended September
17, 1996, the Company 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 $132 and $0 during the year ended 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 $305 during the
year ended December 30, 1995. In addition, during the year ended
December 30, 1995 and the period ended September 17, 1996, the Company
charged off approximately $1,960 and $651 of assets against accrued
expenses.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-113
<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 in this prospectus 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.
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
F-114
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
September 17, 1996 and at various times during the period 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 September 17, 1996:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Food and beverages............................................. $ 792,000
Smallwares..................................................... 504,000
----------
$1,296,000
==========
</TABLE>
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment, fixtures and leasehold improvements are depreciated or
amortized over three to seven years using the straight-line method.
Expenditures that materially increase values or capacities or extend useful
lives of property and equipment are capitalized. Routine maintenance, repairs
and renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are 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-115
<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 is being amortized over the life of the Series A
secured notes to produce an effective interest rate of zero percent.
F-116
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes payable consist of the following as of September 17, 1996:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
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
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
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........................................................ 243,000
Premium on restructured debt................................. 2,872,000
21,224,000
Less current portion......................................... (21,224,000)
------------
$ --
============
</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 year ended
December 30, 1995 and for the period ended September 17, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Current:
Federal.............................................. $ -- $ --
State................................................ 241,000 205,000
Deferred:
Federal.............................................. -- (1,125,000)
State................................................ -- (109,000)
Change in valuation allowance........................ -- 1,234,000
-------- -----------
Total provision for income taxes................... $241,000 $ 205,000
======== ===========
</TABLE>
The Company incurred financial reporting losses for the year ended 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 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.
F-117
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Fiscal Year
-----------
<S> <C>
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.
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
F-118
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Fiscal Year
-----------
<S> <C>
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>
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 year ended
F-119
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 1995 and for the period ended September 17, 1996 was approximately
$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>
Fiscal Year
-----------
<S> <C>
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 September 17, 1996 were approximately $707,400. Under the
terms of the agreement, the Company is required to assume any franchisee
borrowings which are in default as defined. As of September 17, 1996, the
Company has assumed loans totaling approximately $240,000, which are included
in notes payable.
As of December 30, 1995, the Company had recorded deferred credits,
representing vendor rebates, 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. The supplier periodically prepays rebates to the Company for
anticipated purchases. The Company records the prepayments as deferred credits
and amortizes them ratably as purchases are made from the supplier. In April
1996, the Company and the supplier renegotiated the agreement whereby the
supplier would reduce the unearned portion of the deferred credits to $504,000
and advance the Company a rebate of $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 year ended December 30, 1995 and
for the period ended September 17, 1996, the Company paid maintenance fees of
approximately $100,000 and $17,000, respectively, which are included in general
and administrative expenses.
F-120
<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 year
ended December 30, 1995 and the period ended September 17, 1996 totaled
approximately $152,000 and $136,000, respectively, of which approximately
$9,000 is included in accounts receivable as of 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 year ended
December 30, 1995 and for the period ended September 17, 1996 were
approximately $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-121
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Original Cookie Company, Incorporated and Hot Sam Company, Inc.:
We have audited the accompanying combined balance sheet 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
September 17, 1996, and the related combined statements of operations,
stockholders' equity and cash flows for the year ended 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 September 17, 1996, and the results of their operations and
their cash flows for the year ended December 30, 1995, and for the period
December 31, 1995 to September 17, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Cleveland, Ohio
July 11, 1997
F-122
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 17,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 655
Accounts receivable........................................... 340
Inventories................................................... 1,728
Prepaids and other............................................ 984
--------
Total current assets........................................ 3,707
--------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements........................................ 31,329
Furniture and fixtures........................................ 7,719
Buildings and improvements.................................... 639
Land.......................................................... 69
--------
39,756
Accumulated depreciation and amortization..................... (22,687)
--------
Net property and equipment.................................. 17,069
--------
OTHER ASSETS, net............................................... 256
--------
COST IN EXCESS OF FAIR VALUE OF NET ASSETS OF PURCHASED
BUSINESS, net of accumulated amortization of $9,092............ 37,992
--------
$ 59,024
========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
this combined balance sheet.
F-123
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED BALANCE SHEET (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 17,
1996
-------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 1,696
Accrued payroll and related expenses............................ 2,208
Accrued liabilities............................................. 3,443
-------
Total current liabilities..................................... 7,347
-------
LONG-TERM LIABILITIES:
Deferred lease credit........................................... 1,653
Store closure reserve........................................... 1,002
Related-party notes payable..................................... 30,977
Other........................................................... 1,102
-------
Total long-term liabilities................................... 34,734
-------
COMMITMENTS (NOTE 9)
STOCKHOLDERS' EQUITY:
Common stock.................................................... 10,000
Additional paid-in capital...................................... 15,873
Accumulated deficit............................................. (8,930)
-------
Total stockholders' equity.................................... 16,943
-------
Total liabilities and stockholders' equity.................... $59,024
=======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
this combined balance sheet.
F-124
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
Year Ended 1995 to
December 30, September 17,
1995 1996
------------ -------------
<S> <C> <C>
NET SALES............................................ $85,581 $54,366
------- -------
OPERATING COSTS AND EXPENSES:
Food cost of sales................................. 19,996 12,728
Selling and occupancy expenses..................... 47,032 31,935
General and administrative expenses................ 8,425 5,538
Severance and related expenses..................... -- 2,000
Depreciation and amortization...................... 6,902 4,937
Provision for store closure costs.................. 791 --
------- -------
Total operating costs and expenses............... 83,146 57,138
------- -------
INCOME (LOSS) FROM OPERATIONS........................ 2,435 (2,772)
INTEREST EXPENSE, net................................ (4,268) (2,828)
OTHER EXPENSE........................................ -- (45)
------- -------
LOSS BEFORE INCOME TAXES............................. (1,833) (5,645)
PROVISION FOR INCOME TAXES........................... 263 --
------- -------
NET LOSS............................................. $(2,096) $(5,645)
======= =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-125
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(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, 1995............ $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-126
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
Year Ended 1995 to
December 30, September 17,
1995 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(2,096) $(5,645)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
Depreciation and amortization...................... 6,902 4,937
Changes in assets and liabilities--
Increase in accounts receivable.................. (61) (279)
Decrease (increase) in related-party
receivables/payables............................ 18 (169)
Decrease (increase) in inventories............... 461 (65)
Decrease in prepaids and other................... 695 967
Decrease (increase) in other assets.............. 64 (60)
(Decrease) increase in accounts payable.......... (476) 410
Decrease in accrued payroll and related
expenses........................................ (331) (384)
Increase (decrease) in accrued liabilities....... (1,196) 330
Increase in other long-term liabilities.......... 231 73
Increase (decrease) in deferred lease credit..... 38 (111)
Increase (decrease) in store closure reserve..... 202 (382)
------- -------
Net cash provided by (used in) operating
activities.................................... 4,451 (378)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net........... (568) (1,200)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to related party........................ (4,599) (1,380)
------- -------
CASH AND CASH EQUIVALENTS:
Net decrease during the period..................... (716) (2,958)
Balance, beginning of the period................... 4,329 3,613
------- -------
Balance, end of the period......................... $ 3,613 $ 655
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
State and local income taxes paid.................. $ 234 $ 82
======= =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-127
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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-128
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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
September 17, 1996:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Food and beverages................................................ $1,215,000
Small wares....................................................... 513,000
----------
$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:
<TABLE>
<S> <C>
Leasehold improvements........................................ 5 to 10 years
Furniture and fixtures........................................ 3 to 10 years
Buildings and improvements.................................... 10 to 50 years
</TABLE>
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.
Revenue Recognition
Revenues from product sales are recognized at the point of sale to the
customer.
F-129
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 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 $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 year ended 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 closing the store, which are predominantly estimated lease
settlement costs and/or estimated lease payments after the date of the store
closing.
F-130
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
An analysis of the activity in the store closure reserve is as follows for
the year ended December 30, 1995 and for the period December 31, 1995 to
September 17, 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Beginning Balance.................................... $1,182,000 $1,384,000
Provision............................................ 791,000 --
Payments and Other Deductions........................ (589,000) (382,000)
---------- ----------
Ending Balance....................................... $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 year ended December 30, 1995, and
for the period December 31, 1995 to September 17, 1996 was $143,000 and
$106,000, respectively.
The Companies do not provide for any other post-retirement 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 $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 $15,038,000 for the year ended
December 30, 1995. Total rental expense for the period ended September 17, 1996
was approximately $11,165,000.
The minimum rentals under operating leases subsequent to September 17, 1996
are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
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-131
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cookies USA, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' deficit, and
of cash flows present fairly, in all material respects, the financial position
of Cookies USA, Inc. and its subsidiary at June 29, 1997 and June 28, 1998, and
the results of their operations and their cash flows for each of the three
fifty-two week periods in the period ended June 28, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PriceWaterhouseCoopers LLP
Atlanta, Georgia
August 24, 1998
F-132
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,885 $ 8,382
Accounts receivable--trade................................. 1,702 2,042
Inventory (Notes 1 and 2).................................. 1,292 1,212
Prepaid expenses (Note 3).................................. 1,227 1,245
Current deferred income tax benefit (Notes 1 and 10)....... 392 872
Current portion of notes receivable (Note 4)............... 867 88
Other receivables.......................................... 8 8
------- -------
Total current assets..................................... 10,373 13,849
------- -------
Property and equipment, net of accumulated depreciation (Note
5).......................................................... 6,304 4,916
Construction in progress, net of construction deposits
received from franchisees................................... 92 163
------- -------
6,396 5,079
------- -------
Other assets:
Deferred loan costs, net of accumulated amortization of
$2,050 and $2,626, respectively (Note 1).................. 2,050 1,474
Notes receivable, net of current portion (Note 4).......... 302 352
Deferred income tax benefit (Notes 1 and 10)............... 2,372 1,438
Deposits................................................... 50 49
Accrued straight-line minimum rent receivable for subleases
to franchisees (Note 1)................................... 1,267 1,388
------- -------
6,041 4,701
------- -------
Cost in excess of fair value of net assets acquired
(goodwill), net of accumulated amortization of $3,104 and
$3,975, respectively (Note 1)............................... 31,848 30,977
------- -------
$54,658 $54,606
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-133
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable......................................... $ 376 $ 913
Sales taxes payable...................................... 105 102
Accrued interest payable................................. 2,202 2,202
Accrued expenses (Note 6)................................ 1,568 1,075
Deposits................................................. 673 727
-------- --------
Total current liabilities.............................. 4,924 5,019
-------- --------
Capital lease obligations (Note 9)......................... 62 36
-------- --------
Accrued straight-line minimum rent payable (Note 1)........ 2,113 2,164
-------- --------
Long-term debt (Note 7):
Senior secured notes..................................... 40,000 40,000
Original issue discount, net of accumulated amortization
of $102 and $131, respectively.......................... (98) (69)
Subordinated unsecured notes payable..................... 10,000 10,000
-------- --------
Total long-term debt................................... 49,902 49,931
-------- --------
Commitments and contingencies (Note 9)
Mandatorily redeemable preferred stock (Note 11):
Senior cumulative (6.00%) convertible; $1.00 par value;
10,500 shares authorized, issued and outstanding........ 12,739 13,369
Junior Class A cumulative ($50 per annum); $1.00 par
value; 2,500 shares authorized, issued and outstanding.. 2,944 3,069
Junior Class B cumulative ($50 per annum); $1.00 par
value; 750 shares authorized, issued and outstanding.... 883 921
-------- --------
Total mandatorily redeemable preferred stock........... 16,566 17,359
-------- --------
Common stock and other stockholders' deficit:
Common stock, $.01 par value; 115,000 shares authorized;
82,800 shares issued and outstanding.................... 1 1
Additional paid-in capital............................... 449 449
Excess of purchase price over predecessor basis.......... (10,164) (10,164)
Accumulated deficit...................................... (9,195) (10,189)
-------- --------
Total stockholders' deficit............................ (18,909) (19,903)
-------- --------
$ 54,658 $ 54,606
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-134
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Fifty-Two For the Fifty-Two For the Fifty-Two
Week Period Week Period Week Period
Ended Ended Ended
June 30, 1996 June 29, 1997 June 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Cookie and beverage
sales................ $24,719 $22,375 $18,854
Batter sales to
franchisees.......... 10,104 11,270 12,214
Franchise royalties... 4,289 4,729 5,267
Franchise license
fees--existing and
new stores........... 521 675 503
Other, net............ 115 66 139
------- ------- -------
Total revenue....... 39,748 39,115 36,977
------- ------- -------
Operating expenses:
Cost of sales......... 19,523 18,615 17,056
Retail store
occupancy............ 7,379 7,055 5,737
Other retail store
expenses............. 1,316 1,019 870
Selling, general and
administrative
expenses............. 7,309 7,619 7,220
Management fee expense
(Note 14)............ 250 250 250
------- ------- -------
Total operating
expenses........... 35,777 34,558 31,133
------- ------- -------
Income from operations.. 3,971 4,557 5,844
------- ------- -------
Other (income) expenses,
net:
Interest income....... (56) (251) (346)
Interest expense...... 5,646 5,634 5,635
Amortization of
deferred loan costs.. 572 586 576
Gain on sale of
existing stores...... (636) (927) (370)
------- ------- -------
Total other
expenses, net...... 5,526 5,042 5,495
------- ------- -------
Income (loss)
before income
taxes............ (1,555) (485) 349
State and federal income
tax expense (benefit)
(Note 10).............. (194) 261 551
------- ------- -------
Net loss.......... $(1,361) $ (746) $ (202)
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statement are an integral part
to these statements.
F-135
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Dollars in Thousands)
<TABLE>
<CAPTION>
Excess of
Purchase
Common Stock Additional Price Over Total
------------- Paid-in Predecessor Accumulated Stockholders'
Shares Amount Capital Basis Deficit Deficit
------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 29,
1995................... 82,800 $ 1 $449 $(10,164) $ (5,503) $(15,217)
Net loss for the
fifty-two week period
ended June 30, 1996.. -- -- -- -- (1,361) (1,361)
Redeemable preferred
stock accretion...... -- -- -- -- (792) (792)
------ ---- ---- -------- -------- --------
Balance at June 30,
1996................... 82,800 1 449 (10,164) (7,656) (17,370)
Net loss for the
fifty-two week period
ended June 29, 1997.. -- -- -- -- (746) (746)
Redeemable preferred
stock accretion...... -- -- -- -- (793) (793)
------ ---- ---- -------- -------- --------
Balance at June 29,
1997................... 82,800 1 449 (10,164) (9,195) (18,909)
Net loss for the
fifty-two week period
ended June 28, 1998.. -- -- -- -- (202) (202)
Redeemable preferred
stock accretion...... -- -- -- -- (792) (792)
------ ---- ---- -------- -------- --------
Balance at June 28,
1998................... 82,800 $ 1 $449 $(10,164) $(10,189) $(19,903)
====== ==== ==== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-136
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Fifty- For the Fifty- For the Fifty-
Two Week Two Week Two Week
Period Ended Period Ended Period Ended
June 30, 1996 June 29, 1997 June 28, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(1,361) $ (746) $ (202)
Adjustments to reconcile net loss
to net cash provided by (used
for) operating activities:
Depreciation..................... 1,854 1,940 1,604
Amortization of cost in excess of
fair value of net assets
acquired (goodwill)............. 870 871 871
Amortization of deferred loan
costs........................... 572 586 576
Amortization of original issue
discount........................ 29 29 29
Net gain on sales and disposals
of property, equipment and
inventory....................... (402) (550) (247)
Net (decrease) increase in
accrued straight-line minimum
rent receivable and payable..... 86 (29) (70)
Changes in assets and
liabilities:
Decrease (increase) in accounts
receivable.................... (550) (195) (340)
Decrease (increase) in
inventory..................... (140) 95 80
Decrease (increase) in prepaid
expenses...................... (100) (52) (18)
Decrease (increase) in current
deferred tax benefit.......... (50) (195) (480)
Decrease (increase) in other
receivables................... 165 56 --
Decrease (increase) in deferred
tax benefit................... (186) 348 934
Decrease (increase) in other
assets........................ (7) 11 1
Increase (decrease) in accounts
payable....................... (462) (456) 538
Increase (decrease) in sales
taxes payable................. 2 (25) (3)
Increase (decrease) in accrued
interest payable.............. -- (3) --
Increase (decrease) in accrued
expenses...................... (913) 172 (493)
Increase (decrease) in
deposits...................... (22) (66) 54
------- ------- -------
Net cash provided by (used
for) operating activities.... (615) 1,791 2,834
------- ------- -------
Cash flows from investing
activities:
Acquisitions of property and
equipment, including net
increase in construction in
progress, net of construction
deposits received from
franchisees..................... (1,913) (1,084) (1,263)
Proceeds from sales and disposals
of property and equipment....... 1,146 453 1,005
Proceeds from collection of notes
receivable...................... 448 474 947
------- ------- -------
Net cash provided by (used
for) investing activities.... (319) (157) 689
------- ------- -------
Cash flows from financing
activities:
Payments of deferred loan costs.. -- (27) --
Principal repayments under
capital lease obligations....... (15) (25) (26)
------- ------- -------
Net cash used for financing
activities................... (15) (52) (26)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents during
period........................... (949) 1,582 3,497
Cash and cash equivalents,
beginning of period.............. 4,252 3,303 4,885
------- ------- -------
Cash and cash equivalents, end of
period........................... $ 3,303 $ 4,885 $ 8,382
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-137
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
For the Fifty- For the Fifty- For the Fifty-
Two Week Two Week Two Week
Period Ended Period Ended Period Ended
June 30, 1996 June 29, 1997 June 28, 1998
-------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash paid for:
Interest......................... $5,617 $5,609 $5,606
State and federal income taxes... $ 119 $ 91 $ 286
</TABLE>
Cash paid for state and federal income taxes represents payments made to
government authorities during the periods presented.
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During the fifty-two weeks ended June 30, 1996, June 29, 1997 and June 28,
1998, the Company recorded accretion on mandatorily redeemable preferred stock
totaling $792,000, $793,000 and $793,000, respectively.
During the fifty-two weeks ended June 30, 1996, the Company exchanged
accounts receivable from unrelated franchisees totaling $156,000 for fixtures
and equipment and leasehold improvements representing retail cookie stores
previously licensed by franchisees.
During the fifty-two weeks ended June 30, 1996, notes receivable with face
amounts totaling $296,000 were received from unrelated franchisees in
connection with the sale of two Company-operated stores.
During the fifty-two weeks ended June 29, 1997, notes receivable with face
amounts totaling $1,353,000 were received from unrelated franchisees in
connection with the sale of eight Company-operated stores.
During the fifty-two weeks ended June 29, 1997, the Company exchanged
accounts receivable from unrelated franchisees totaling $91,000 for fixtures
and equipment and leasehold improvements representing retail cookie stores
previously licensed by the franchisees.
During the fifty-two weeks ended June 28, 1998, notes receivable with face
amounts totaling $217,000 were received from unrelated franchisees in
connection with the sale of five Company-operated stores.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-138
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Cookies USA, Inc. ("Cookies USA") was incorporated in December 1993 and was
formed by the Jordan Company to acquire 100% of the common stock of The
Original Great American Chocolate Chip Cookie Company, Inc. ("Great American
Cookies"). Great American Cookies is in the business of franchising cookie
stores and manufacturing cookie batter which is sold to Company-operated and
franchised retail stores. The financial statements include the consolidated
accounts of Cookies USA and Great American Cookies (the "Company").
On December 10, 1993, Cookies USA acquired Great American Cookies in several
transactions. Immediately following the acquisition, Great American Cookies
changed its name from The Original Great American Chocolate Chip Cookie
Company, Inc. to Great American Cookie Company, Inc. Due to the 22% interest
retained by the selling stockholders of Great American Cookies via their common
and convertible preferred stock interest in Cookies USA, the excess of purchase
price over predecessor basis as reflected in the stockholders' deficit section
of the accompanying consolidated balance sheets represents the limitation on
the write-up of the assets acquired.
The Company's business follows seasonal trends and 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
significantly dependent on the performance of those malls.
Consolidation
The consolidated financial statements include the accounts of Cookies USA and
its subsidiary, Great American Cookies. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Accounting Periods
During the fiscal year ended June 30, 1996, the Company changed its year end
from the last Thursday in the month of June to the last Sunday in the month of
June. As a result, three days were added to the fifty-two week period ended
Thursday, June 27, 1996 to effectively change the Company's fiscal year end to
Sunday, June 30, 1996. This change does not materially impact the comparability
of the years presented in these financial statements.
Use of Estimates in Financial Statements
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 the 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.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, accounts payable and accrued expenses approximate fair value at the
respective balance sheet dates due to the relatively short period to maturity
of these instruments. The long-term notes payable with fixed interest rates are
recorded at face values of $50.0 million at June 29, 1997 and June 28, 1998;
however, the fair values of such long-term notes, based on quoted market
values, are approximately $50.5 million and $51.4 million at June 29, 1997 and
June 28, 1998, respectively.
F-139
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenues from the Company-operated stores are recognized in the period the
related cookies and beverages are sold. Revenues from the sale of batter are
recognized at the time of shipment. Franchise royalties, which are based on a
percentage of franchised store sales, are recognized in the same period related
franchise store revenues are generated. Franchise license fee revenues are
recognized at the time that all Company obligations regarding the franchise
sale have been met. Fees received under development agreements which grant the
right to develop franchised units in future periods in specific geographic
areas are deferred and recognized as income on a pro rata basis as the
Company's obligations regarding the franchised units subject to the development
agreements are met.
Cash Equivalents
The Company considers all highly liquid, short-term investments with original
maturities of three months or less to be cash equivalents. Cash equivalents at
June 29, 1997 and June 28, 1998 consist of short-term commercial paper. These
investments are stated at cost, which approximates market.
Inventories
Inventories of cookie and brownie products, beverage products, paper and
supplies and smallwares are stated at the lower of cost or market with cost
determined based on the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are expensed in the year incurred, while renewals and betterments
that materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed, and the related accumulated depreciation,
are eliminated from the accounts, and any resulting gain or loss is recognized
in the statement of operations.
Depreciation is provided using straight-line and accelerated methods over the
estimated lives of the assets which are as follows:
<TABLE>
<S> <C>
Building................ 20 years
Furniture, fixtures and
equipment.............. 3-7 years
Building and leasehold
improvements........... Lesser of 8 years or the life of the related lease
</TABLE>
During fiscal year 1996, the Company revised its estimate of the useful life
of certain leasehold improvements. The Company began amortizing leasehold
improvements using accelerated methods over an average of eight years instead
of using the straight-line method over an average of ten years. The effect of
this change in estimate was to increase fiscal year 1996 pre-tax loss by
$214,000.
During fiscal year 1998, the Company revised its estimate of the useful life
of certain computer equipment from five to three years. The effect of this
change in estimate was to decrease fiscal 1998 pre-tax income by $111,000.
Store Opening and Closing Costs
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed in the year incurred. When a store is closed, the
store's unamortized investment in leasehold improvements and fixtures and
equipment is recorded as a loss on store closing.
F-140
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Loan Costs
Debt issue costs of approximately $4.0 million were incurred in connection
with the issuance of the 10.875% senior secured notes payable due 2001 (see
Note 7). Deferred loan costs are being amortized over the life of the related
notes (85 months), with annual charges to income of approximately $576,000.
Cost in Excess of Fair Value of Net Assets Acquired (Goodwill)
Cost in excess of fair value of net assets acquired (goodwill) is being
amortized over a forty-year period, with annual charges to income of
approximately $870,000.
The carrying value of goodwill is periodically evaluated for indications of
possible impairment. The review is based on comparing the carrying amount to
the undiscounted estimated cash flows from continuing operations over the
remaining amortization period.
Operating Leases
The Company has various operating lease commitments on both Company-operated
and franchised store locations and equipment. Operating leases with escalating
payment terms, including those subleased to franchisees, are recorded on a
straight-line basis over the life of the related lease.
Original Issue Discount
The Company has issued warrants to the holders of the senior secured notes.
The value of the warrants has been accounted for as an original issue discount
and is being amortized over the life of the related notes (85 months), with
annual charges to income of approximately $29,000.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Concurrent with the acquisition and its termination of the S Corporation
status (see Note 10), the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). In accordance
with the provisions of SFAS 109, deferred income taxes are determined based on
the estimated future tax effects of differences between the financial statement
and tax basis of assets and liabilities given the provisions of the enacted tax
laws.
Earnings Per Share
Earnings per share is not presented, as the Company is a non-public entity
that is closely held.
Reclassifications
Certain reclassifications have been made in the prior period consolidated
financial statements to conform with the current period presentation.
F-141
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
---------- ----------
<S> <C> <C>
Raw ingredients...................................... $ 237,000 $ 279,000
Batter, including retail stores...................... 368,000 254,000
Beverage syrup....................................... 56,000 43,000
Paper goods and packaging supplies................... 168,000 149,000
Purchased icing and decorative toppings held for
resale.............................................. 52,000 57,000
Equipment held for resale............................ 75,000 43,000
Marketing and miscellaneous supplies held for
resale.............................................. 336,000 387,000
---------- ----------
$1,292,000 $1,212,000
========== ==========
</TABLE>
3. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
---------- ----------
<S> <C> <C>
Rent................................................... $1,158,000 $1,178,000
Other.................................................. 69,000 67,000
---------- ----------
$1,227,000 $1,245,000
========== ==========
</TABLE>
4. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
---------- --------
<S> <C> <C>
Notes receivable....................................... $1,169,000 $440,000
Less current portion................................... (867,000) (88,000)
---------- --------
Notes receivable, net of current portion............... $ 302,000 $352,000
========== ========
</TABLE>
Notes receivable are due from various franchisees and principally result from
the sale of existing Company-operated stores to franchisees. Each note is
guaranteed by the purchaser and collateralized by the assets sold. Short-term
notes generally carry an interest rate of 15% per annum and are intended to
serve as interim financing until the franchisee can secure long-term financing
from a third-party lender. Notes classified as non-current are generally due in
monthly installments of principal and interest, with the interest rates ranging
from between 9% and 12.5% per annum. The total maturities of the notes
receivable are as follows:
<TABLE>
<S> <C>
Fiscal Year Ending June
1999................................................................. $ 88,000
2000................................................................. 140,000
2001................................................................. 94,000
2002................................................................. 41,000
2003................................................................. 8,000
Thereafter........................................................... 69,000
--------
$440,000
========
</TABLE>
F-142
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
----------- -----------
<S> <C> <C>
Land................................................ $ 240,000 $ 240,000
Building............................................ 761,000 761,000
Building and leasehold improvements................. 6,829,000 6,189,000
Furniture, fixtures and equipment................... 3,228,000 3,067,000
----------- -----------
11,058,000 10,257,000
Less accumulated depreciation....................... (4,754,000) (5,341,000)
----------- -----------
Property and equipment, net......................... $ 6,304,000 $ 4,916,000
=========== ===========
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<CAPTION>
June 29, June 28,
1997 1998
----------- -----------
<S> <C> <C>
Employee compensation including payroll taxes....... $ 379,000 $ 388,000
Bonuses payable..................................... 480,000 475,000
Construction expenses............................... 15,000 --
Professional fees................................... 293,000 88,000
Management fees..................................... 188,000 62,000
Other............................................... 213,000 62,000
----------- -----------
$ 1,568,000 $ 1,075,000
=========== ===========
7. LONG-TERM DEBT
Notes payable at June 29, 1997 and June 28, 1998 are described as follows:
<CAPTION>
June 29, June 28,
1997 1998
----------- -----------
<S> <C> <C>
10.875% senior secured notes payable due January
15, 2001, Series B. Interest accrues daily and is
payable semi-annually on January 15 and July 15.
(The notes are secured by certain tangible and
intangible assets, including, but not limited to,
the equipment constituting Great American
Cookies' batter production facility, the capital
stock of all current and future subsidiaries of
Great American Cookies, intellectual property
rights and other intangible assets of Great
American Cookies)................................ $40,000,000 $40,000,000
Original issue discount related to the issuance of
7,200 detachable warrants with the 10.875% senior
secured notes.................................... (98,000) (69,000)
12.5% subordinated unsecured note payable due
October 31, 2003 with initial annual prepayment
thereof due October 31, 2001. Interest accrues
daily and is payable semi-annually on April 30
and October 31................................... 10,000,000 10,000,000
----------- -----------
$49,902,000 $49,931,000
=========== ===========
</TABLE>
F-143
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $10 million of subordinated notes issued by Cookies USA have principal
payments due as follows: $2.5 million due October 31, 2001; $2.5 million due
October 31, 2002; and $5.0 million due October 31, 2003. As Great American
Cookies is the sole operating unit of the consolidated entity, Great American
Cookies is the sole source of any cash to be paid by Cookies USA as interest
and principal payment on such debt. Such payments will be made primarily via
dividends to Cookies USA. Such dividends are subject to certain covenants
provided for under the senior secured notes (see Note 11).
Great American Cookies is subject to certain covenants provided for under the
indenture including limitations on restricted payments, incurrence of
indebtedness and issuances of preferred stock, asset sales, granting of liens,
restrictions on subsidiary dividends, mergers, consolidations, sale of assets,
and on transactions with affiliates, various reporting requirements to the
holders of the senior secured notes and the Securities and Exchange Commission
and maintenance of a fixed charge coverage ratio. If a violation of a covenant
occurs, the holders of at least 25% in principal amount of the then outstanding
senior secured notes may declare all outstanding senior secured notes to be due
and payable immediately (see Note 11).
Upon the occurrence of a change of control as defined in the note agreements,
the Company will be required to (i) offer to repurchase all of the 10.875%
senior secured notes then outstanding at a purchase price equal to 101% of the
total principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase and (ii) repurchase the 12.5% subordinated notes at par plus
accrued and unpaid interest, if any, to the date of repurchase.
8. 401(K) PROFIT-SHARING PLAN
The Company provides a defined contribution profit-sharing plan (the "Plan")
for all employees meeting certain requirements. On February 14, 1997, the
Company amended the Plan to include a pre-tax savings provision in accordance
with Section 401(k) of the Internal Revenue Code.
Under the Plan, eligible employees may contribute as much as 15% of
compensation up to the federal statutory limit, with the Company matching 25%
of the first 6% of compensation contributed by the employee. The Company's
matching portion of the Plan contributions resulted in expense of $9,000 and
$39,000 in fiscal years 1997 and 1998, respectively. During fiscal year 1996,
no amounts were expensed for profit-sharing plan contributions.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has various operating lease commitments on both Company-operated
and franchised store locations. These leases generally contain escalating
rental payments and various provisions for contingent rental payments based on
sales volume. Future minimum lease payments, including scheduled escalating
rental payments, as of June 28, 1998 are as follows:
<TABLE>
<CAPTION>
Subleases to
Leases Franchises Net
----------- ------------ -----------
<S> <C> <C> <C>
Fiscal Year Ending June
1999.................................. $ 9,796,000 $ 7,071,000 $ 2,725,000
2000.................................. 8,797,000 6,369,000 2,428,000
2001.................................. 7,586,000 5,589,000 1,997,000
2002.................................. 6,540,000 4,747,000 1,793,000
2003.................................. 5,368,000 3,909,000 1,459,000
Thereafter............................ 9,737,000 7,331,000 2,406,000
----------- ----------- -----------
$47,824,000 $35,016,000 $12,808,000
=========== =========== ===========
</TABLE>
F-144
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating leases with escalating payment terms, including those subleased to
franchisees, are expensed on a straight-line basis over the life of the related
lease.
For the fifty-two week periods ended June 30, 1996, June 29, 1997 and June
28, 1998, gross rent expense (including mall pass-through charges) was
approximately $13,332,000, $14,135,000 and $13,593,000, respectively, while
sublease income (including mall pass-through charges) was approximately
$9,628,000, $10,533,000 and $10,571,000, respectively.
Capital Leases
The Company leases various office equipment under capital lease agreements
expiring on various dates through 2000. The Company's total future obligation
under these agreements, net of interest expense, is $62,000 as of June 29, 1997
and $36,000 as of June 28, 1998.
Lease Guarantees
In connection with the sale of existing Company-operated stores to
franchisees, the Company has guaranteed certain lease renewals to the
prospective franchisee. If such leases are not obtained, then predetermined
payments shall be made to the franchisees as follows:
<TABLE>
<CAPTION>
Number
of
Lease Amount of
Renewals Guarantee
-------- ---------
<S> <C> <C>
Fiscal Year of Lease Expiration
1999.................................................... 1 $ 75,000
2000.................................................... 1 24,000
2001.................................................... -- --
2002.................................................... 1 60,000
--- --------
$159,000
========
</TABLE>
As of June 28, 1998, the Company has not recorded any liability with respect
to these guarantees as these amounts represent loss contingencies which
management believes are not probable.
Purchase Commitments
The Company is committed to purchase certain raw materials from various
suppliers over the next year at fixed prices. As of June 28, 1998, such
purchase commitments totaled approximately $1,750,000.
Employment Agreements
On December 10, 1993, the Company entered into annual renewable employment
agreements with the founders of Great American Cookies ("Founders"), who are
also directors of the Company. Under these employment agreements, each Founder
receives a salary of $150,000 and a payment in connection with an agreement not
to compete of $100,000 per year. Additionally, whether employed or not, each
Founder is also entitled to receive an annual $100,000 bonus if Great American
Cookies advances funds to Cookies USA to permit Cookies USA to pay interest on
its subordinated notes. The Company's employment of the two Founders ended on
December 7, 1995 and December 9, 1996. Under the above agreements, the Company
made total payments to the Founders of $564,000, $285,000 and $200,000, during
the fifty-two week periods ended June 30, 1996, June 29, 1997 and June 28,
1998, respectively. As of June 30, 1996, June 29, 1997 and June 28, 1998,
$200,000 was due to the Founders and included in accrued liabilities in the
accompanying consolidated balance sheets.
F-145
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has entered into employment agreements with its Executive Vice
President of Development, Vice President of Operations and Director of
Production with terms of one to two years. The agreements are for an total
annual base salary of $355,000. The agreements have customary provisions for
benefits and noncompetition.
Incentive and Severance Agreements
In connection with the Company's negotiations (see Note 15) with Mrs. Fields'
Original Cookies, Inc. ("Mrs. Fields"), the Company has entered into agreements
with a number of employees incenting them to assist with the sale process and
to stay until the closing of such sale. In addition, the Company has informed
its home office employees of the severance payments to be paid to them in the
event their employment is terminated without cause subsequent to the closing of
the proposed sale. The total amount of these incentives and severance payments,
as well as any severance payments to employees with employment agreements, is
$1,623,000. These amounts are conditional upon the closing of the sale and no
amounts will be due or paid if a sale to Mrs. Fields does not occur.
Legal
On September 22, 1997, nine Great American Cookies franchisees filed a
lawsuit against Great American Cookies and certain other parties alleging
certain anticipatory breaches of contract and violations of certain state,
franchise and unfair trade practice laws. These allegations resulted from
discussions held be Cookies USA and Mrs. Fields regarding the possibility of
Mrs Fields acquiring all of the outstanding shares of Common Stock of Cookies
USA, Inc. As of August 14, 1998, a settlement has been reached whereby the
franchisees have been granted certain rights upon the sale of the Company to
Mrs. Fields for a period of three years. In exchange, Cookies USA has been
released from further legal action.
10. INCOME TAXES
Cookies USA and Great American Cookies file consolidated federal income tax
returns. The following information has been determined based upon the
provisions of SFAS 109 for the fifty-two week periods ended June 30, 1996, June
29, 1997 and June 28, 1998.
<TABLE>
<CAPTION>
Fifty-two Fifty-two Fifty-two
Week Period Week Period Week Period
Ended Ended Ended
June 30, 1996 June 29, 1997 June 28, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Income tax (benefit) provision:
Current:
Federal......................... -- -- --
State........................... $ 48,000 $107,000 $ 97,000
--------- -------- --------
48,000 107,000 97,000
Deferred:
Federal......................... (217,000) 131,000 386,000
State........................... (25,000) 23,000 68,000
--------- -------- --------
(242,000) 154,000 454,000
--------- -------- --------
Total (benefit) provision for
income taxes................. $(194,000) $261,000 $551,000
========= ======== ========
</TABLE>
F-146
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between income taxes at the statutory federal and state
income tax rates and the income tax expense reported in the statements of
operations for the fifty-two week periods ended June 30, 1996, June 29, 1997
and June 28, 1998 are as follows:
<TABLE>
<CAPTION>
Fifty-Two Fifty-Two Fifty-Two
Week Period Week Period Week Period
Ended Ended Ended
June 30, 1996 June 29, 1997 June 28, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory tax rate....... (34.0)% 34.0% 34.0%
State income taxes, net of
federal benefit................. (4.0)% 4.0% 4.0%
Goodwill amortization and other.. 25.5 % 15.8% 119.9%
----- ---- -----
(12.5)% 53.8% 157.9%
===== ==== =====
</TABLE>
Deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
June 29, June 28,
1997 1998
---------- ----------
<S> <C> <C>
Current:
NOL carryforward..................................... $ 350,000 $ 872,000
Other................................................ 42,000 --
---------- ----------
$ 392,000 $ 872,000
========== ==========
Non-current:
NOL carryforward..................................... $1,079,000 $ --
Depreciation......................................... 841,000 1,191,000
Other................................................ 452,000 247,000
---------- ----------
$2,372,000 $1,438,000
========== ==========
</TABLE>
As of June 28, 1998, the Company had net operating loss carryforwards for
income tax reporting purposes of approximately $2.2 million, which are
scheduled to expire in varying amounts in the years 2009 to 2011. The Company's
net operating loss carryforwards are limited under Section 382 of the Internal
Revenue Code regarding changes in ownership.
11. PREFERRED STOCK
In connection with Cookies USA's acquisition of Great American Cookies on
December 10, 1993, Cookies USA issued $2.5 million of Junior Class A Preferred
Stock and $750,000 of Junior Class B Preferred Stock. Additionally, Cookies USA
issued $10.5 million of Senior Preferred Stock to the Founders of Great
American Cookies in exchange for a portion of the stock of Great American
Cookies ($3.5 million) and the assets of other entities owned by the Founders
($7.0 million). As Great American Cookies is a wholly owned subsidiary of
Cookies USA and is the sole operating unit of the consolidated entity, Great
American Cookies is the sole source of any cash to be paid by Cookies USA as
dividends on such securities.
The 10,500 shares of $1.00 par Senior Preferred Stock issued by Cookies USA
on December 10, 1993 are 6% cumulative convertible shares. A share of the
Senior Preferred Stock is convertible at any time at the option of the holder
into 1.1308 shares of Cookies USA Common Stock. The holders of Senior Preferred
Stock are entitled to certain antidilution protections to maintain their
percentage of ownership in Cookies USA. Accumulated dividends on the Senior
Preferred Stock have priority over any dividends of "Junior Securities" (Junior
Class A and Class B Preferred and Common Stock), but are subordinate to any
debt payments of
F-147
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cookies USA or the Company. Such preferred shares may be redeemed at any time
for $1,000 per share plus accrued but unpaid dividends at the option of Cookies
USA; however, all such shares not previously converted or redeemed shall be
redeemed by payment in cash of $1,000 per share plus accrued but unpaid
dividends on November 30, 2003. As of June 28, 1998, Cookies USA has accrued
$2,869,000 for unpaid dividends due to the holders of the Senior Preferred
Stock.
The 2,500 shares of $1.00 par Junior Class A Preferred Stock and the 750
shares of $1.00 par Junior Class B Preferred Stock issued by Cookies USA are
entitled to receive, when legally available and when declared, dividends at the
rate of $50 per share per annum. Such shares may be redeemed by Cookies USA at
any time for $1,000 per share plus all dividends accrued and unpaid; however,
all such shares not previously redeemed shall be redeemed by payment of cash of
$1,000 per share plus all accrued and unpaid dividends on the first business
day of January 2004. The Junior Class A and B Preferred Stock have no
conversion, preemptive, voting or subscription rights. As of June 28, 1998,
Cookies USA has accrued $740,000 for unpaid dividends due to the holders of the
Junior Class A and B Preferred Stock.
Great American Cookies' debt covenants related to the senior secured notes
limit the ability of Great American Cookies to pay dividends. Under the debt
covenants, as outlined in the Indenture under which the Senior Secured Notes
were issued, Great American Cookies may pay dividends if:
(a) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof,
(b) immediately after the dividend and after giving effect to it on a pro
forma basis, the Company could incur at least $1.00 of additional
indebtedness under the provisions of the debt covenants, and
(c) such dividend, together with the total of all other "Restricted
Payments" (as defined in the Indenture) made by Great American Cookies and
its subsidiaries after the date of the Indenture, is less than the sum of
(x) 50% of the Adjusted Consolidated Net Income of Great American Cookies
for the period (taken as one accounting period) from the beginning of the
first quarter commencing immediately after the date of the Indenture to the
end of Great American Cookies' most recently ended first quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Adjusted Consolidated Net Income for such period is a
deficit, 100% of such deficit), plus (y) 100% of the total net cash
proceeds received by Great American Cookies from the issue or sale of
Equity Interest of Great American Cookies (other than Equity Interests sold
to a subsidiary of Great American Cookies and other than Disqualified
Stock) after the date of the Indenture and on or prior to the time of such
Restricted Payment, plus (z) 100% of the net cash proceeds received by
Great American Cookies from the issuance or sale, other than to a
subsidiary of Great American Cookies, of any convertible or exchangeable
debt security of Great American Cookies that has been converted or
exchanged into equity interests of Great American Cookies under the terms
thereof (other than Disqualified Stock) after the date of the Indenture and
on or prior to the time of such dividend. The foregoing limitations on
Restricted Payments do not prohibit, among other items, payments to Cookies
USA under the Tax Sharing Agreement, payments to Cookies USA to permit
payments of current interest then due on the Subordinated Debt or for any
other purpose provided that certain fixed coverage ratio tests have been
achieved, or making other Restricted Payments in the total amount not to
exceed $1.5 million.
12. STOCK OPTION AGREEMENTS, WARRANTS AND OTHER STOCKHOLDERS' AGREEMENT
As part of its acquisition of Great American Cookies, Cookies USA entered
into Non-Qualified Stock Option Agreements (the "Stock Option Agreements") with
the Founders. Under the Stock Option Agreements, each of the Founders is
granted an option to purchase 5,600 shares of common stock of Cookies USA at an
F-148
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise price of $2.23 per share, which expires on December 10, 2003. The
options will not be vested initially. The options will become vested at the
rate of 20% per year for each fiscal year in which certain operating cash flow
targets are achieved. Notwithstanding the foregoing, if Cookies USA's operating
cash flow targets are achieved on a cumulative basis in subsequent years, then
the options will be vested. As of June 28, 1998, none of the outstanding stock
options were vested.
If the employment with the Company of either of the Founders is terminated,
each Founder will have the right to require Cookies USA to repurchase all of
his shares of Common Stock, and all other securities of Cookies USA convertible
into, exchangeable for or entitling the holder to acquire its Common Stock, at
the appraised fair market value thereof. The purchase price will be paid with a
subordinated note that will bear interest at 8% per annum until the fifth
anniversary of the Stockholders' Agreement dated December 10, 1993 and at the
prime rate plus 2% thereafter. The note will be secured by the Common Stock
purchased by Cookies USA and will be payable in equal installments on each of
the sixth through the tenth anniversaries of the Stockholders' Agreement. As of
June 28, 1998, the employment of both of the Founders has been terminated and
such Founders have not requested Cookies USA to repurchase their shares. At
June 29, 1997 and June 28, 1998, the fair value of these options was de
minimis.
In connection with the issuance of the 10.875% senior secured notes payable
(see Note 7), the Company issued 7,200 warrants to purchase common stock at a
purchase price of $27.78 per warrant. The warrants expire on January 15, 2001
and have an exercise price of $0.01 per share subject to anti-dilution
protection. Additionally, the warrants have certain rights related to the
purchase of shares of common stock to a third party whereby the warrant holder
may require the purchaser to purchase a determined number of warrants at the
common stock purchase price less the exercise price per warrant. If the holders
of at least 75% of the common stock agree to sell their shares to a third
party, the warrants have certain obligations whereby the warrant holders may be
required to sell their warrants for a price equal to the purchase price of the
common stock less the exercise price per warrant.
13. COMPANY AND FRANCHISED STORES
As of June 30, 1996, June 29, 1997 and June 28, 1998 there were 115, 100 and
81 Company-operated outlets and 253, 263 and 279 franchised outlets in
operation, respectively.
During the fifty-two week period ended June 30, 1996, the Company earned
initial license fees of $275,000 from the sale of 11 new in-line stores to
franchisees. Additionally, the Company earned $21,000 from license transfer,
upgrade and other fees.
During the fifty-two week period ended June 29, 1997, the Company earned
initial license fees of $300,000 from the sale of 12 new in-line stores to
franchisees. Additionally, the Company earned $75,000 from license transfer,
upgrade and other fees.
During the fifty-two week period ended June 28, 1998, the Company earned
initial license fees of $125,000 from the sale of five new in-line stores to
franchisees. Additionally, the Company earned $13,000 from license transfer,
upgrade and other fees.
14. RELATED-PARTY TRANSACTIONS
The majority shareholders of the Common Stock of Cookies, USA, Inc. are
affiliated with the holders of the $10 million of Subordinated Notes issued by
Cookies USA. The holders of the Senior Preferred Stock of Cookies USA are also
holders of some of the Common Stock of Cookies USA. The holders of the Junior
Class A and B Preferred Stock of Cookies USA are also affiliated with the
majority of the holders of the Common Stock of Cookies USA (see Note 11).
F-149
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A franchisee who owns eight franchise outlets is related to one of the
Company's directors. During the fifty-two week periods ended June 30, 1996,
June 29, 1997 and June 28, 1998, the Company had sales of batter and supplies
of approximately $497,000, $476,000 and $419,000, respectively, to this related
party. The Company also received royalty revenues of approximately $202,000,
$199,000 and $186,000 for the fifty-two week periods ended June 30, 1996, June
29, 1997 and June 28, 1998, respectively, from this franchisee. As of June 30,
1996, June 29, 1997 and June 28, 1998, this franchisee owed the Company
approximately $91,000, $34,000 and $47,000, respectively.
During the fifty-two week periods ended June 30, 1996, June 29, 1997 and June
28, 1998, the Company expensed $250,000 for management services provided by TJC
Management Corp. ("TJC"), an affiliate of the majority shareholder of Cookies
USA. Under the agreement with TJC, these fees are not to exceed $300,000 per
year. Amounts due to TJC as of June 30, 1996, June 29, 1997 and June 28, 1998
were $375,000, $188,000 and $63,000, respectively, and are included in accrued
liabilities in the accompanying consolidated balance sheets.
15. SUBSEQUENT EVENTS
On August 24, 1998, Mrs. Fields, acquired 100% of the common stock,
redeemable preferred stock and subordinated indebtedness of Cookies USA, Inc.,
for an total purchase price of approximately $18.4 million, under a Securities
Purchase Agreement (the "Purchase Agreement"), dated as of August 13, 1998
among Mrs. Fields, Cookies USA, and the individuals and entities identified as
sellers therein. In addition, Mrs Fields assumed all principal and accrued
interest on the senior secured notes totaling approximately $42.4 million. Per
the terms of the Purchase Agreement, the Stock Option Agreements and all other
options and warrants, as discussed in Note 12, were cancelled. Mrs Fields also
purchased eight stored from a related party franchise, as disclosed in Note 14,
for a total purchase price of $1.75 million on September 9, 1998. The franchise
was also a holder of Cookies USA securities and a party to the Purchase
Agreement.
The foregoing summary should be read in conjunction with and is qualified by
reference to the Purchase Agreement, the stock purchase agreements between Mrs.
Fields and the holders of the capital stock of Deblan and Chocolate Chip, the
merger agreements between each of Deblan and Chocolate Chip, the Indenture, the
First Supplemental Indenture, dated as of August 24, 1998, among Mrs. Fields,
The Mrs. Fields Brand, Inc., and The Bank of New York, as trustee, the Second
Supplemental Indenture, dated as of August 24, 1998, among Mrs. Fields, The
Mrs. Fields Brand, Inc., and The Bank of New York, as trustee, and the Credit
Agreement, which are described as exhibits hereto.
The foregoing summary should be read in conjunction with and is qualified by
reference to the Purchase Agreement, to the stock purchase agreements between
Mrs. Fields and the holders of the capital stock of Deblan and Chocolate Chip,
and to the merger agreements between each of Deblan and Chocolate Chip and the
Company, which are described as exhibits to this report.
In connection with the contemplated acquisition of Cookies USA, the Company
commenced a tender offer on August 17, 1998 for all of the outstanding $40.0
million in total principal amount of Great American's 10 7/8% Senior Secured
Notes due 2001 (the "Notes"). On August 24, 1998, the Company purchased
approximately $33.5 million of the Notes that had been tendered through August
20, 1998 and an additional $5.4 million of the Notes that had been tendered
through August 21, 1998. All remaining Notes outstanding were tendered as of
the expiration of the tender offer at Midnight on September 14, 1998, and Mrs.
Fields accepted and paid for the approximately $1.1 million of remaining Notes
on September 16, 1998.
F-150
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Deblan Corporation
Houston, Texas
We have audited the accompanying Balance Sheets of Deblan Corporation as of
December 31, 1996 and 1997 and the related Statements of Earnings,
Shareholders' Equity and Cash Flows for the years ended December 31, 1995, 1996
and 1997. 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 audits 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 Deblan Corporation as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1995, 1996 and 1997, in conformity with
generally accepted accounting principles.
Weinstein Spira & Company, P.C.
Houston, Texas
August 17, 1998
F-151
<PAGE>
DEBLAN CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1996 1997 1998
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 399 $ 689 $ 702
Temporary investment.............................. 50 50 50
Accounts receivable:
Employees....................................... 12 10 12
Other........................................... 12 18 11
Inventory......................................... 161 145 180
Prepaid expenses.................................. 4 2 17
------ ------ ------
Total Current Assets.......................... 638 914 972
------ ------ ------
Property and Equipment:
Machinery and equipment........................... 1,173 1,269 1,339
Furniture and fixtures............................ 62 75 81
Leasehold improvements............................ 1,531 1,721 1,721
Transportation equipment.......................... 21 80 55
------ ------ ------
2,787 3,145 3,196
Less: Accumulated depreciation and amortization... 1,319 1,417 1,520
------ ------ ------
Net Property and Equipment...................... 1,468 1,728 1,676
------ ------ ------
Deferred Federal Income Tax Asset................... 3 2 14
------ ------ ------
Goodwill, net of accumulated amortization of $7, $8
and $8, respectively............................... 13 12 12
------ ------ ------
Intangibles, net of accumulated amortization of
$317, $325 and $347, respectively.................. 275 285 263
------ ------ ------
Other Assets........................................ 185 181 181
------ ------ ------
$2,582 $3,122 $3,118
====== ====== ======
</TABLE>
See notes to financial statements.
F-152
<PAGE>
DEBLAN CORPORATION
BALANCE SHEETS--(Continued)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1996 1997 1998
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES
Current Liabilities:
Current portion of long-term debt................. $ 278 $ 291 $ 244
Accounts payable.................................. 212 232 335
Accrued expenses.................................. 191 230 108
Accrued payroll................................... 143 190 137
Federal income tax payable........................ 95 44 44
------ ------ ------
Total Current Liabilities..................... 919 987 868
Long-Term Debt, net of current portion.............. 299 479 362
------ ------ ------
1,218 1,466 1,230
------ ------ ------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common Stock--$.10 par, 110,000 shares authorized,
97,800 shares issued and outstanding............... 10 10 10
Additional Paid-In Capital.......................... 104 104 104
Retained Earnings................................... 1,250 1,542 1,774
------ ------ ------
Total Shareholders' Equity.......................... 1,364 1,656 1,888
------ ------ ------
$2,582 $3,122 $3,118
====== ====== ======
</TABLE>
See notes to financial statements
F-153
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF EARNINGS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Six
For the Year Ended Months Ended
December 31, June 30,
---------------------- --------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Store Sales.......................... $8,512 $8,572 $9,503 $4,342 $4,768
------ ------ ------ ------ ------
Operating Costs and Expenses
Selling and store occupancy costs.... 5,465 5,400 5,744 2,570 2,666
Food cost of sales................... 1,518 1,519 1,675 773 831
General and administrative........... 971 1,061 1,169 672 779
Depreciation and amortization........ 266 237 255 138 142
------ ------ ------ ------ ------
Total operating costs and
expenses.......................... 8,220 8,217 8,843 4,153 4,418
------ ------ ------ ------ ------
Earnings From Operations............... 292 355 660 189 350
------ ------ ------ ------ ------
Other Income (Expense)
Interest income...................... 14 19 26 10 17
Gain (loss) on disposition of
property and equipment.............. (124) 32 (147) -- (4)
Interest expense..................... (109) (79) (73) (32) (34)
Other................................ 21 13 21 22 18
------ ------ ------ ------ ------
(198) (15) (173) -- (3)
------ ------ ------ ------ ------
Earnings Before Income Tax............. 94 340 487 189 347
------ ------ ------ ------ ------
Federal and State Income Tax (Recovery)
Current.............................. 52 145 194 82 127
Deferred............................. (9) (9) 1 (10) (12)
------ ------ ------ ------ ------
43 136 195 72 115
------ ------ ------ ------ ------
Net Earnings........................... $ 51 $ 204 $ 292 $ 117 $ 232
====== ====== ====== ====== ======
</TABLE>
See notes to financial statements.
F-154
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1996, 1997 and
For the Six Months Ended June 30, 1998 (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1994............ 97,800 $10 $104 $ 995 $1,109
Net Earnings........................ -- -- -- 51 51
------ --- ---- ------ ------
Balance--December 31, 1995............ 97,800 10 104 1,046 1,160
Net Earnings........................ -- -- -- 204 204
------ --- ---- ------ ------
Balance--December 31, 1996............ 97,800 10 104 1,250 1,364
Net Earnings........................ -- -- -- 292 292
------ --- ---- ------ ------
Balance--December 31, 1997............ 97,800 10 104 1,542 1,656
Net Earnings (unaudited)............ -- -- -- 232 232
------ --- ---- ------ ------
Balance--June 30, 1998 (unaudited).... 97,800 $10 $104 $1,774 $1,888
====== === ==== ====== ======
</TABLE>
See notes to financial statements.
F-155
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Six
For the Year Ended Months Ended
December 31, June 30,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Cash received from customers and
employees...................... $ 8,506 $ 8,563 $ 9,500 $ 4,348 $ 4,773
Cash paid to vendors and
employees...................... (7,777) (8,146) (8,442) (4,082) (4,389)
Interest paid................... (109) (79) (73) (32) (34)
Income tax paid................. (100) (9) (245) (165) (127)
Interest received............... 14 19 26 10 17
Other income received........... 21 13 21 22 18
------- ------- ------- ------- -------
Net Cash Provided by Operating
Activities................... 555 361 787 101 258
------- ------- ------- ------- -------
Cash Flows From Investing
Activities:
Purchase of property and
equipment...................... (282) (203) (685) (348) (78)
Purchase of license agreement... -- (59) (75) (50) --
Payment of store start-up
costs.......................... (5) (13) (36) (21) --
Purchase of additional cash
value of life insurance........ (18) (13) (19) (9) (9)
Proceeds from sale of property
and equipment.................. -- 226 125 -- 6
------- ------- ------- ------- -------
Net Cash Used in Investing
Activities................... (305) (62) (690) (428) (81)
------- ------- ------- ------- -------
Cash Flows From Financing
Activities:
Proceeds from long-term
financing...................... 228 -- 482 284 --
Payment of debt................. (323) (306) (289) (147) (164)
------- ------- ------- ------- -------
Net Cash Provided by (Used in)
Financing Activities......... (95) (306) 193 137 (164)
------- ------- ------- ------- -------
Net Increase (Decrease) in Cash
and Cash Equivalents............. 155 (7) 290 (190) 13
Cash and Cash Equivalents--
Beginning of Period.............. 251 406 399 399 689
------- ------- ------- ------- -------
Cash and Cash Equivalents--End of
Period........................... $ 406 $ 399 $ 689 $ 209 $ 702
======= ======= ======= ======= =======
</TABLE>
See notes to Financial statements.
F-156
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Year For the Six
Ended December Months Ended
31, June 30,
----------------- -------------
1995 1996 1997 1997 1998
---- ----- ---- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings............................... $ 51 $ 204 $292 $ 117 $ 232
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization............ 266 237 255 138 142
(Gain) Loss on disposition of property
and equipment........................... 124 (32) 147 -- 4
Deferred taxes (recovery)................ (9) (9) 1 (10) (12)
(Increase) Decrease in:
Accounts receivable.................... (5) (9) (4) 6 5
Inventory.............................. 25 (16) 16 (16) (35)
Prepaid expenses....................... (2) 5 2 (11) (15)
Prepaid federal income tax............. (41) 41 -- -- --
Deposits............................... 4 9 23 7 9
Accounts payable....................... 66 (109) 20 37 103
Accrued expenses....................... 84 (55) 86 (82) (175)
Federal income tax payable............. (8) 95 (51) (85) --
---- ----- ---- ----- ------
Net Cash Provided by Operating
Activities.......................... $555 $ 361 $787 $ 101 $ 258
==== ===== ==== ===== ======
</TABLE>
See notes to financial statements.
F-157
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information at June 30, 1998 and for the Six Months
Ended June 30, 1997 and June 30, 1998 is Unaudited)
1. ACCOUNTING POLICIES
Doing business as The Great American Chocolate Chip Cookie Company, the
Company operated twenty-three franchise locations at December 31, 1995, 1996
and 1997 and June 30, 1998, in various Texas, Louisiana, Colorado and Florida
shopping malls. The Company maintains its accounts on the accrual method of
accounting in accordance with generally accepted accounting principles.
Accounting principles followed by the Company and the methods of applying those
principles which materially affect the determination of financial position,
results of operations and cash flows are summarized below:
Revenue Recognition
Revenue is recognized at the time sales are made.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. At all balance sheet dates, the
Company had deposits in excess of federally insured limits.
Inventory
Inventory consists of packaging materials, beverages and baking ingredients
for use in the ordinary course of business. All inventory is valued at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line and accelerated methods over the following estimated useful
lives:
<TABLE>
<S> <C>
Machinery and equipment.......... 5-7 years
Furniture and fixtures........... 5-7 years
Leasehold improvements........... 10-20 years
Transportation equipment......... 5 years
</TABLE>
Temporary Investment
Temporary investment includes certificates of deposit with an original
maturity of greater than three months.
Federal and State Income Tax
Federal and state income tax is provided at current prevailing rates.
The Company records deferred tax liabilities and assets for the anticipated
future tax effects of temporary differences that arise as a result of
differences in the carrying amounts and tax bases of assets and liabilities.
Licenses
Fees paid in connection with obtaining operating licenses are amortized over
the life of the license, ranging from 60 months to 360 months.
F-158
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1998 and for the Six Months
Ended June 30, 1997 and June 30, 1998 is Unaudited)
Intangibles
Intangibles consist of organization and store start-up costs which are
amortized over a 60-month period, and store license fees which are amortized
over periods ranging from 60 months to 360 months. In April 1998, the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5 which requires store start-up expenses to be expensed as incurred. This
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998.
Goodwill
Goodwill represents the excess of cost over book value of assets acquired.
The Company amortizes goodwill using the straight-line method over twenty
years.
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.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited interim financial statements for
the six months ended June 30, 1997 and 1998, presented in this prospectus,
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position,
results of operations, shareholders' equity and cash flows for the interim
period. The results of operations and cash flows for the six months ended June
30, 1997 and 1998 are not necessarily indicative of the results which would be
expected for a full year.
Long-Lived Assets
The Company assesses and measures for impairment of all 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.
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 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 December 31, 1996, December 31, 1997 and June
30, 1998, the Company does not consider any of its long-lived assets to be
impaired.
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 Pronouncements
The Company has not yet adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income." The Statement will be effective for
the fiscal year 1998. It establishes standards for reporting and displaying of
comprehensive income and its components (revenues, expenses, gains, and losses)
F-159
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1998 and for the Six Months
Ended June 30, 1997 and June 30, 1998 is Unaudited)
in a full set of general-purpose financial statements. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required.
The Company has not yet adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information."
The Statement will be effective for the fiscal year 1998. It establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. In the initial year of application,
comparative information for earlier years is to be restated.
The Company believes that adoption of these Statements will not have a
material impact on its financial condition, results of operations or cash
flows.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform with the presentation as of June 30, 1998.
2. INTANGIBLES
Intangibles consist of the following (in thousands):
<TABLE>
<CAPTION>
December
31,
--------- June 30,
1996 1997 1998
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
License fees (net of accumulated amortization of $263,
$270 and $285, respectively)............................ $243 $237 $222
Organization and store start-up costs (net of accumulated
amortization of $54, $55 and $62, respectively)......... 32 48 41
---- ---- ----
$275 $285 $263
==== ==== ====
3. OTHER ASSETS
Other assets consist of the following (in thousands):
<CAPTION>
December
31,
--------- June 30,
1996 1997 1998
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Cash value of officer's life insurance................... $ 82 $101 $110
Deposits................................................. 103 80 71
---- ---- ----
$185 $181 $181
==== ==== ====
</TABLE>
F-160
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1998 and for the Six Months
Ended June 30, 1997 and June 30, 1998 is Unaudited)
4. FEDERAL INCOME TAXES
Differences between the effective tax rate and the statutory federal tax rate
are as follows (in thousands):
<TABLE>
<CAPTION>
For the Six
For the Year Months
Ended Ended June
December 31, 30,
---------------- --------------
1995 1996 1997 1997 1998
---- ---- ---- ----- ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax expense at the
statutory rate........................... $32 $116 $166 $ 64 $ 118
Increase (Decrease) in:
State income taxes, net of income tax
benefit.................................. 6 4 5 2 1
Officer's life insurance and other
nondeductible expenses................... 17 20 23 7 4
Surtax exemption.......................... (12)
Other..................................... -- (4) 1 (1) (8)
--- ---- ---- ----- ------
$43 $136 $195 $ 72 $ 115
=== ==== ==== ===== ======
</TABLE>
The net deferred federal income tax asset results from differences in
depreciation between tax reporting and financial statement reporting, as
follows (in thousands):
<TABLE>
<CAPTION>
December
31,
--------- June 30,
1996 1997 1998
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Accumulated depreciation.............................. $ 3 $ 2 $ 14
==== ==== ====
5. NOTES PAYABLE
Notes payable are as follows (in thousands):
<CAPTION>
December
31,
--------- June 30,
1996 1997 1998
---- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Notes payable--bank, bearing interest at bank prime
plus 1%, secured by certificate of deposit,
equipment, leasehold improvements, assignment of life
insurance, common stock and guaranty of majority
shareholder, due in total monthly installments of
$6.6, including interest, maturing in 1998........... $ 98 $ 27 $--
Notes payable--bank, bearing interest at bank prime
plus .5%, secured by certificate of deposit,
equipment, leasehold improvements, assignment of life
insurance, common stock and guaranty of majority
shareholder, due in total monthly installments of
$26.5, including interest, maturing in various years
through 2002......................................... 465 686 561
Notes payable--bearing interest at 8.5% to 8.6%,
secured by transportation equipment, due in total
monthly installments of $1.8, including interest,
maturing in various years through 2002............... 14 57 45
---- ---- ----
577 770 606
Less: Current maturities.............................. 278 291 244
---- ---- ----
$299 $479 $362
==== ==== ====
</TABLE>
F-161
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1998 and for the Six Months
Ended June 30, 1997 and June 30, 1998 is Unaudited)
The following is a schedule of future minimum principal payments on debt (in
thousands):
<TABLE>
<CAPTION>
For the Year Ending December 31, Amount
-------------------------------- ------
<S> <C>
1998.................................................................. $291
1999.................................................................. 210
2000.................................................................. 113
2001.................................................................. 124
2002.................................................................. 32
----
$770
====
</TABLE>
In connection with the notes payable-bank, the Company has entered into a
loan agreement which contains certain restrictive covenants, including
maintenance of certain financial ratios, and limitations on borrowings, capital
expenditures, loans, sale of assets, dividend payments and executive
compensation. At December 31, 1996, December 31, 1997 and June 30, 1998, the
Company was in compliance with the covenants or had obtained waivers for those
covenants for the succeeding 12 months for which it was not in compliance.
6. OPERATING LEASES
The Company leases facilities at various locations from unrelated third
parties. The facility leases expire in years ranging from 1998 through 2005.
Rent expense is composed of the following items (in thousands):
<TABLE>
<CAPTION>
For the Six
Months
For the Year Ended Ended June
December 31, 30,
-------------------- -----------
1995 1996 1997 1997 1998
------ ------ ------ ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Facilities.................................. $ 997 $ 908 $ 953 $ 478 $ 478
Equipment................................... 20 18 8 5 2
Contingent rents............................ 78 101 162 54 54
------ ------ ------ ----- -----
$1,095 $1,027 $1,123 $ 537 $ 534
====== ====== ====== ===== =====
</TABLE>
The following is a schedule of future minimum rental payments (in thousands):
<TABLE>
<CAPTION>
For the Year Ending December 31, Facilities Equipment Total
-------------------------------- ---------- --------- ------
<S> <C> <C> <C>
1998............................................ $ 805 $ 2 $ 807
1999............................................ 726 -- 726
2000............................................ 624 -- 624
2001............................................ 529 -- 529
2002............................................ 477 -- 477
Thereafter...................................... 1,305 -- 1,305
------ --- ------
$4,466 $ 2 $4,468
====== === ======
</TABLE>
F-162
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at June 30, 1998 and for the Six Months
Ended June 30, 1997 and June 30, 1998 is Unaudited)
7. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code for all eligible employees. All eligible employees are permitted
to defer compensation up to the maximum percentage of annual compensation
allowed by the Internal Revenue Code. The plan provides for a matching 50%
contribution and a discretionary contribution by the Company. The Company
provided contributions of $40,560, $49,974 and $77,877 for the years ended
December 31, 1995, 1996 and 1997, and $14,470 and $25,211 for the six months
ended June 30, 1997 and 1998, respectively.
8. COMMITMENTS
The Company is required to pay its franchisor seven percent of revenues as a
franchise fee.
9. CORPORATE REGISTRATION
In a corporate reorganization in February, 1997, the par value of the common
stock was changed from $1.00 to $.10, followed by a 150-to-1 stock split which
increased the number of issued shares to 97,800. Additionally, the number of
shares authorized was increased to 110,000. The financial statements presented
have been restated to reflect the stock split. Common stock was increased
$3,000, and retained earnings were reduced $3,000.
10. REDEMPTION AGREEMENT
The shareholders of the Company entered into a stock redemption agreement
with the Company in March, 1997. The following is a brief overview of the
general terms:
Upon the death of the majority shareholder, the Company is obligated to
purchase his stock (87,300 shares at December 31, 1997). The price per share
shall be the greater of the proceeds from the redemption of life insurance or
the value of the stock as stipulated by the shareholders, annually. The initial
value stipulated in March, 1997 was $22.75 per share. The Company owns and is
beneficiary of life insurance in the amount of $1,500,000 on the life of the
majority shareholder, the proceeds of which may be used toward this redemption.
Upon the death of the other shareholders, the Company is obligated to
purchase the stock at the above described stipulated value.
11. SUBSEQUENT EVENT
Subsequent to year end, the shareholders of the Company agreed to sell their
shares to Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields") subject to
certain events, including Mrs. Fields obtaining financing through a private
placement of debt securities.
F-163
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chocolate Chip Cookies of Texas, Inc.:
We have audited the accompanying balance sheets of Chocolate Chip Cookies of
Texas, Inc. (a Texas corporation) as of September 30, 1996 and 1997, and the
related statements of operations, stockholders' equity and cash flows for the
years ended September 30, 1995, 1996 and 1997. 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 Chocolate Chip Cookies of
Texas, Inc. as of September 30, 1996 and 1997, and the results of its
operations and its cash flows for the years ended September 30, 1995, 1996 and
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Salt Lake City, Utah
July 22, 1998
F-164
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1996 1997 1998
------------- ------------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash................................. $ 161 $ 66 $ 173
Accounts receivable.................. -- -- 2
Inventories.......................... 21 22 34
Prepaid assets....................... 4 1 20
----- ----- -----
Total current assets............... 186 89 229
----- ----- -----
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements............... 353 494 496
Equipment and fixtures............... 150 168 168
Vehicles............................. 26 26 26
----- ----- -----
529 688 690
Less accumulated depreciation and
amortization........................ (377) (408) (435)
----- ----- -----
Net property and equipment......... 152 280 255
----- ----- -----
OTHER ASSETS:
Deposits............................. -- -- 13
Intangibles, net of accumulated
amortization of $216, $245 and $257,
respectively........................ 47 43 31
----- ----- -----
Total other assets................. 47 43 44
----- ----- -----
DEFERRED TAX ASSET..................... 2 3 1
----- ----- -----
Total assets....................... $ 387 $ 415 $ 529
===== ===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-165
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
BALANCE SHEETS--(Continued)
(In Thousands, Except Share and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1996 1997 1998
------------- ------------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt.... $ 31 $ 33 $ --
Accounts payable..................... 73 73 50
Accrued salaries..................... 33 43 94
Accrued liabilities.................. 18 45 50
Deferred rent expense................ 22 31 34
Income taxes payable................. 12 15 57
----- ----- -----
Total current liabilities.......... 189 240 285
LONG-TERM DEBT, net of current
portion............................... 81 47 --
----- ----- -----
Total liabilities.................. 270 287 285
----- ----- -----
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 1,000,000
shares authorized and 250 shares
outstanding......................... -- -- --
Treasury stock, 750 shares at cost... (216) (216) (216)
Retained earnings.................... 333 344 460
----- ----- -----
Total stockholder's equity........... 117 128 244
----- ----- -----
Total liabilities and stockholders'
equity............................ $ 387 $ 415 $ 529
===== ===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-166
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended Year Ended Year Ended Ended Ended
September 30, September 30, September 30, June 30, June 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET STORE SALES......... $2,168 $2,321 $2,650 $1,962 $2,266
------ ------ ------ ------ ------
OPERATING COSTS:
Selling and store
occupancy costs...... 1,197 1,234 1,373 1,005 1,101
Food cost of sales.... 504 603 634 472 531
General and
administrative....... 352 363 565 424 429
Depreciation and
amortization......... 48 49 60 41 39
------ ------ ------ ------ ------
Total operating
costs and
expenses........... 2,101 2,249 2,632 1,942 2,100
------ ------ ------ ------ ------
Income from
operations......... 67 72 18 20 166
------ ------ ------ ------ ------
OTHER INCOME/(EXPENSE):
Interest expense...... (21) (11) (8) (6) (4)
Interest income....... 4 3 6 4 4
------ ------ ------ ------ ------
Income before
provision for
income taxes....... 50 64 16 18 166
PROVISION FOR INCOME
TAXES.................. 12 12 5 6 50
------ ------ ------ ------ ------
NET INCOME.............. $ 38 $ 52 $ 11 $ 12 $ 116
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-167
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Treasury
Common Stock Stock
------------- ------------- Retained
Shares Amount Shares Amount Earnings Total
------ ------ ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994....... 250 $-- 750 $(216) $243 $ 27
Net income...................... -- -- -- -- 38 38
--- ---- --- ----- ---- ----
BALANCE, SEPTEMBER 30, 1995....... 250 -- 750 (216) 281 65
Net income...................... -- -- -- -- 52 52
--- ---- --- ----- ---- ----
BALANCE, SEPTEMBER 30, 1996....... 250 -- 750 (216) 333 117
Net income...................... -- -- -- -- 11 11
--- ---- --- ----- ---- ----
BALANCE, SEPTEMBER 30, 1997....... 250 -- 750 (216) 344 128
Net income (unaudited).......... -- -- -- -- 116 116
--- ---- --- ----- ---- ----
BALANCE, JUNE 30, 1998 (unau-
dited)........................... 250 $-- 750 $(216) $460 $244
=== ==== === ===== ==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-168
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended Year Ended Year Ended Ended Ended
September 30, September 30, September 30, June 30, June 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 38 $ 52 $ 11 $ 12 $116
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 48 49 60 41 39
Changes in assets and
liabilities:
Accounts receivable.. -- -- -- -- (2)
Inventories.......... (11) 9 (1) (13) (12)
Prepaid assets....... (7) 3 3 4 (19)
Deposits............. -- -- -- -- (13)
Deferred tax asset... (1) 1 (1) (2) 2
Accounts payable..... -- (10) -- 4 (23)
Income taxes
payable............. (20) 7 3 4 42
Accrued liabilities,
salaries and
deferred rent
expense............. 28 4 46 121 59
----- ---- ----- ---- ----
Net cash provided by
operating
Activities......... 75 115 121 171 189
----- ---- ----- ---- ----
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition of property
and equipment......... (143) (10) (159) (69) (2)
Amounts paid for non-
compete agreements.... (63) -- -- -- --
Amounts paid for
franchise agreements.. (25) -- (25) (26) --
----- ---- ----- ---- ----
Net cash used in
investing
activities......... (231) (10) (184) (95) (2)
----- ---- ----- ---- ----
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of debt............... 160 -- -- -- --
Principal payments on
debt.................. (21) (27) (32) (24) (80)
----- ---- ----- ---- ----
Net cash provided by
(used in) financing
activities......... 139 (27) (32) (24) (80)
----- ---- ----- ---- ----
NET (DECREASE) INCREASE
IN CASH................ (17) 78 (95) 52 107
CASH, beginning of
period................. 100 83 161 161 66
----- ---- ----- ---- ----
CASH, end of period..... $ 83 $161 $ 66 $213 $173
===== ==== ===== ==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-169
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF CASH FLOWS--(Continued)
(In Thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $21, $11, $8, $6 (unaudited) and $4
(unaudited) for the years ended September 30, 1995, 1996 and 1997 and for the
nine months ended June 30, 1997 and 1998, respectively.
Cash paid for income taxes was approximately $17, $2, $1, $1 (unaudited) and
$1 (unaudited) for the years ended September 30, 1995, 1996 and 1997 and for
the nine months ended June 30, 1997 and 1998, respectively.
The accompanying notes to financial statements are an integral part of these
statements.
F-170
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Notes to Unaudited Periods)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Chocolate Chip Cookies of Texas, Inc. (the "Company"), a Texas corporation,
was incorporated in 1981. The Company operates retail stores which sell freshly
baked cookies and other food products. The Company's stores are franchised from
Great American Cookie Company, Inc. ("GACC"). As of June 30, 1998, the Company
owned and operated six stores, of which five are located in Texas and one in
Louisiana.
The Company's business follows seasonal trends and is also affected by
climate and weather conditions. The Company experiences its highest revenues in
the first fiscal quarter. Because the Company's stores are all located in
shopping malls, the Company's sales performance is significantly dependent on
the performance of those malls. As a franchisee of GACC, substantially all of
the Company's sales are derived from products purchased from GACC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 disclosures 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 may differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
payable and debt instruments. The carrying value of those instruments reported
in the balance sheets are considered to estimate their respective fair values
due to the short-term nature of such instruments and the current interest rate
environment.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the FIFO (first-in, first-out) method (see Note 3).
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the useful life of the improvement or the remaining term of the
applicable lease. The depreciable lives of equipment, fixtures and vehicles
range from five to ten years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the
useful lives of existing equipment are capitalized and depreciated. On
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
Intangibles
Intangibles primarily consist of franchise fees paid to GACC and amounts paid
for non-compete agreements between the Company and various other parties.
Intangibles are being amortized on a straight-line
F-171
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
basis over the lives of the agreements, which are generally ten years for
franchise agreements and three years for non-compete agreements.
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.
Revenue Recognition
Revenues generated from the Company's stores are recognized at the point of
sale.
Sources of Supply
The Company currently buys a significant amount of its food products and
supplies from GACC and an unrelated supplier. In accordance with the franchise
agreement, the Company must buy its food products from GACC (see Note 6).
Management believes that the Company could obtain its supplies from numerous
other suppliers at comparable prices and terms.
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.
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 or group of assets over the remaining life in
measuring whether 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 June 30, 1998, the Company does not consider any of its
long-lived assets to be impaired.
Recent Accounting Pronouncements
During the nine months ended June 30, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
130, "Comprehensive Income", SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company does not expect
that these statements will have a significant impact on its financial
statements.
Interim Financial Statements
The financial statements as of and for the nine months ended June 30, 1998,
and for the nine months ended June 30, 1997, are unaudited. In the opinion of
management, these 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. These interim
financial statements are not necessarily indicative of the results that may be
achieved for the full fiscal year.
F-172
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
3. INVENTORIES
The Company's inventories consist of the following as of September 30, 1996
and 1997 and June 30, 1998:
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1996 1997 1998
------------- ------------- -----------
(Unaudited)
<S> <C> <C> <C>
Food................................. $12,000 $13,000 $23,000
Beverages............................ 3,000 3,000 4,000
Supplies............................. 6,000 6,000 7,000
------- ------- -------
$21,000 $22,000 $34,000
======= ======= =======
</TABLE>
4. LONG-TERM DEBT
As of September 30, 1996 and September 30, 1997, long-term debt consisted of
a promissory note payable to Wells Fargo Bank secured by the property and
equipment of the Company. The note was originally issued by the Company on
October 17, 1994 with a variable interest rate equal to the prime rate. As of
September 30, 1997 the interest rate on the note was 8.50%. During April 1998,
the note was paid in full.
5. INCOME TAXES
The components of the provision for income taxes for the years ended
September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
September 30, September 30, September 30, June 30, June 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Federal:
Current............... $11,000 $11,000 $ 5,000 $ 8,000 $44,000
Deferred.............. (1,000) -- (1,000) (2,000) 2,000
State:
Current............... 2,000 1,000 1,000 -- 4,000
------- ------- ------- ------- -------
Total................... $12,000 $12,000 $ 5,000 $ 6,000 $50,000
======= ======= ======= ======= =======
</TABLE>
The differences between income taxes at the statutory income tax rate and
income taxes reported in the statements of operations are as follows for the
years ended September 30, 1995, 1996 and 1997 and the nine months ended June
30, 1997 and 1998:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30, September 30, June 30, June 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Federal statutory rate.. 15% 15% 15% 15% 30%
State franchise taxes... 4 2 6 -- 2
Other................... 5 2 10 18 (2)
--- --- --- --- ---
24% 19% 31% 33% 30%
=== === === === ===
</TABLE>
F-173
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
The significant components of the Company's deferred income tax assets and
liabilities at September 30, 1996 and 1997 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1996 1997 1998
------------- ------------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred income tax assets:
Deferred rent expense............ $ 3,000 $ 5,000 $ 10,000
Amortization of non-compete
agreements and franchise
agreements...................... 6,000 9,000 20,000
------- -------- --------
Total deferred income tax
assets........................ 9,000 14,000 30,000
Deferred income tax liabilities:
Accumulated depreciation......... (7,000) (11,000) (29,000)
------- -------- --------
Net deferred income tax assets..... $ 2,000 $ 3,000 $ 1,000
======= ======== ========
</TABLE>
6. RELATED-PARTY TRANSACTIONS
Related-Party Operating Leases
The Company leases retail store facilities under long-term noncancelable
operating lease agreements with remaining terms of one to nine years from GACC.
The future minimum lease payments due under these operating leases as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending September 30,
-------------------------
<S> <C>
1998........................................................... $ 185,000
1999........................................................... 185,000
2000........................................................... 192,000
2001........................................................... 193,000
2002........................................................... 166,000
Thereafter..................................................... 326,000
----------
$1,247,000
==========
</TABLE>
Each of these leases provides for contingent rentals based on gross revenues.
Total rental expense, which has been accounted for on a straight-line basis for
escalating leases included above, for the years ended September 30, 1995, 1996
and 1997 and for the nine months ended June 30, 1997 and 1998 was approximately
$280,000, $299,000, $335,000, $239,000 (unaudited) and $219,000 (unaudited),
respectively.
Franchise Royalties
The Company pays GACC franchise royalties in connection with its franchise
agreements with GACC. Franchise royalties are calculated as 7% of gross
revenues (as defined in the individual agreements). During the years ended
September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and
1998, the Company incurred approximately $152,000, $163,000, $185,000, $132,000
(unaudited) and $158,000 (unaudited), respectively, for franchise royalties,
which are included as part of selling and store occupancy costs in the
accompanying statements of operations. As of September 30, 1996 and 1997 and
June 30, 1998, approximately $13,000, $15,000 and $17,000 (unaudited),
respectively, in franchise royalties were payable to GACC.
F-174
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
6.RELATED PARTY TRANSACTIONS (Continued)
Inventory
The Company, in connection with its franchise agreements with GACC, purchases
the majority of its inventories from GACC. During the years ended September 30,
1995, 1996 and 1997 and the nine months ended June 30, 1997 and 1998, the
Company purchased approximately $311,000, $348,000, $387,000, $298,000
(unaudited) and $327,000 (unaudited), respectively, in inventories from GACC.
As of September 30, 1996 and 1997 and June 30, 1998, approximately $12,000,
$14,000 and $15,000 (unaudited), respectively, were payable to GACC related to
inventory purchases.
7. SUBSEQUENT EVENT
On August 24, 1998, the Company sold 100 percent of its common stock to Mrs.
Fields' Original Cookies, Inc.
F-175
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Combined Karp Entities:
We have audited the accompanying combined balance sheets of the Combined Karp
Entities (the "Company") identified in Note 1 as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1995, 1996 and 1997. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Combined Karp
Entities as of December 31, 1996 and 1997, and the results of their operations
and their cash flows for the years ended December 31, 1995, 1996 and 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Salt Lake City, Utah
October 6, 1998
F-176
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1996 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash................................... $ 179 $ 176 $ 98
Inventories............................ 57 54 62
Prepaid assets......................... 42 34 31
------ ------ ------
Total current assets................. 278 264 191
------ ------ ------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements................. 803 803 803
Equipment and fixtures................. 460 460 462
------ ------ ------
1,263 1,263 1,265
Less accumulated depreciation.......... (617) (718) (768)
------ ------ ------
Net property and equipment........... 646 545 497
------ ------ ------
OTHER ASSETS:
Deposits............................... 42 37 35
Intangibles, net of accumulated
amortization of $159, $179 and $191,
respectively.......................... 136 121 111
------ ------ ------
Total other assets................... 178 158 146
------ ------ ------
NON-CURRENT DEFERRED TAX ASSET........... 8 20 23
------ ------ ------
Total assets......................... $1,110 $ 987 $ 857
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets.
F-177
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED BALANCE SHEETS--(Continued)
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 30, December 30, June 30,
1996 1997 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................... $ 39 $ 95 $ 63
Accrued salaries....................... 55 52 42
Accrued liabilities.................... 123 121 107
Income taxes payable................... 128 142 147
------ ------ -------
Total current liabilities............ 345 410 359
------ ------ -------
RELATED-PARTY PAYABLES................... 23 23 23
------ ------ -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock (Note 5).................. 90 90 90
Additional paid-in capital............. 1,324 1,452 1,536
Accumulated deficit.................... (672) (988) (1,151)
------ ------ -------
Total stockholders' equity........... 742 554 475
------ ------ -------
Total liabilities and stockholders'
equity.............................. $1,110 $ 987 $ 857
====== ====== =======
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets.
F-178
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Year Ended Year Ended Ended Ended
December 31, December 31, December 31, June 30, June 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET STORE SALES......... $2,342 $2,445 $2,500 $1,144 $1,181
------ ------ ------ ------ ------
OPERATING COSTS:
Food cost of sales.... 614 668 683 336 339
Selling and store
occupancy costs...... 1,421 1,488 1,635 788 744
General and
administrative....... 192 199 238 101 114
Depreciation and
amortization......... 104 127 121 59 62
------ ------ ------ ------ ------
Total operating
costs.............. 2,331 2,482 2,677 1,284 1,259
------ ------ ------ ------ ------
Income (loss) from
operations......... 11 (37) (177) (140) (78)
INTEREST EXPENSE........ (54) (30) (18) (9) (7)
------ ------ ------ ------ ------
Loss before
provision for
income taxes....... (43) (67) (195) (149) (85)
PROVISION FOR INCOME
TAXES.................. (26) (19) (15) (4) (6)
------ ------ ------ ------ ------
NET LOSS................ $ (69) $ (86) $ (210) $ (153) $ (91)
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
F-179
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid-In Capital Deficit Total
------------ --------------- ----------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994..... $90 $ 398 $ (13) $ 475
Distributions................ -- -- (137) (137)
Net loss..................... -- -- (69) (69)
--- ------ ------- -----
BALANCE, DECEMBER 31, 1995..... 90 398 (219) 269
Distributions................ -- -- (367) (367)
Capital contributions........ -- 926 -- 926
Net loss..................... -- -- (86) (86)
--- ------ ------- -----
BALANCE, DECEMBER 31, 1996..... 90 1,324 (672) 742
Distributions................ -- -- (106) (106)
Capital contributions........ -- 128 -- 128
Net loss..................... -- -- (210) (210)
--- ------ ------- -----
BALANCE, DECEMBER 31, 1997..... 90 1,452 (988) 554
Distributions (unaudited).... -- -- (72) (72)
Capital contributions
(unaudited)................. -- 84 -- 84
Net loss (unaudited)......... -- -- (91) (91)
--- ------ ------- -----
BALANCE, JUNE 30, 1998
(unaudited)................... $90 $1,536 $(1,151) $ 475
=== ====== ======= =====
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
F-180
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Year Ended Year Ended Ended Ended
December 31, December 31, December 31, June 30, June 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $ (69) $ (86) $(210) $(153) $(91)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 104 127 121 59 62
Changes in assets and
liabilities:
Related-party
receivables......... (79) 143 -- -- --
Inventories.......... -- -- 3 -- (8)
Prepaid assets....... (5) 5 8 11 3
Deposits............. 1 (11) 5 5 2
Deferred taxes....... (2) (9) (12) (7) (3)
Accounts payable..... 38 (52) 56 25 (32)
Accrued salaries..... -- 17 (3) (15) (10)
Accrued liabilities.. 15 13 (2) (21) (14)
Income taxes
payable............. 13 14 14 3 5
Related-party
payables............ 69 (567) -- -- --
----- ----- ----- ----- ----
Net cash provided by
(used in) operating
activities......... 85 (406) (20) (93) (86)
----- ----- ----- ----- ----
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition of property
and equipment......... (13) (111) -- -- (2)
Acquisition of
intangibles........... 4 (20) (5) (5) (2)
Distributions.......... (137) (367) (106) (66) (72)
Additional investment.. -- 926 128 62 84
----- ----- ----- ----- ----
Net cash provided by
(used in) investing
activities......... (146) 428 17 (9) 8
----- ----- ----- ----- ----
NET INCREASE (DECREASE)
IN CASH................ (61) 22 (3) (102) (78)
CASH, beginning of
period................. 218 157 179 179 176
----- ----- ----- ----- ----
CASH, end of period..... $ 157 $ 179 $ 176 $ 77 $ 98
===== ===== ===== ===== ====
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
F-181
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED STATEMENTS OF CASH FLOWS--(Continued)
SUPPLEMENTAL DISCLOSURE OF COMBINED CASH FLOW INFORMATION:
Cash paid for interest was approximately $40,000, $18,000, $18,000, $9,000
(unaudited) and $7,000 (unaudited) for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1997 and 1998, respectively.
Cash paid for income taxes was approximately $18,000, $10,000, $10,000,
$2,000 (unaudited) and $1,000 (unaudited) for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30, 1997 and 1998,
respectively.
During the year ended December 31, 1996, related-party payables of Hot White
Plains Cookies, Inc, Hot Roosevelt Cookies, Inc. and Hot Rockaway Cookies of
approximately $364,000, $264,000 and $198,000, respectively, were forgiven and
accounted for as capital contributions to these entities.
During the year ended December 31, 1996 and December 31,1997, related party
receivables of Hot Barton and Northpark Cookies, Inc. and Northpark Cookies,
Inc. of approximately $71,000 and $0 and $120,000 and $4,000, respectively,
were distributed to stockholders.
The accompanying notes to combined financial statements
are an integral part of these statements.
F-182
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Including Notes to Unaudited Periods)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
The Combined Karp Entities (the "Company") established operations on the
following dates under the laws of the respective states:
<TABLE>
<CAPTION>
Structure of State of State of
Company Inception date Entity Incorporation Operation
------- ------------------ ------------- ------------- ----------
<S> <C> <C> <C> <C>
Hot Barton and Northpark
Cookies, Inc........... August 6, 1981 C-corporation Georgia New Jersey
Northpark Cookies,
Inc.................... October 5, 1981 C-corporation Iowa Iowa
Crossroads Cookies,
Inc.................... December 9, 1981 C-corporation Georgia Oklahoma
Quail Springs Cookies,
Inc.................... April 20, 1982 C-corporation Georgia Oklahoma
Westgate Cookies, Inc... August 30, 1982 S-corporation Texas Texas
Hot White Plains
Cookies, Inc........... September 23, 1992 S-corporation Georgia New York
Hot Roosevelt Cookies,
Inc.................... April 7, 1993 S-corporation Georgia New York
Hot Rockaway Cookies.... April 11, 1996 -- Florida New Jersey
</TABLE>
Northpark Cookies, Inc.'s status of incorporation became inactive as of
November 25, 1987. The successor in interest is Hot Barton and Northpark
Cookies, Inc.
The ASK & MSK Family Limited Partnership-II(B), Inc. (the "Partnership") was
incorporated in Florida on April 11, 1996. On this date, the Partnership
acquired Hot Roosevelt Cookies, Inc. and Hot White Plains Cookies, Inc. As
these entities share common control, these acquisitions were accounted for in
a manner similar to a pooling of interests. In addition, on April 11, 1996,
the Partnership invested in the Hot Rockaway Cookies store.
The Company operates retail stores that sell freshly baked cookies and other
food products. The retail stores are franchised from Great American Cookie
Company, Inc. ("GACC").
The entities that make up the Company have various fiscal year ends which
have been recast to December 31 for purposes of these combined financial
statements. These fiscal year ends are as follows:
<TABLE>
<CAPTION>
Company Fiscal Year End
------- ---------------
<S> <C>
Hot Barton and Northpark Cookies, Inc....................... July 31
Northpark Cookies, Inc...................................... July 31
Crossroads Cookies, Inc..................................... November 30
Quail Springs Cookies, Inc.................................. November 30
Westgate Cookies, Inc....................................... December 31
Hot White Plains Cookies, Inc............................... December 31
Hot Roosevelt Cookies, Inc.................................. December 31
Hot Rockaway Cookies........................................ December 31
</TABLE>
F-183
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
The Company's business follows seasonal trends and is affected by climate and
weather conditions. The Company experiences its highest revenues in the fourth
quarter. Because the stores are located in shopping malls, sales performance is
significantly dependent on the performance of those malls. As a franchisee of
GACC, substantially all of the Entities' sales are derived from products
purchased from GACC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The individuals entities included within the combined financial statements
operate under similar ownership and common control. All significant
intercompany balances and transactions have been eliminated in the combination.
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 disclosures 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 may differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
payable and related-party payables. The carrying value of cash and accounts
payable reported in the combined balance sheets are considered to approximate
their respective fair values due to the short-term nature of such instruments
and the current interest rate environment. The fair value of related-party
payables at prevailing market rates is estimated to be $25,000 as of December
31, 1996, 1997 and June 30, 1998.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the FIFO (first-in, first-out) method (see Note 3).
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the useful life of the improvement or the remaining term of the
applicable lease. The depreciable lives of equipment and fixtures are ten
years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the
useful lives of existing equipment are capitalized and depreciated. On
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in the statement of operations.
Intangibles
Intangibles consist primarily of franchise fees and store operating lease
costs paid to GACC. Intangibles are being amortized on a straight-line basis
over the lives of the franchise or lease agreements, which are generally ten
years.
F-184
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company recognizes deferred income tax assets or liabilities for expected
future tax consequences of events that have been recognized in the combined
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.
Revenue Recognition
Revenues generated from the combined stores are recognized at the point of
sale.
Sources of Supply
The Company currently buys a significant portion of their food products and
supplies from GACC and an unrelated supplier. In accordance with the franchise
agreements, the Company must buy its food products from GACC (see Note 6).
Management believes that the Company could obtain its supplies from numerous
other suppliers at comparable prices and terms.
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.
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 or group of assets over the remaining life in
measuring whether assets are recoverable. The Company assesses impairment of
long-lived assets at the store level, which management believes is the lowest
level for which there are identifiable cash flows that are independent of other
groups of assets. As of June 30, 1998, the Company does not consider any of its
long-lived assets to be impaired.
Recent Accounting Pronouncements
During the six months ended June 30, 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Comprehensive Income", SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company does not expect the
implementation of these pronouncements will have a significant impact on its
financial statements.
Interim Combined Financial Statements
The combined financial statements as of and for the six months ended June 30,
1998 and for the six months ended June 30, 1997 are unaudited. In the opinion
of management, these combined 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 combined financial position and results of operations for
these periods. These combined interim financial statements are not necessarily
indicative of the results that may be achieved for the full fiscal year.
F-185
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
3. INVENTORIES
The Company's inventories consist of the following as of December 31, 1996
and 1997 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Food................................... $38,000 $33,000 $40,000
Beverages.............................. 5,000 6,000 7,000
Supplies............................... 14,000 15,000 15,000
------- ------- -------
$57,000 $54,000 $62,000
======= ======= =======
</TABLE>
4. INCOME TAXES
The following four entities are not included in income tax calculations due
to their status as S-corporations or as a business operated within a
partnership; Westgate Cookies, Inc., Hot White Plains Cookies, Inc., Hot
Roosevelt Cookies, Inc. and Hot Rockaway Cookies. Had these entities been
taxable entities, on a pro forma basis, an income tax provision (benefit) of
approximately $22,000, $(27,000), $16,000, $(14,000) and $15,000 would have
been provided for the years ended December 31, 1995, 1996, 1997 and the six
months ended June 30, 1997 and 1998, respectively. Income taxes were provided
for all entities with C-corporation status.
The components of the provision for income taxes for the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31, June 30, June 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Federal:
Current.... $10,000 $13,000 $ 9,000 $ 4,000 $ 3,000
Deferred... (2,000) (8,000) (12,000) (7,000) (3,000)
State:
Current.... 18,000 14,000 18,000 7,000 6,000
------- ------- -------- ------- -------
Total........ $26,000 $19,000 $ 15,000 $ 4,000 $ 6,000
======= ======= ======== ======= =======
</TABLE>
The differences between income taxes at the statutory income tax rate and
income taxes reported in the statements of operations are the result of
permanent differences.
The significant components of the Entities' deferred income tax assets and
liabilities at December 31, 1996 and 1997 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Deferred income tax assets:
Accumulated depreciation........... $5,000 $ 9,000 $11,000
Net operating loss carryforwards... 3,000 8,000 9,000
Capital losses in excess of capital
gains............................. -- 3,000 3,000
------ ------- -------
Net deferred income tax assets... $8,000 $20,000 $23,000
====== ======= =======
</TABLE>
F-186
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
5. STOCKHOLDERS' EQUITY
Share Data
The individual entities had the following assigned par value, authorized and
outstanding shares at December 31, 1996 and 1997, and June 30, 1998:
<TABLE>
<CAPTION>
Shares Shares
Entity Par Value Authorized Outstanding
------ --------- ---------- -----------
<S> <C> <C> <C>
Hot Barton and Northpark Cookies, Inc. ... $0.10 1,000 200
Northpark Cookies, Inc. .................. 0.50 1,000,000 180,000
Crossroads Cookies, Inc. ................. 0.10 2,000 1,000
Quail Springs Cookies, Inc. .............. 0.10 1,000 500
Westgate Cookies, Inc. ................... 0.10 1,000 1,000
Hot White Plains Cookies, Inc. ........... 0.01 10,000 500
Hot Roosevelt Cookies, Inc. .............. 0.01 10,000 500
</TABLE>
Capital Contributions
The individual entities received the following capital contributions:
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months
December 31, December 31, Ended
Entity 1996 1997 June 30, 1998
------ ------------ ------------ -------------
<S> <C> <C> <C>
Hot Barton and Northpark Cookies,
Inc. ............................ $ -- $ 7,000 $ --
Northpark Cookies, Inc. .......... -- -- 7,000
Crossroads Cookies, Inc. ......... -- -- --
Quail Springs Cookies, Inc. ...... -- -- --
Westgate Cookies, Inc. ........... -- -- --
Hot White Plains Cookies, Inc. ... 428,000 46,000 15,000
Hot Roosevelt Cookies, Inc. ...... 300,000 27,000 12,000
Hot Rockaway Cookies.............. 198,000 48,000 50,000
-------- -------- -------
$926,000 $128,000 $84,000
======== ======== =======
</TABLE>
Distributions
The individual entities made the following distributions to stockholders:
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months
December 31, December 31, Ended
Entity 1996 1997 June 30, 1998
------ ------------ ------------ -------------
<S> <C> <C> <C>
Hot Barton and Northpark Cookies,
Inc. ............................ $ (71,000) $ -- $ --
Northpark Cookies, Inc. .......... (120,000) (4,000) --
Crossroads Cookies, Inc. ......... (24,000) (3,000) --
Quail Springs Cookies, Inc. ...... (45,000) (45,000) (30,000)
Westgate Cookies, Inc. ........... (107,000) (54,000) (42,000)
Hot White Plains Cookies, Inc. ... -- -- --
Hot Roosevelt Cookies, Inc. ...... -- -- --
Hot Rockaway Cookies.............. -- -- --
--------- --------- --------
$(367,000) $(106,000) $(72,000)
========= ========= ========
</TABLE>
F-187
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
6. RELATED-PARTY TRANSACTIONS
Related-party Operating Leases
The Company leases retail store facilities under long-term noncancelable
operating lease agreements with remaining terms of one to nine years from GACC.
The future minimum lease payments due under these operating leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1998............................................................ $ 370,000
1999............................................................ 347,000
2000............................................................ 240,000
2001............................................................ 222,000
2002............................................................ 110,000
Thereafter...................................................... 152,000
----------
$1,441,000
==========
</TABLE>
Each of these leases provides for contingent rentals based upon gross
revenues. Total rental expense, which has been accounted for on a straight-line
basis for escalating leases included above, for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30, 1997 and 1998 was
approximately $457,000, $486,000, $553,000, $276,000 (unaudited) and $225,000
(unaudited), respectively.
Franchise Royalties
The Company pays GACC franchise royalties in connection with its franchise
agreements with GACC. Franchise royalties are calculated as 7% of gross
revenues (as defined in the individual agreements). During the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998, the Company incurred approximately $164,000, $165,000, $175,000, $80,000
(unaudited) and $83,000 (unaudited), respectively, for franchise royalties,
which are included as part of selling and store occupancy costs in the
accompanying combined statements of operations. As of December 31, 1996 and
1997 and June 30, 1998, approximately $21,000, $21,000 and $14,000 (unaudited),
respectively, in franchise royalties were payable to GACC.
Inventory
The Company, in connection with its franchise agreements with GACC, purchases
the majority of its inventory from GACC. During the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998, the
Company purchased approximately $372,000, $406,000, $425,000, $190,000
(unaudited) and $178,000 (unaudited), respectively, in inventory from GACC. As
of December 31, 1996 and 1997 and June 30, 1998, approximately $14,000, $24,000
and $8,000 (unaudited), respectively, were payable to GACC related to inventory
purchases.
Related-party Payables
The related-party payables of $23,000, $23,000 and $23,000 (unaudited) as of
December 31, 1996, December 31, 1997 and June 30, 1998 represent loans from
stockholders to Hot Barton and Northpark Cookies, Inc. These loans are non-
interest bearing and have no specific payment terms or maturity dates.
F-188
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Including Notes to Unaudited Periods)
Management Fees
Each entity was responsible for paying management fees to a company owned by
a related party. For the years ended December 31, 1995, 1996 and 1997 and for
the six months ended June 30, 1997 and 1998, the Entities paid approximately
$24,000, $60,000, $80,000, $40,000 (unaudited) and $40,000 (unaudited),
respectively, in management fees. As of December 31, 1996 and 1997 and June 30,
1998 approximately $5,000, $7,000 and $7,000 (unaudited), respectively, were
payable to a related party for management fees.
7. SUBSEQUENT EVENT
On July 29, 1998, the Entities entered into individual Asset Purchase
Agreements with Mrs. Fields' Original Cookies, Inc. In accordance with these
agreements, Mrs. Fields' Original Cookies, Inc. purchased the following assets
of the entities: leasehold rights and interests, tangible personal property,
such as inventories and property and equipment, certain agreements between the
sellers and GACC, customer and vendor lists, recipes and production techniques,
store petty cash, deposits and prepaid expenses. On September 9, 1998, the
agreements were completed.
F-189
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Partners
The Cookie Conglomerate, Inc., Cookie Conglomerate, L.L.P.,
and The Cookie Conglomerate of Carolina Place, Inc.
We have audited the accompanying combined balance sheets of THE COOKIE
CONGLOMERATE, INC. AND AFFILIATES (The Cookie Conglomerate, L.L.P. and The
Cookie Conglomerate of Carolina Place, Inc.) as of December 31, 1997 and 1996
and the related combined statements of operations, changes in equity [deficit]
and cash flows for the years then ended. These financial statements are the
responsibility of the Companies' and Partnership'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 audits to
obtain reasonable assurance about whether the combined 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 financial position of THE COOKIE
CONGLOMERATE, INC. AND AFFILIATES as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
November 12, 1998
F-190
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Current assets
- --------------
Cash................................................. $ 227,385 $ 184,963
Advances............................................. 0 0
Inventories.......................................... 52,029 61,909
Prepaid expenses..................................... 26,993 33,064
----------- ----------
Total current assets................................. 306,407 279,936
----------- ----------
Property and equipment, at cost
- -------------------------------
Equipment............................................ 720,050 688,156
Fixtures............................................. 174,103 174,103
Leasehold improvements............................... 679,892 679,892
----------- ----------
1,574,045 1,542,151
Accumulated depreciation............................. (1,099,171) ( 938,942)
----------- ----------
474,874 603,209
----------- ----------
Other assets
- ------------
Deposits............................................. 34,450 34,450
Franchise costs, net of accumulated amortization of
$61,456 for 1997 and $49,122 for 1996............... 73,544 85,936
Organizational costs, net of accumulated amortization
of $4,004 for 1997 and $6,832 for 1996.............. 1,854 3,026
Intangible assets, net of accumulated amortization of
$13,394 for 1997 and $9,474 for 1996................ 45,406 49,326
Loan costs, net of accumulated amortization of $6,999
for 1997 and $1,729 for 1996........................ 4,708 9,978
----------- ----------
159,962 182,716
----------- ----------
$ 941,243 $1,065,861
=========== ==========
</TABLE>
See auditors' report and accompanying notes
F-191
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Current liabilities
- -------------------
Accounts payable....................................... $ 156,264 $ 191,219
Accrued expenses....................................... 160,482 139,164
Line-of-credit......................................... 40,000 80,000
Current portion of long-term debt...................... 155,107 176,098
--------- ----------
Total current liabilities............................. 511,853 586,481
--------- ----------
Other liabilities
- -----------------
Long-term debt, net of current portion................. 108,671 268,664
Deferred rent payable.................................. 81,998 84,182
--------- ----------
190,669 352,846
--------- ----------
Equity (deficit)
- ----------------
Common stock, $1 par value, 20,000 shares of Class A
(voting) authorized and 10,000 shares of Class B
(nonvoting) authorized; 2,357 shares of Class A issued
and outstanding....................................... 2,357 2,357
Additional paid-in capital............................. 473,643 473,643
Accumulated deficit.................................... (239,117) (330,174)
Partner capital (deficit).............................. 1,838 (19,292)
--------- ----------
238,721 126,534
--------- ----------
$ 941,243 $1,065,861
========= ==========
</TABLE>
See auditors' report and accompanying notes
F-192
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Sales.................................................... $4,202,799 $3,651,231
Food cost of sales....................................... 1,097,277 1,042,314
---------- ----------
Gross profit.......................................... 3,105,522 2,608,917
---------- ----------
Selling, general, and administrative expenses............ 2,787,260 2,519,005
---------- ----------
Interest expense......................................... 40,075 56,762
---------- ----------
Net income............................................ $ 278,187 $ 33,150
========== ==========
</TABLE>
See auditors' report and accompanying notes
F-193
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Partners'
Common Paid-In Accumulated Capital
Stock Capital Deficit (Deficit) Total
------ ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances,
December 31, 1995.......... $2,357 $473,643 $(255,382) $ (60,217) $ 160,401
Net income (loss)........... (71,792) 104,942 33,150
Dividends paid.............. (3,000) (64,017) (67,017)
------ -------- --------- --------- ---------
Balances,
December 31, 1996.......... 2,357 473,643 (330,174) (19,292) 126,534
Net income.................. 91,057 187,130 278,187
Dividends paid.............. 0 (166,000) (166,000)
------ -------- --------- --------- ---------
Balances,
December 31, 1997.......... $2,357 $473,643 $(239,117) $ 1,838 $ 238,721
====== ======== ========= ========= =========
</TABLE>
See auditors' report and accompanying notes
F-194
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income............................................... $ 278,187 $ 33,150
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation........................................... 160,229 198,535
Amortization........................................... 22,754 25,882
Changes in assets and liabilities
Decrease in advances.................................. 0 1,600
Decrease in inventories............................... 9,880 10,915
Decrease (Increase) in prepaid expenses............... 6,071 (6,793)
Decrease in deposits.................................. 0 8,767
Decrease in accounts payable.......................... (34,955) (56,024)
Increase in accrued expenses.......................... 21,318 34,500
Increase (Decrease) in deferred rent payable.......... (2,184) 16,830
--------- ---------
Total adjustments................................... 183,113 234,212
--------- ---------
Net cash provided by operating activities............... 461,300 267,362
--------- ---------
Cash flows from investing activities
Acquisition of property and equipment.................... (31,894) (87,109)
Franchise costs reimbursed............................... 0 8,000
Loan costs incurred...................................... 0 (9,462)
--------- ---------
Net cash used by investing activities................... (31,894) (88,571)
--------- ---------
Cash flows from financing activities
Net proceeds from (payments on) line-of-credit........... (40,000) 55,000
Payments on long-term debt............................... (180,984) (161,252)
Dividends paid........................................... (166,000) (67,017)
--------- ---------
Net cash used by financing activities................... (386,984) (173,269)
--------- ---------
Net increase in cash.............................. 42,422 5,522
Cash, beginning of year................................... 184,963 179,441
--------- ---------
Cash, end of year................................. $ 227,385 $ 184,963
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for
Interest................................................. $ 36,616 $ 55,347
</TABLE>
See auditors' report and accompanying notes
F-195
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
A.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Combination Policy
The accompanying combined financial statements include the accounts of The
Cookie Conglomerate Inc., The Cookie Conglomerate, L.L.P., and The Cookie
Conglomerate of Carolina Place, Inc., all of which are under common control.
Intercompany transactions and balances have been eliminated in the
combination.
Nature of Operations
The Companies and Partnership operate retail cookie stores in North Carolina,
South Carolina, and Ohio. The stores are franchised from Great American Cookie
Company, Inc., now a subsidiary of Mrs. Fields' Original Cookies, Inc.
Inventories
Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out method.
Property and Equipment
Property and equipment is carried at cost. Expenditures for maintenance and
repairs are expensed currently, while renewals and betterments that materially
extend the life of an asset are capitalized. The cost of assets sold, retired,
or otherwise disposed of, and the related allowance for depreciation, are
eliminated from the accounts, and any resulting gain or loss is recognized.
Depreciation is provided using both the straight-line and accelerated methods
over the estimated useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Equipment.......................................... 5 years
Fixtures........................................... 7 years
Leasehold improvements............................. Life of related lease
</TABLE>
Franchise Costs
Franchise costs represent amounts paid to open the stores and for operating
under the name of Great American Cookie Company, Inc., now a subsidiary of Mrs.
Fields' Original Cookies, Inc. These costs are being amortized over the eight
to fifteen year lives of the related agreements using the straight-line method
of amortization.
Organizational Costs
Organizational costs are carried at cost. Amortization is provided using the
straight-line method over a period of sixty months.
Intangible Assets
Intangible assets include goodwill and restrictive convenant fees. Goodwill
represents the excess of the cost of the Carolina Place franchise over the fair
value of its net assets at the date of acquisition. Restrictive convenant fees
represent the costs of a non-compete agreement with the previous owners of the
Carolina Place franchise. These assets are being amortized on the straight-line
method over the fifteen year life of the related agreement.
F-196
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997 AND 1996
A.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Costs
Loan costs represent bank loan and closing fees incurred in connection with
the procurement of long-term debt. These costs are being amortized over the
terms of the related loan agreements, which are two to five years.
Income Taxes
The Cookie Conglomerate, Inc. and The Cookie Conglomerate of Carolina Place,
Inc. elected by unanimous consent of its stockholders to be taxed under the
provisions of subchapter S of the Internal Revenue Code. Under those
provisions, the Companies do not pay corporate income taxes on their taxable
income. Instead, the stockholders are liable for individual income taxes on
their respective shares of the Company's taxable income.
The Cookie Conglomerate, L.L.P. is also not subject to income tax. Income is
taxed directly to its partners. On December 30, 1997, the partners elected to
become a limited liability partnership under the Georgia Uniform Partnership
Act.
Compensated Absences
Employees of the Companies and Partnership are entitled to paid vacation,
paid sick days and personal days off, depending on job classification, length
of service, and other factors. It is impractical to estimate the amount of
compensation for future absences, and accordingly, no liability has been
recorded in the accompanying financial statements. The Companies' and
Partnership's policy is to recognize the costs of compensated absences when
actually paid to employees.
Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
B.LINES-OF-CREDIT
A summary of the lines-of-credit is as follows:
<TABLE>
<CAPTION>
Collateral 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Riverside Bank -- $100,000 Guarantee of Ronald Eichel,
note payable dated Alan Kuehn, and Cookie
September 30, 1996 with Conglomerate, Inc.
interest payable monthly at
prime plus 1%. Principal
payable at maturity on
September 30, 1997. $ 0 $80,000
Riverside Bank -- $100,000 Inventory, accounts
note payable dated November receivable,
4, 1997 with interest equipment, general
payable monthly at prime intangibles,
plus 1%. Principal payable corporate guarantee of Cookie
at maturity on November 4, Conglomerate Partnership,
1998. personal guarantees of Ronald
Eichel, Nancy Eichel, and
Alan
Kuehn. 40,000 0
------- -------
$40,000 $80,000
======= =======
</TABLE>
F-197
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997 AND 1996
C.LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
Collateral 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Tony Hege - $160,000 note Notes and accounts
payable dated July 18, receivable,
1994. Principal payments inventory, fixtures and
of $1,905 plus interest equipment.
at 9% per annum payable
monthly beginning August
10, 1994 until July 10,
1998 when remaining
principal due. $ 77,778 $104,762
Alan Kuehn (stockholder)-- Notes and accounts
$20,000 note payable at receivable,
9%. Interest only payable inventory, fixtures and
through December of 1995. equipment.
Principal payments of
$417 plus interest due
monthly through July 10,
1998 when remaining
principal due. Interest
expense incurred for each
year totals $3,600. 20,000 20,000
Ron Eichel (stockholder)-- Notes and accounts
$20,000 note payable at receivable,
9%. Interest only payable inventory, fixtures and
through December of 1995. equipment.
Principal payments of
$417 plus interest due
monthly through July 10,
1998 when remaining
principal due. Interest
expense incurred for each
year totals $3,600. 20,000 20,000
Riverside Bank--$106,222 Inventory, equipment,
note payable dated accounts
September 30, 1996 with receivable, general
50 monthly installment intangibles.
payments of principal and Personal guarantees of Ronald
interest of $2,574 Eichel, Nanci Eichel, Alan
beginning on October 30, Kuehn
1996. Interest at 9.25%. and corporate guarantee of
Matures November 30, Cookie
2000. Conglomerate Partnership. 76,000 100,000
Riverside Bank--$196,747 Inventory, equipment,
note payable dated accounts
September 30, 1996 with receivable, general
25 monthly installment intangibles.
payments beginning Personal guarantees of Ronald
October 30, 1996 of Eichel and Alan Kuehn
principal of $7,870 plus and corporate guarantee of
interest at prime plus Cookie
1%. Matures October 30, Conglomerate Partnership.
1998. 70,000 173,000
Riverside Bank--$30,837 Inventory, accounts
note payable dated receiveable,
September 30, 1996 with general intangibles.
25 monthly installment Corporate
payments beginning guarantee of Cookie
October 30, 1996 of Conglomerate
principal of $1,233 plus partnership, personal
interest at 9.25%. guarantees
Matures October 30, 1998. of Ronald Eichel, Nanci
Eichel and
Alan Kuehn. 0 27,000
-------- --------
263,778 444,762
Less: Current maturities 155,107 176,098
-------- --------
$108,671 $268,664
======== ========
</TABLE>
F-198
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997 AND 1996
C.LONG-TERM DEBT (Continued)
Following are maturities of long-term debt for each of the next five years:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1998............................................................... $155,107
1999............................................................... 49,907
2000............................................................... 49,557
2001............................................................... 9,207
2002............................................................... 0
--------
$263,778
========
</TABLE>
D.COMMITMENTS
The Cookie Conglomerate, Inc. and Affiliates are the lessee of store space in
various malls under sublease arrangements with Great American Cookie Company,
Inc., now a subsidiary of Mrs. Fields' Original Cookies, Inc. Minimum future
lease payments under non-cancelable operating leases having remaining terms in
excess of one year as of December 31, 1997 for each of the next five years and
in total are:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1998............................................................ $ 481,036
1999............................................................ 454,143
2000............................................................ 297,246
2001............................................................ 237,789
2002............................................................ 195,536
Thereafter...................................................... 353,804
----------
$2,019,554
==========
</TABLE>
Additional rental payments are contingent on sales exceeding certain
breakpoint levels specified in each lease. Rent expense totaled $640,870 for
1997 and $620,355 for 1996.
Franchise agreements provide for the Companies and Partnership to pay annual
service fees equal to 7% of gross sales. The service fees due the franchiser in
connection with these agreements are due on a monthly basis. The franchise
agreements end simultaneously with the termination of the lease of the premises
in which the cookie facilities are located.
E.SUBSEQUENT EVENT
The Cookie Conglomerate of Carolina Place, Inc. effectively merged with The
Cookie Conglomerate, Inc. on January 1, 1998.
The Cookie Conglomerate, Inc. and The Cookie Conglomerate, L.L.P. entered
into an asset purchase agreement on October 5, 1998 with Mrs. Fields' Original
Cookies, Inc. to sell substantially all the assets of the Company and
Partnership.
F-199
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Current assets
- --------------
Cash............................................................ $135,749
Inventories..................................................... 71,635
Other current assets............................................ 2,011
--------
Total current assets........................................... 209,395
Property and equipment, net...................................... 435,604
Intangibles, net................................................. 111,490
Other assets..................................................... 34,451
--------
$790,940
========
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Current liabilities
- -------------------
<S> <C>
Accounts payable................................................ $101,243
Accrued expenses................................................ 91,213
Current portion of long-term debt............................... 121,621
--------
Total current liabilities...................................... 314,077
<CAPTION>
Other liabilities
- -----------------
<S> <C>
Long-term debt, net of current portion.......................... 29,366
--------
Total liabilities.............................................. 343,443
--------
<CAPTION>
Stockholders' equity
- --------------------
<S> <C>
Common stock, $1 par value, 20,000 shares of Class A [voting]
authorized and 10,000 Shares of Class B [nonvoting] authorized;
2,357 shares of Class A issued and outstanding................. 2,357
Additional paid-in capital...................................... 473,643
Partner capital................................................. 23,629
Accumulated Deficit............................................. (52,132)
--------
447,497
--------
$790,940
========
</TABLE>
See footnote
F-200
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Sales...................................................... $2,906,499 $2,926,659
Cost of sales.............................................. 2,313,079 2,388,393
---------- ----------
Gross profit............................................. 593,420 538,266
<CAPTION>
Selling, general, and administrative expenses.............. 389,462 380,901
<S> <C> <C>
Interest expense........................................... 16,972 27,649
---------- ----------
Net income............................................... $ 186,986 $ 129,716
========== ==========
</TABLE>
See footnote
F-201
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income.............................................. $ 186,985 $ 129,716
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation & amortization............................ 117,584 125,688
Changes in assets and liabilities
Increase (decrease) in inventories.................... (19,606) 7,908
Decrease in prepaid expenses.......................... 24,981 28,124
Decrease in accounts payable & accrued expenses....... (246,288) (212,000)
--------- ---------
Total adjustments.................................... (123,329) (50,280)
--------- ---------
Net cash provided by operating activities........... 63,656 79,436
--------- ---------
Cash flows from investing activities
- ------------------------------------
Acquisition of equipment................................ (64,292) (25,003)
--------- ---------
Net cash used by investing activities.................. (64,292) (25,003)
--------- ---------
Cash flows from financing activities
- ------------------------------------
Dividends paid.......................................... (43,906) (43,365)
Payments on long-term debt and line-of-credit........... (47,095) (76,854)
--------- ---------
Net cash used by financing activities.................. (91,001) (120,219)
--------- ---------
Net decrease in cash.................................. (91,637) (65,786)
Cash, beginning of period............................... 227,385 184,963
--------- ---------
Cash, end of period................................... $ 135,748 $ 119,177
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash paid during the years for interest................. $ 16,972 $ 27,649
</TABLE>
See footnote
F-202
<PAGE>
THE COOKIE CONGLOMERATE, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
(1)BASIS OF PRESENTATION
The accompanying interim unaudited combined financial statements have been
prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission, and accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, these combined financial statements reflect all
adjustments, which consist only of normal recurring adjustments, which are
necessary to present fairly the Company's financial position as of September
30, 1998 and results of operations and cash flows for the nine months ended
September 30, 1998 and September 30, 1997. These interim unaudited combined
financial statements should be read in conjunction with the audited combined
financial statements and notes to it included in this filing.
F-203
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Pretzelmaker Holdings, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Pretzelmaker
Holdings, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pretzelmaker
Holdings, Inc. and Subsidiaries at December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, during 1997
the Company's subsidiary became non-compliant with the covenants under its bank
debt agreements and the lender has not agreed to provide waivers. Accordingly,
such debt has been reclassified as a current liability since, due to the
covenant default, the lender has the right to accelerate the repayment of the
loans.
AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
Denver, Colorado
December 11, 1998
F-204
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Pretzelmaker Holdings, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Pretzelmaker
Holdings, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (February 24, 1995) to December 31, 1995 and for the
year ended December 31, 1996. 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 Pretzelmaker
Holdings, Inc. and Subsidiaries at December 31, 1996, and the results of its
operations and its cash flows for the period from inception (February 24, 1995)
to December 31, 1995 and for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado
February 7, 1997
F-205
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Substantially all pledged)
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1996 1997 1998
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................... $ 95,914 $ 115,805 $ 216,261
Accounts receivable, net of allowance for
doubtful
accounts of $10,000, $10,000 and
$45,000.................................. 485,002 642,821 510,904
Due from affiliates....................... 77,904 46,129 24,809
Refundable income taxes................... -- 56,524 --
Inventories............................... 31,583 74,226 47,400
Prepaid expenses and supplies............. 14,126 237 22,677
---------- ---------- ----------
Total Current Assets.................... 704,529 935,742 822,051
---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Store fixtures and equipment.............. 719,509 872,864 646,598
Leasehold improvements.................... 336,301 416,631 267,233
Computer equipment........................ 54,346 71,761 70,811
Furniture and fixtures.................... 54,264 54,134 34,959
---------- ---------- ----------
1,164,420 1,415,390 1,019,601
Less accumulated depreciation and
amortization............................. 150,336 341,523 453,193
---------- ---------- ----------
Net Property and Equipment................ 1,014,084 1,073,867 566,408
---------- ---------- ----------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization............................. 1,414,628 1,258,470 1,141,351
Deferred tax asset........................ 62,000 62,000 62,000
Other assets.............................. 122,762 46,880 62,533
Restricted cash........................... -- 64,575 59,112
---------- ---------- ----------
Total Other Assets...................... 1,599,390 1,431,925 1,324,996
---------- ---------- ----------
$3,318,003 $3,441,534 $2,713,455
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-206
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1996 1997 1998
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Bank debt............................... $ -- $ 732,916 $ 443,742
9% Notes payable in 1998................ -- 215,587 38,500
Accounts payable........................ 367,904 461,124 330,541
Accruals and other payables............. 47,810 138,065 185,213
Income taxes payable.................... 70,000 23,449 --
Deferred initial franchise fees......... 357,760 151,500 214,950
Current maturities of long-term debt.... 151,797 45,647 49,141
Current portion of non-compete
agreements............................. 130,416 151,418 168,082
---------- ---------- ----------
Total Current Liabilities............. 1,125,687 1,919,706 1,430,169
---------- ---------- ----------
LONG-TERM OBLIGATIONS:
Long-term debt, less current
maturities............................. 288,639 237,130 180,555
Unsecured promissory notes.............. 534,000 540,000 540,000
Non-compete agreements payable.......... 327,221 175,803 --
Deferred revenues....................... -- -- 180,906
---------- ---------- ----------
Total Liabilities..................... 2,275,547 2,872,639 2,331,630
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; shares
authorized 1,000,000;
shares issued and outstanding 135,155.. 135 135 135
Additional paid-in capital.............. 1,070,814 1,070,814 1,070,814
Accumulated deficit..................... (28,493) (502,054) (689,124)
---------- ---------- ----------
Total Stockholders' Equity............ 1,042,456 568,895 381,825
---------- ---------- ----------
$3,318,003 $3,441,534 $2,713,455
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-207
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
February 24 Years Ended December Nine Months Ended
(Inception) to 31, September 30,
December 31, --------------------- -----------------------
1995 1996 1997 1997 1998
-------------- ---------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Franchising............ $ 706,410 $1,663,846 $2,026,385 $1,415,632 $1,538,486
Net company-owned store
sales................. 254,124 1,061,889 1,818,919 1,222,149 1,038,775
Initial franchise
fees.................. 435,988 893,099 778,294 593,285 186,202
Product and equipment
revenue 329,523 1,795,262 1,441,815 1,322,613 598,068
---------- ---------- ---------- ---------- ----------
Total Revenues........ 1,726,045 5,414,096 6,065,413 4,553,679 3,361,531
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
General and
administrative
expenses.............. 1,088,763 2,588,832 2,685,646 2,007,944 1,546,513
Company-owned stores
expenses.............. 275,163 1,104,908 1,815,775 1,370,404 992,336
Product and equipment
costs................. 209,910 1,173,866 921,131 895,829 121,254
Losses on store
closings and asset
dispositions.......... -- -- 340,491 153,611 108,858
Litigation settlement.. -- -- 148,702 148,702 --
Depreciation and
amortization.......... 156,382 291,862 402,693 288,566 627,337
Interest expense....... 89,247 157,242 224,536 171,316 152,303
---------- ---------- ---------- ---------- ----------
Total Costs and
Expenses............. 1,819,465 5,316,710 6,538,974 5,036,372 3,548,601
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
TAXES ON INCOME (93,420) 97,386 (473,561) (482,693) (187,070)
TAXES ON INCOME -- 32,459 -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (93,420) $ 64,927 $ (473,561) $ (482,693) $ (187,070)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-208
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances at February 24,
1995 (Inception)........... -- $-- $ -- $ -- $ --
Issuance of Capital Stock.. 135,155 135 1,070,814 -- 1,070,949
Net loss for the period.... -- -- -- (93,420) (93,420)
------- ---- ---------- --------- ----------
Balances at December 31,
1995....................... 135,155 135 1,070,814 (93,420) 977,529
Net income for the year.... -- -- -- 64,927 64,927
------- ---- ---------- --------- ----------
Balances at December 31,
1996....................... 135,155 135 1,070,814 (28,493) 1,042,456
Net loss for the year...... -- -- -- (473,561) (473,561)
------- ---- ---------- --------- ----------
Balances at December 31,
1997....................... 135,155 135 1,070,814 (502,054) 568,895
Net loss for the period
(unaudited)............... -- -- -- (187,070) (187,070)
------- ---- ---------- --------- ----------
Balances at September 30,
1998 (unaudited)........... 135,155 $135 $1,070,814 $(689,124) $ 381,825
======= ==== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-209
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 24, Years Ended Nine Months Ended
(Inception) to December 31, September 30,
December 31, -------------------- ----------------------
1995 1996 1997 1997 1998
-------------- --------- --------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...... $ (93,420) $ 64,927 $(473,561) $(482,693) $(187,070)
Adjustments to
reconcile net income
(loss)
to net cash provided
by (used in)
operating activities:
Depreciation and amor-
tization............. 156,382 291,862 402,693 288,566 627,337
Loss on disposal of
equipment............ -- -- 108,890 6,795 (76,601)
Interest accretion.... 73,637 69,974 51,884 38,904 23,161
Deferred revenues..... -- -- -- -- 180,906
Deferred income tax-
es................... (22,000) (40,000) -- -- --
Accounts receivable
allowance............ 5,000 5,000 -- -- 35,000
Changes in operating
assets and
liabilities:
Accounts receivable.. (172,836) (211,469) (81,319) (52,693) 71,917
Refundable income
taxes............... (23,000) 23,000 (56,524) -- 56,524
Inventories.......... (11,254) (18,779) (42,643) (60,727) 26,826
Due from affiliates.. -- (77,904) 31,775 51,565 21,320
Prepaid expenses and
supplies............ (14,126) -- 13,889 (24,722) (22,440)
Accounts payable..... 147,000 184,788 72,520 255,828 (130,583)
Accruals and other
payables............ 62,995 (86,315) 110,955 52,476 23,699
Income taxes pay-
able................ -- 70,000 (46,551) (70,000) --
Deferred initial
franchise fees...... 90,679 16,561 (206,261) (147,910) 63,450
--------- --------- --------- --------- ---------
Net Cash Provided by
(Used in) Operating
Activities............ 199,057 291,645 (114,253) (144,611) 713,446
--------- --------- --------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (445,612) (665,948) (278,529) (161,209) (75,296)
Proceeds from sale of
property and
equipment............. -- -- 199,564 191,064 166,361
Purchase of business,
net of cash acquired.. (333,784) -- -- -- --
Other assets........... (63,003) (70,451) 80,335 49,972 (7,876)
Restricted cash........ -- -- (64,575) (69,560) 5,463
--------- --------- --------- --------- ---------
Net Cash Provided by
(Used in) Investing
Activities............ (842,399) (736,399) (63,205) 10,267 88,652
--------- --------- --------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of capital stock...... 795,000 -- -- -- --
Proceeds from notes
payable............... 399,000 593,878 518,426 406,728 --
Principal payments on
notes payable......... -- (49,727) (128,928) (84,804) (466,261)
Principal payments on
non-compete
agreements............ (360,000) (182,300) (182,300) (182,300) (182,300)
Principal payments on
capital lease
obligations........... (3,165) (8,676) (9,849) (3,830) (53,081)
--------- --------- --------- --------- ---------
Net Cash Provided by
(Used in) Financing
Activities............ 830,835 353,175 197,349 135,794 (701,642)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE)
IN CASH................ 187,493 (91,579) 19,891 1,450 100,456
CASH BALANCE, beginning
of period.............. -- 187,493 95,914 95,914 115,805
--------- --------- --------- --------- ---------
CASH BALANCE, end of pe-
riod................... $ 187,493 $ 95,914 $ 115,805 $ 97,364 $ 216,261
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-210
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months Ended September 30, 1997 and 1998 is Unaudited.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Pretzelmaker Holdings, Inc. and Subsidiaries (the Company), was incorporated
on February 24, 1995 and acquired all the issued and outstanding common stock
of Pretzelmaker, Inc. (Pretzelmaker) on March 28, 1995. Pretzelmaker holds
legal title to certain trademarks and recipes for specialty bakery products.
Pretzelmaker licenses use of the trademarks and recipes to qualified third
parties for the establishment and operation of Pretzelmaker stores. In
connection with these licensing activities, Pretzelmaker will require third-
party-licensees to use certain business formats, systems, methods, procedures,
designs, layouts, specifications, tradenames and trademarks. There are licensed
locations located throughout the United States and Canada, as well as Korea.
Pretzelmaker also operates company-owned stores and sports venues for the sale
of its bakery products.
On September 26, 1996, Pretzelmaker Canada, Inc. (Canada) was incorporated.
Pretzelmaker owns all the issued and outstanding stock of Canada. Canada has a
master franchise agreement with Pretzelmaker which covers all locations in
Canada.
Basis of Presentation
The Consolidated financial statements include the accounts of the Company,
Pretzelmaker and Canada, its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The acquisition of
Pretzelmaker has been accounted for as a purchase and accordingly these
consolidated financial statements include the results of Pretzelmaker from the
date of acquisition forward.
Unaudited Information
The accompanying consolidated financial statements as of September 30, 1998
and for the nine months ended September 30, 1997 and 1998 are unaudited and
have been prepared on a substantially equivalent basis with that of the annual
consolidated financial statements. In the opinion of management, the unaudited
information contains all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position and results of operations as of September 30, 1998 and for such
periods.
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.
Financial Instruments and Credit Risk Concentration
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash and accounts receivable. The Company places
its cash in what it believes to be highly rated financial institutions. The
balance in each cash account maintained in the United States is insured by the
Federal Deposit Insurance Corporation up to $100,000. From time to time,
balances in these accounts may exceed the insured limits.
F-211
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months Ended September 30, 1997 and 1998 is Unaudited.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of credit risk with respect to accounts receivable are limited
due to a broad franchisee base and generally short payment terms.
Cash and Equivalents
For the purposes of the statement of cash flows, the Company considers cash
and all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories
Inventories consisting of food products, ovens, belts and promotional
materials are stated at the lower of cost or market, cost being determined on a
first-in, first-out basis.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is determined using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Store fixtures and equipment................................. 5-7 years
Leasehold improvements....................................... Term of lease
Computers and equipment...................................... 5 years
Furniture and fixtures....................................... 7 years
</TABLE>
Intangible Assets
Intangible assets consist primarily of goodwill and non-compete agreements,
which arose in connection with the acquisition of Pretzelmaker by the Company
in 1995. The goodwill and non-compete agreements are being amortized over
periods of fifteen and nine years, respectively.
Revenue Recognition
Revenues generated from company-owned stores are recognized at the point of
sale. Initial franchise fees are recognized after the Company has completed
performance of its initial license obligations. A portion of the franchise fee
revenue is deferred until commencement of operations of the licensee's
location. Franchise and license royalties, which are based upon a percentage of
gross store sales, are recognized as earned.
Advance payments received from suppliers are recorded as deferred revenues
and recognized as income over the life of the related supply agreement.
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 basis of assets and liabilities using enacted tax rates expected to
apply when differences are expected to be settled or realized. Valuation
allowances will be established when necessary, to reduce deferred tax assets to
the amount expected to be realized.
F-212
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months Ended September 30, 1997 and 1998 is Unaudited.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. The translation of the applicable foreign currency
into U.S. dollars is computed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using a weighted average exchange rate during the period. The gains and losses
resulting from such translation are immaterial.
Recent Accounting Pronouncement
During the nine months ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires an "all-inclusive" income
presentation approach which specifies that all revenues, expenses, gains and
losses recognized during the period be reported in income, regardless of
whether they are considered to be results of operations of the period. The
adoption of SFAS No. 130 had no material impact on the Company's financial
statement presentation.
Reclassifications
Certain reclassifications have been made in the prior period consolidated
financial statements to conform with the current period presentation.
Year 2000 Issues
Management of the Company has assessed the year 2000 issue and has determined
that its financial software and related corporate systems and retail sales data
collecting systems are not year 2000 compliant. As a result of the acquisition
of the Company (Note 12) all of the Company's year 2000 non-compliant systems
will be converted to Mrs. Fields' systems by early 1999.
NOTE 2--BANK DEBT
During April 1997, the Company through Pretzelmaker established a $300,000
line-of-credit with a bank and subsequently finalized a term loan facility to
repay then outstanding term debt as well as to provide financing for expansion
equipment and fixtures. Advances under the line-of-credit were made based upon
75% of eligible accounts receivable and 30% of allowable inventories. Advances
under the term loan facility are repayable in 36 monthly installments, plus
interest. Interest on amounts outstanding on the bank debt is computed at the
bank's prime rate plus 1% and the debt is collateralized by the Company's
accounts receivable, inventories, intangibles and property and equipment.
F-213
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the Nine Months Ended September
30, 1997 and 1998 is Unaudited.)
NOTE 2--BANK DEBT (Continued)
The following amounts were outstanding under the bank debt agreements:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Line-of-credit.................................. $300,000 $279,692
Term loans, payable $14,114 monthly, plus
interest....................................... 432,916 164,050
-------- --------
Total......................................... $732,916 $443,742
======== ========
</TABLE>
Under the terms of the agreements, the Company is subject to certain debt
covenants, which include, among other items, limitations on capital
expenditures, minimum tangible net worth and debt coverage ratio amounts and
maximum leverage ratio (all as defined under the agreements). As of December
31, 1997 and September 30, 1998 the Company was not in compliance with the
covenant requirements and the lender has not agreed to provide waivers of such
violations. Accordingly, the term debt which by its original terms would have
been classified as a long-term obligation, has been reclassified as a current
liability due to the default, as the lender has the right to accelerate the
repayment of the loans. Subsequent to the acquisition as discussed in Note 12,
Mrs. Fields is in discussions with the lender regarding repayment or
refinancing.
All required payments under the terms of the debt are current and on March 5,
1998, by mutual agreement with the lender, the Company made a $200,000
prepayment on the term loan portion of the debt. Subsequent to December 31,
1997, advances under the line-of-credit were frozen and an agreement was
reached to extend the repayment of the line-of-credit balance to January 31,
1999.
As of December 31, 1996 there was approximately $409,000 outstanding in 10.1%
to 10.25% term loans, payable to a bank in monthly installments through October
1999. Such amounts, which at that time totaled approximately $360,000 were
repaid out of proceeds from the Company's new term loan facility discussed
above.
NOTE 3--STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Articles of Incorporation authorize $0.001 par value, non-
voting preferred stock in series A (300,000 shares authorized) and series B
(800 shares authorized). In connection with the 1995 acquisition of
Pretzelmaker by the Company, there were 275,942 share of series A and 800
shares of series B preferred shares issued. The series A and B shares contained
dividends and liquidation preferences, cumulative dividend rights and were
convertible into common stock of the Company under terms as defined in the
agreements. No dividends were paid on the preferred shares. In connection with
the acquisition of the Company discussed in Note 12, the 275,942 shares of
series A and 800 shares of series B preferred stock were converted into 35,155
shares of common stock. The accompanying financial statements retroactively
reflect the conversion (which has no affect on total stockholders' equity
amounts) for all periods presented.
F-214
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months Ended September 30, 1997 and 1998 is Unaudited.)
NOTE 3--STOCKHOLDERS' EQUITY (Continued)
Stock Options
The Company has 35,000 shares of common stock reserved for issuance under
three stock option plans (Incentive Stock Option Plan, Non-Qualified Stock
Option Plan and Stock Bonus Plan) collectively referred to as the "Plan".
Through December 31, 1997, options to acquire 13,250 shares had been granted at
exercise prices ranging from $13.20 to $25.00 per share. There were no options
granted in 1998. The Company applies APB Opinion No. 25, Accounting for Stock
Issues to Employees, in accounting for its plans. FASB Statement No. 123,
Accounting for Stock-Basis Compensation, requires the Company to provide pro
forma information regarding net income as if compensation cost for the
Company's stock option plans has been determined in accordance with the fair
value based method prescribed in FASB Statement No. 123. Under the accounting
provisions of FASB Statements No. 123 the Company's reported net income (loss)
would not have been materially impacted for the periods presented under FASB
Statement No. 123.
As part of the acquisition of the Company discussed in Note 12, all of the
stock options were cancelled in connection with the consulting, bonus and
service agreements.
NOTE 4--NON-COMPETE AGREEMENTS
In connection with the 1995 acquisition of Pretzelmaker, the Company entered
into non-compete agreements with the two principal former owners of
Pretzelmaker. The non-interest bearing obligations have been recorded as a
liability on a discounted present value basis using an imputed interest rate of
15%. The agreements require annual payments of $182,300 and as of December 31,
1997, future minimum payments under the obligations are summarized as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- ---------
<S> <C>
1998.............................................................. $ 182,300
1999.............................................................. 182,300
---------
Total Payments.................................................... 364,600
Less: Amounts Representing Interest............................... (37,379)
---------
Present Value of Payments......................................... 327,221
Less: Current Portion............................................. (151,418)
---------
$ 175,803
=========
</TABLE>
NOTE 5--UNSECURED PROMISSORY NOTES
During 1995, the Company issued 15% unsecured promissory notes due September
30, 2000 to various parties, who at the time, were also shareholders of the
Company. In addition to the stated interest, which is payable quarterly, the
notes also contain a net profits interest, as defined, in all Pretzelmaker
company-owned stores and sports venues. Through September 30, 1998, there has
been no net profit interest due under the agreements.
In connection with the acquisition of the Company during November 1998 (as
discussed in Note 12), the acquirer has agreed to repay the outstanding
unsecured promissory notes in January, 1999.
F-215
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months Ended September 30, 1997 and 1998 is Unaudited.)
NOTE 6--CAPITAL LEASE OBLIGATIONS
At December 31, 1997 included with long-term debt are capitalized lease
obligations incurred for store equipment, fixtures and improvements. The
obligations bear implicit interest rates of 16.9% to 21.6% and require total
monthly payments of approximately $6,800, decreasing as the leases are paid off
through October 2001.
Total future payments required under the lease obligations at December 31,
1997 are approximately $78,600 in 1998, $76,300 in 1999, $66,800 in 2000 and
$67,300 in 2001.
As of December 31, 1997, property and equipment includes $197,469 acquired
through capital leases. Accumulated depreciation related to these assets was
$19,183.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases retail store facilities and corporate office space under
long-term non-cancelable operating lease agreements requiring monthly payments
over their remaining terms which expire through 2007. Certain of the retail
store leases also provide for contingent rentals based upon gross revenue of
the store as well as adjustments for operating costs. Additionally, as a result
of master franchise agreements in Canada and former company-owned stores which
have been franchised, the Company is contingently liable under lease guarantees
or assignment agreements.
Total rent expense, including lease termination costs for closed company-
owned stores is summarized as follows:
<TABLE>
<CAPTION>
February 24 Nine Months Ended
(Inception) to Years Ended December 31, September 30,
December 31, ------------------------ -------------------
1995 1996 1997 1997 1998
--------------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Rent expense............ $77,100 $256,900 $446,100 $308,700 $256,200
Lease termination
expense................ -- -- 109,200 103,600 186,600
------- ------------ ------------ --------- ---------
$77,100 $256,900 $555,300 $412,300 $442,800
======= ============ ============ ========= =========
</TABLE>
As of December 31, 1997, future minimum lease payments due under operating
leases are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- ----------
<S> <C>
1998............................................................. $ 242,000
1999............................................................. 248,000
2000............................................................. 216,000
2001............................................................. 151,000
2002............................................................. 130,000
Thereafter....................................................... 356,000
----------
$1,343,000
==========
</TABLE>
F-216
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the Nine Months Ended September
30, 1997 and 1998 is Unaudited.)
NOTE 7--COMMITMENTS AND CONTINGENCIES (Continued)
During September 1998, the Company entered into a sub-lease agreement for its
corporate office space providing for sub-rental income to the Company of
approximately $8,000 monthly to July 2000. Such amounts are not reflected in
the table above.
As of December 31, 1997, future minimum amounts due under operating leases
where the Company is contingently liable under lease guarantees or assignment
agreements are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Amount
------------------------ ----------
<S> <C>
1998............................................................ $ 390,000
1999............................................................ 398,000
2000............................................................ 405,000
2001............................................................ 401,000
2002............................................................ 352,000
Thereafter...................................................... 1,262,000
----------
$3,208,000
==========
</TABLE>
Approximately 51% of the above amounts relate to franchised locations which
are owned in whole or in part by individuals or entities which were
stockholders of the Company prior to the acquisition discussed in Note 12.
Legal Matters
From time to time the Company is the subject of legal actions or threatened
legal actions, which it considers routine to its business activities.
Management of the Company believes that the potential liability to the Company
under such matters would not have a material affect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 8--RELATED PARTY TRANSACTIONS
Since 1996, the Company has had business relationships with various entities
owned in whole or in part by its Chairman, President, and Chief Executive
Officer (the "Officer") summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
---------------- -------------
1996 1997 1998
-------- ------- -------------
<S> <C> <C> <C>
Franchise Fee Income from Related Entities.. $200,000 $ -- $ --
Royalty and Advertising Fees from Related
Entities in Illinois....................... 25,400 55,000 37,765
Account Receivables Outstanding at Period
End from Related Entities.................. 77,904 46,129 24,809
</TABLE>
During 1997, Canada received loans totaling approximately $65,000 (U.S.) from
the two largest franchisees in Canada who are related to the Company through
common ownership. The proceeds are invested in a Canadian certificate of
deposit and the debt evidenced by non-interest bearing promissory notes. The
certificate of deposit is presented as restricted cash and the notes are
included with long-term debt. The advances were made to secure a limited loan
guarantee made by Canada on behalf of the franchisees. Subsequent to September
30, 1998, the loan guarantee obligation was transferred to another corporation
affiliated with the franchisees and the certificate of deposit used to
liquidate the related debt obligations, thereby releasing Canada from any
further obligations under the agreements.
F-217
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the
Nine Months Ended September 30, 1997 and 1998 is Unaudited.)
NOTE 9--INCOME TAXES
Income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996 1997
-------- -------- ----
<S> <C> <C> <C>
CURRENT:
Federal........................................... $ 19,000 $ 68,507 $--
State............................................. 3,000 3,952 --
-------- -------- ----
<CAPTION>
22,000 72,459 --
<S> <C> <C> <C>
-------- -------- ----
DEFFERED (BENEFIT):
Federal........................................... (20,000) (37,000) --
State............................................. (2,000) (3,000) --
-------- -------- ----
(22,000) (40,000) --
-------- -------- ----
Total........................................... $ -- $ 32,459 $--
======== ======== ====
</TABLE>
The components of the net deferred tax assets (liabilities) are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
------- ---------
<S> <C> <C>
Net operating loss carryforward.......................... $ -- $ 55,000
Intangible assets........................................ 65,000 95,000
Accrued expenses......................................... -- 21,000
Accounts receivable allowance............................ 4,000 4,000
Other.................................................... -- 13,000
Accumulated depreciation................................. (7,000) (17,000)
------- ---------
62,000 171,000
Valuation allowance...................................... -- (109,000)
------- ---------
$62,000 $ 62,000
======= =========
</TABLE>
As of December 31, 1997, the Company has a net operating loss carryforward
for income tax purposes of approximately $149,000, expiring in 2012.
A reconciliation of the effective tax rates to the federal statutory rate is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal Statutory Income
Tax Rate (Benefit)..... (34.0)% 34.0 % (34.0)%
Amortization Of Non-
Deductible Goodwill.... 18.2 21.6 12.0
Non-Deductible
Expenses............... -- -- 15.1
Other................... 15.8 (22.3) 6.9
----- ----- -----
Effective Income Tax
Rate................... 0.0 % 33.3 % 0.0 %
===== ===== =====
</TABLE>
F-218
<PAGE>
PRETZELMAKER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the Nine Months Ended September
30, 1997 and 1998 is Unaudited.)
NOTE 10--LITIGATION SETTLEMENT
During 1997, the Company settled a lawsuit, which arose in 1996 in a case in
which the plaintiffs claimed that the Company breached the Franchise Agreement
by failing to grant a specific mall location. The plaintiffs sought damages of
approximately $600,000, plus punitive damages and attorney fees. The cost of
the settlement, including the Company's outside legal fees, was approximately
$149,000.
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
February 24 Years Ended Nine Months Ended
(Inception) to December September 30,
December 31, ---------------- -----------------
1995 1996 1997 1997 1998
--------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Supplemental Disclosure of
Cash Flow Information:
Cash Paid for:
Interest.................. $ 69,600 $87,900 $157,400 $106,700 $106,800
Income taxes.............. 45,000 4,000 103,800 89,700 8,600
Supplemental Disclosure of
Non-Cash Investing and
Financing Activities:
Preferred Stock Issued in
Pretzelmaker
Acquisition.............. 279,800 -- -- -- --
Equipment Acquired under
Financing Obligations.... 42,100 -- 417,200 297,200 --
Company-owned Stores Sold
with Deferred Terms...... -- -- 76,500 76,500 25,000
</TABLE>
NOTE 12--SUBSEQUENT EVENT--ACQUISITION OF COMPANY
During November 1998 the stockholders of the Company sold their shares to
Mrs. Field's Original Cookies, Inc. ("Mrs. Fields"). As a condition to closing,
by mutual agreement among the parties, all preferred shares previously
outstanding were converted to common shares, outstanding stock option
agreements were terminated, and the repayment terms under the non-compete
agreements and unsecured promissory notes were modified so that such
obligations would be repaid by Mrs. Fields by January 1999.
In connection with the acquisition of the Company, Pretzelmaker entered into
various consulting, bonus and severance agreements totaling $327,300 to be paid
during December 1998 and January 1999.
F-219
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales representative, or other person has been 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 Mrs. Fields' Holding or
the initial purchasers. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities other than the securities
to which it relates, nor does it constitute 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 offer or solicitation. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of Mrs.
Fields' Holding since the date hereof or that information contained in this
prospectus is correct as of any time subsequent to its date.
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$55,000,000
Mrs. Fields'
Holding Company, Inc.
14% Series B Senior Secured Discount Notes
Due 2005
----------------
PROSPECTUS
----------------
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
As authorized by Section 145 of the General Corporation Law of the State of
Delaware, each director and officer of Mrs. Fields' Holding may be indemnified
by Mrs. Fields' Holding 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 Mrs. Fields' Holding 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 Mrs. Fields' Holding 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 Mrs.
Fields' Holding, 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 Mrs. Fields'
Holding unless a court determines otherwise.
The Mrs. Fields' Holding by-laws authorize Mrs. Fields' Holding 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
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
1.1+ Purchase Agreement, dated as of August 13, 1998, among Mrs. Fields'
Holding Company, Inc., Jefferies & Company, Inc. and BT Alex. Brown
Incorporated
2.1** Stock Purchase Agreement among Mrs. Fields' Holding Company, Inc. and
Martin E. Lisiewski, shareholder of Pretzel Time, Inc. dated as of
January 2, 1998
2.2** Stock Purchase Agreement among Mrs. Fields' Holding Company, Inc. and
Martin E. Lisiewski, shareholder of Pretzel Time, Inc. dated as of
June 12, 1998
2.3** Securities Purchase Agreement by and among Cookies USA, Inc., the
Individuals and Entities Identified Therein as The Sellers and Mrs.
Fields' Original Cookies, Inc., dated as of August 13, 1998
2.4+ Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Jake Tortorice of Chocolate Chip Cookies of Texas, Inc. as
Seller. Filed as Exhibit 2.3 to the 8-K dated September 3, 1998 and
incorporated herein by reference
2.5+ Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome E. Mouton,
Steven J. Bryan and Jason A. Piltzmaker, holders of all outstanding
capital stock of Deblan Corporation, as Sellers Filed as Exhibit 2.2
to the 8-K dated September 3, 1998 and incorporated herein by
reference
2.6+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and ASK & MSK Family Limited Partnership-II(B), Ltd. Filed as Exhibit
2.4 to the Mrs. Fields' Original Cookies, Inc. 8-K dated September 3,
1998 and incorporated herein by reference
2.7+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Crossroads Cookies, Inc. Filed as Exhibit 2.5 to the Mrs. Fields'
Original Cookies, Inc. 8-K dated September 3, 1998 and incorporated
herein by reference
2.8+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Hot Barton and Northpark Cookies, Inc. Filed as Exhibit 2.6 to
the Mrs. Fields' Original Cookies, Inc. 8-K dated September 3, 1998
and incorporated herein by reference
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
2.9+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Northpark Cookies, Inc. Filed as Exhibit 2.7 to the Mrs. Fields'
Original Cookies, Inc. 8-K dated September 3, 1998 and incorporated
herein by reference
2.10+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Quail Springs Cookies, Inc. Filed as Exhibit 2.8 to the Mrs.
Fields' Original Cookies, Inc. 8-K dated September 3, 1998 and
incorporated herein by reference
2.11+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Westgate Cookies, Inc. Filed as Exhibit 2.9 to the Mrs. Fields'
Original Cookies, Inc. 8-K dated September 3, 1998 and incorporated
herein by reference
2.12** Asset Purchase Agreement between Mrs. Field's Original Cookies, Inc.
as buyer. The Cookie Conglomerate, Inc. and The Cookie Conglomerate,
LLP. the sellers and Ronald A. Eichel and Alan M. Kuehn, partners in
Cookie Comglomerate, LLP and shareholders of Cookie Conglomerate,
Inc., dated as of October 5, 1998.
2.13** Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc. as
the buyer and Martin E. Lisiewski, a shareholder of Pretzel Time,
Inc., dated as of December 9, 1998
2.14** Stock Purchase Agreement among Mrs. Fields' Holding Company, Inc., and
Mrs. Fields Original Cookies, Inc., as buyer, and Pretzel Time, Inc.
and Martin E. Lisiewski, as seller, dated as of December 30, 1998
2.15** Stock Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
as buyer and Pretzelmaker Holdings, Inc., Mark N. Geman, Donald G.
Cox, Jr., and Louis H. Marks as principal sellers, dated as of
November 19, 1998
3.1+ Restated Certificate of Incorporation of Mrs. Fields' Holding Company,
Inc.
3.2+ By-Laws of Mrs. Fields' Holding Company, Inc.
4.1+ Indenture, dated as of August 24, 1998, between Mrs. Fields' Holding
Company, Inc. and The Bank of New York, as Trustee
4.2+ Form of Certificate of Senior Secured Discount Note (included as
Exhibit A to Exhibit 4.1)
4.3+ Pledge Agreement, dated as of August 24, 1998, by Mrs. Fields' Holding
Company, Inc., in favor of The Bank of New York, as Collateral Agent
4.4+ Registration Rights Agreement, dated as of August 24, 1998, among Mrs.
Fields' Holding Company, Inc., Jefferies & Company, Inc. and BT Alex.
Brown Incorporated
4.5** 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
4.6** Form of Notation of Guarantee (included as Exhibit E to Exhibit 4.5)
4.7** Form of certificate of Senior Note (included as Exhibit A to Exhibit
4.5)
4.8** First Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc. and The
Bank of New York, as Trustee
4.9** Second Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., Great
American Cookie Company, Inc., Jefferies & Company, Inc. and BT Alex
Brown Incorporated
4.10** Third Supplemental Indenture, dated as of November 20, 1998, among
Mrs. Fields' Original Cookies, Inc., Great American Cookie Company,
Inc., The Mrs. Fields' Brand, Inc., Pretzelmaker Holdings, Inc., and
The Bank of New York, as a Trustee
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
4.11** Registration Rights Agreement, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., Great
American Cookie Company, Inc., Jefferies & Company, Inc. and BT Alex.
Brown Incorporated
5.1* Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to
legality of the new senior secured discount notes to be issued by
Mrs. Fields' Holding Company, 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., filed as Exhibit 10.1 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.2+ Asset Purchase Agreement, dated as of August 7, 1996, among Mrs.
Fields, Inc., Mrs. Fields' Original Cookies, Inc., and Capricorn
Investors II, L.P., filed as Exhibit 10.11 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.3+ Warrant Agreement, dated as of August 24, 1998, between Mrs. Fields'
Holding Company, Inc. and The Bank of New York, as Warrant Agent
10.4+ Warrant Registration Rights Agreement, dated as of August 24, 1998,
among Mrs. Fields' Holding Company, Inc., Jefferies & Company, Inc.,
BT Alex. Brown Incorporated and Capricorn Investors II, L.P.
10.5+ Amended and Restated Marketing Agreement, dated as of January 9, 1997,
between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain, filed as Exhibit 10.27 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.6** Amendment, dated December 1, 1997, to existing marketing agreement,
dated as of January 9, 1997, between Mrs. Fields' Original Cookies,
Inc. and Coca-Cola USA Fountain
10.7** Corollary agreement, dated September 21, 1998, to existing marketing
agreement, dated as of January 9, 1997 and amended on December 1,
1997, between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain
10.8+ Employment Agreement, dated as of October 1, 1997, between Michael R.
Ward and Mrs. Fields' Original Cookies, Inc. Registration Statement
on S-4 (No. 333-45179) and incorporated by reference herein
10.9+ Employment Agreement, dated as of October 1, 1997, between Pat Knotts
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.29 to
the Mrs. Fields' Original Cookies, Inc. Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.10+ Employment Agreement, dated as of July 1, 1996, between Lawrence
Hodges and Mrs. Fields' Original Cookies, Inc., filed as Exhibit
10.31 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.11** Employment Agreement, dated as of July 10, 1998, between Garry
Remington and Mrs. Fields' Original Cookies, Inc.
10.12+ Lease Agreement, dated as of February 23, 1993, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies,
filed as Exhibit 10.32 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
10.13+ Lease Agreement, dated as of October 10, 1995, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies,
filed as Exhibit 10.33 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.14+ Letter of Agreement, dated as of October 1, 1992, between United
Airlines, Inc. and Mrs. Fields Development Corporation, filed as
Exhibit 10.34 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.15+ Lease Agreement, dated as of January 18, 1998, between 2855 E.
Cottonwood Parkway, L.C. and Mrs. Fields' Original Cookies, Inc.,
filed as Exhibit 10.35 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.16+ Amendment to Supply Agreement, dated as of June 19, 1995 between Van
Den Bergh Foods Company and Mrs. Fields, Inc., filed as Exhibit 10.37
to the Mrs. Fields' Original Cookies, Inc. Registration Statement on
S-4 (No. 333-45179) and incorporated by reference herein
10.17+ Stock Acquisition Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc., Pretzel Time, Inc. and Martin E.
Lisiewski, filed as Exhibit 10.39 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.18+ License Agreement, dated as of March 1, 1992, between Mrs. Fields
Development Corporation and Marriott Corporation, filed as Exhibit
10.40 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.19+ License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp.,
filed as Exhibit 10.41 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on Form S-4 (No. 333-45179) and incorporated
by reference herein
10.20+ Stock Acquisition Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc., Pretzel Time, Inc., and Martin E.
Lisiewski, filed as Exhibit 10.43 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.21+ Franchise 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., filed as Exhibit 10.44 to the Mrs.
Fields' Original Cookies, Inc. Registration Statement on
S-4 (No. 333-45179) and incorporated by reference herein
10.23+ Management Agreement, dated as of September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc., filed as
Exhibit 10.45 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.24+ Stock Purchase Agreement, dated as of September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski, filed as
Exhibit 10.46 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.25+ Shareholder Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc., Martin E. Lisiewski and Pretzel Time,
Inc., filed as Exhibit 10.47 to the Mrs. Fields' Original Cookies,
Inc. Registration Statement on S-4 (No. 333-45179) and incorporated
by reference herein
10.26+ Employment Agreement, dated as of September 2, 1997, between Pretzel
Time, Inc. and Martin E. Lisiewski, filed as Exhibit 10.48 to the
Mrs. Fields' Original Cookies, Inc. Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
10.27+ Area Development Agreement, dated as of September 2, 1997, between
Pretzel Time, Inc. and Mrs. Fields' Original Cookies, Inc., filed as
Exhibit 10.49 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.28+ $500,000 Promissory Note, dated as of September 2, 1997, between
Martin E. Lisiewski and Mrs. Fields' Holding Company, Inc., filed as
Exhibit 10.50 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.29+ Exchange Agreement, dated September 2, 1997, between Mrs. Fields'
Holding Company, Inc. and Martin E. Lisiewski, filed as Exhibit 10.51
to the Mrs. Fields' Original Cookies, Inc. Registration Statement on
S-4 (No. 333-45179) and incorporated by reference herein
10.30+ Registration Rights Agreement, dated September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski, filed as
Exhibit 10.52 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.31+ Franchise Development Agreement, dated September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc., filed as
Exhibit 10.53 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.32+ Asset 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., filed as Exhibit 10.53 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.33+ Exhibit A to the Developing Agent Agreement, dated September 2, 1997,
between Pretzel Time, Inc. and Mrs. Fields' Original Cookies, Inc.,
filed as Exhibit 10.54 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.34** Uniform Franchise Offering Circular of Pretzel Time, Inc., as amended
on August 25, 1998
10.35** Uniform Franchise Offering Circular of Great American Cookie Company,
Inc., as amended on November 24, 1998
10.36+ Exhibit B to the Developing Agent Agreement, dated September 2, 1997,
between Pretzel Time, Inc., and Mrs. Fields' Original Cookies, Inc.,
filed as Exhibit 10.57 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.37+ Assignment of Assets and Assumption of Liabilities Agreement, dated
July 25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields'
Pretzel Concepts, Inc., filed as Exhibit 10.62 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.38+ First Amendment to Operating Agreement for UVEST, LLC, dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST Limited,
filed as Exhibit 10.64 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.39+ First Amendment to Operating Agreement for LV-H&M, L.L.C., dated July
25, 1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean
Jensen, filed as Exhibit 10.65 to the Mrs. Fields' Original Cookies,
Inc. Registration Statement on S-4 (No. 333-45179) and incorporated
by reference herein
10.40+ Lease Agreement, dated March 2, 1995, between Price Development
Company, Limited Partnership and Mrs. Fields Cookies, filed as
Exhibit 10.69 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
10.41+ Consulting Agreement, dated November 26, 1996, between Debra J. Fields
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.70 to
the Mrs. Fields' Original Cookies, Inc. Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.42** Mrs. Fields' Holding Company, Inc. Director Stock Option Plan
10.43** Mrs. Fields' Holding Company, Inc. Employee Stock Option Plan
10.44** Mrs. Fields' Holding Company, Inc. Director Stock Purchase Plan
10.45+ Amended and Restated Loan Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National
Bank, filed as Exhibit 10.73 to the Mrs. Fields' Original Cookies,
Inc. Registration Statement on S-4 (No. 333-45179) and incorporated
by reference herein
10.46** Intellectual Property Security Agreement, dated as of February 28,
1998, between Mrs. Fields' Original Cookies, Inc. and LaSalle
National Bank
10.47** Pledge and Security Agreement, dated as of February 28, 1998, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank
10.48** Stockholders' Agreement, dated as of July 17, 1998, between Mrs.
Fields' Holding Company, Inc. and its Stockholders
10.49** Form of Settlement Agreement and Release, by and among Mrs. Fields'
Original Cookies, Inc., Capricorn Investors II, L.P., a Delaware
limited partnership, Great American Cookie Company, Inc., Cookies
USA, Inc., The Jordan Company, and the Franchisees parties thereto
10.50** Supply Agreement, dated as of March 30, 1998 between Mrs. Fields'
Original Cookies, Inc. and LBI Acquisition Corp. d/b/a Pennant Foods
12.1+ Computation of ratio of earnings to fixed charges of Mrs. Fields'
Holding Company, Inc.
21.1+ Subsidiaries of Mrs. Fields' Holding Company, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Weinstein Spira & Company, P.C.
23.4 Consent of PricewaterhouseCoopers LLP
23.5* Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1)
23.6 Consent of Habif, Arogeti & Wynne, P.C.
23.7 Consent of BDO Siedman, LLP
23.8 Consent of AJ, Robbins, P.C.
23.9+ Consent of the Prior Management of Great American Cookie Company
24.1+ Power of Attorney of certain officers and directors of the Company,
included in Part II of the Registration Statement
25.1+ Form T-1 Statement of Eligibility of The Bank of New York to act as
trustee under the Indenture
27.1+ Financial Data Schedule (for SEC use only)
99.1+ Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
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
</TABLE>
- --------
*To be filed by amendment.
+Filed previously
**Incorporated by reference to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on Form S-4 (File No. 333-67389)
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 prospectus any facts or events arising after the
effective date of the registration statement (or most recent post-effective
amendment thereof) 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 respect 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 1933, each post-effective amendment shall be deemed 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 offering thereof.
(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.
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.
Pursuant to the requirements of the Securities Act of 1933, Mrs. Fields'
Holding Company, 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 4th day of
November, 1999.
Mrs. Fields' Holding Company, Inc.
/s/ Larry A. Hodges
By: _________________________________
Larry A. Hodges
President/CEO
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on November 4, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President, Chief Executive Officer and
- ---------------------------------------- Director
(Larry A. Hodges)
/s/ Mark S. Tanner Senior Vice President, Chief Financial
- ---------------------------------------- Officer
(Mark S. Tanner)
* Chairman of the Board of Directors
- ----------------------------------------
(Herbert S. Winokur)
* Director
- ----------------------------------------
(Richard M. Ferry)
* Director
- ----------------------------------------
(Debbi Fields)
* Director
- ----------------------------------------
(Nathaniel A. Gregory)
* Director
- ----------------------------------------
(Walker Lewis)
* Director
- ----------------------------------------
(Peter W. Mullin)
* Director
- ----------------------------------------
(Gilbert C. Osnos)
</TABLE>
*By: /s/ Michael R. Ward
------------------------------
Michael R. Ward
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
EXHIBIT
1.1+ Purchase Agreement, dated as of August 13, 1998, among Mrs. Fields'
Holding Company, Inc., Jefferies & Company, Inc. and BT Alex. Brown
Incorporated
2.1** Stock Purchase Agreement among Mrs. Fields' Holding Company, Inc.
and Martin E. Lisiewski, shareholder of Pretzel Time, Inc. dated as
of January 2, 1998
2.2** Stock Purchase Agreement among Mrs. Fields' Holding Company, Inc.
and Martin E. Lisiewski, shareholder of Pretzel Time, Inc. dated as
of June 12, 1998
2.3** Securities Purchase Agreement by and among Cookies USA, Inc., the
Individuals and Entities Identified Therein as The Sellers and Mrs.
Fields' Original Cookies, Inc., dated as of August 13, 1998
2.4+ Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc.,
as Buyer, and Jake Tortorice of Chocolate Chip Cookies of Texas,
Inc. as Seller. Filed as Exhibit 2.3 to the 8-K dated September 3,
1998 and incorporated herein by reference
2.5+ Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc.,
as Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome E. Mouton,
Steven J. Bryan and Jason A. Piltzmaker, holders of all outstanding
capital stock of Deblan Corporation, as Sellers Filed as Exhibit 2.2
to the 8-K dated September 3, 1998 and incorporated herein by
reference
2.6+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and ASK & MSK Family Limited Partnership-II(B), Ltd. Filed as
Exhibit 2.4 to the Mrs. Fields' Original Cookies, Inc. 8-K dated
September 3, 1998 and incorporated herein by reference
2.7+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Crossroads Cookies, Inc. Filed as Exhibit 2.5 to the Mrs.
Fields' Original Cookies, Inc. 8-K dated September 3, 1998 and
incorporated herein by reference
2.8+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Hot Barton and Northpark Cookies, Inc. Filed as Exhibit 2.6 to
the Mrs. Fields' Original Cookies, Inc. 8-K dated September 3, 1998
and incorporated herein by reference
2.9+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Northpark Cookies, Inc. Filed as Exhibit 2.7 to the Mrs. Fields'
Original Cookies, Inc. 8-K dated September 3, 1998 and incorporated
herein by reference
2.10+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Quail Springs Cookies, Inc. Filed as Exhibit 2.8 to the Mrs.
Fields' Original Cookies, Inc. 8-K dated September 3, 1998 and
incorporated herein by reference
2.11+ Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Westgate Cookies, Inc. Filed as Exhibit 2.9 to the Mrs. Fields'
Original Cookies, Inc. 8-K dated September 3, 1998 and incorporated
herein by reference See additions on pgs 1 & 2 (2.10-2.13)
2.12** Asset Purchase Agreement between Mrs. Field's Original Cookies, Inc.
as buyer and The Cookie Conglomerate, Inc., and The Cookie
Conglomerate, LLP. the sellers and Ronald A. Eichel and Alan M.
Kuehn, partners in Cookie Comglomerate, LLP and shareholders of
Cookie Conglomerate, Inc., dated as of October 5, 1998.
2.13** Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc.
as the buyer and Martin E. Lisiewski, a shareholder of Pretzel
Time, Inc., dated as of December 9, 1998.
2.14** Stock Purchase Agreement among Mrs. Fields' Holding Company, Inc.,
and Mrs. Fields Original Cookies, Inc., as buyer, and Pretzel Time,
Inc. and Martin E. Lisiewski, as seller, dated as of December 30,
1998.
2.15** Stock Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
as buyer and Pretzelmaker Holdings, Inc., Mark N. Geman, Donald G.
Cox, Jr., and Louis H. Marks as principal sellers, dated as of
November 19, 1998.
3.1+ Restated Certificate of Incorporation of Mrs. Fields' Holding
Company, Inc.
3.2+ By-Laws of Mrs. Fields' Holding Company, Inc.
4.1+ Indenture, dated as of August 24, 1998, between Mrs. Fields' Holding
Company, Inc. and The Bank of New York, as Trustee
4.2+ Form of Certificate of Senior Secured Discount Note (included as
Exhibit A to Exhibit 4.1)
4.3+ Pledge Agreement, dated as of August 24, 1998, by Mrs. Fields'
Holding Company, Inc., in favor of The Bank of New York, as
Collateral Agent
4.4+ Registration Rights Agreement, dated as of August 24, 1998, among
Mrs. Fields' Holding Company, Inc., Jefferies & Company, Inc. and BT
Alex. Brown Incorporated
4.5+ Indenture, dated as of November 26, 1997, among Mrs. Fields'
Original Cookies, Inc., The Mrs. Fields' Brand, Inc. and The Bank of
New York, as Trustee, filed as Exhibit 4.1 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
4.6+ Form of Notation of Guarantee (included as Exhibit E to Exhibit 4.5)
4.7+ Form of certificate of Senior Note (included as Exhibit A to Exhibit
4.5)
4.8+ First Supplemental Indenture, dated as of August 24, 1998, among
Mrs. Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc.
and The Bank of New York, as Trustee
4.9+ Second Supplemental Indenture, dated as of August 24, 1998, among
Mrs. Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc.,
Great American Cookie Company, Inc., Jefferies & Company, Inc. and
BT Alex. Brown Incorporated
4.10+ Third Supplemental Indenture, dated as of November 20, 1998, among
Mrs. Fields' Original Cookies, Inc., Great American Cookie Company,
Inc., The Mrs. Fields' Brand, Inc., Pretzelmaker Holdings, Inc., and
The Bank of New York, as a Trustee.
<PAGE>
EXHIBIT (CONTINUED)
4.11** Registration Rights Agreement, dated as of August 24, 1998, among
Mrs. Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc.,
Great American Cookie Company, Inc., Jefferies & Company, Inc. and
BT Alex. Brown Incorporated
5.1* Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP
as to legality of the new senior secured discount notes to be
issued by Mrs. Fields' Holding Company
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., filed as Exhibit 10.1 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.2+ Asset Purchase Agreement, dated as of August 7, 1996, among Mrs.
Fields, Inc., Mrs. Fields' Original Cookies, Inc., and Capricorn
Investors II, L.P., filed as Exhibit 10.11 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.3+ Warrant Agreement, dated as of August 24, 1998, between Mrs.
Fields' Holding Company, Inc. and The Bank of New York, as Warrant
Agent
10.4+ Warrant Registration Rights Agreement, dated as of August 24, 1998,
among Mrs. Fields' Holding Company, Inc., Jefferies & Company,
Inc., BT Alex. Brown Incorporated and Capricorn Investors II, L.P.
10.5+ Amended and Restated Marketing Agreement, dated as of January 9,
1997, between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain, filed as Exhibit 10.27 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.6** Amendment, dated December 1, 1997, to existing marketing agreement,
dated as of January 9, 1997, between Mrs. Fields' Original Cookies,
Inc. and Coca-Cola USA Fountain
10.7** Corollary agreement, dated September 21, 1998, to existing
marketing agreement, dated as of January 9, 1997 and amended on
December 1, 1997, between Mrs. Fields' Original Cookies, Inc. and
Coca-Cola USA Fountain
10.8+ Employment Agreement, dated as of October 1, 1997, between Michael
R. Ward and Mrs. Fields' Original Cookies, Inc., filed as Exhibit
10.28 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
10.9+ Employment Agreement, dated as of October 1, 1997, between Pat
Knotts and Mrs. Fields' Original Cookies, Inc., filed as Exhibit
10.29 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
10.10+ Employment Agreement, dated as of July 1, 1996, between Lawrence
Hodges and Mrs. Fields' Original Cookies, Inc., filed as Exhibit
10.31 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
10.11** Employment Agreement, dated as of July 10, 1998, between Garry
Remington and Mrs. Fields' Original Cookies, Inc.
10.12+ Lease Agreement, dated as of February 23, 1993, between The
Equitable Life Assurance Society of the United States and Mrs.
Fields Cookies, filed as Exhibit 10.32 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.13+ Lease Agreement, dated as of October 10, 1995, between The
Equitable Life Assurance Society of the United States and Mrs.
Fields Cookies, filed as Exhibit 10.33 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.14+ Letter of Agreement, dated as of October 1, 1992, between United
Airlines, Inc. and Mrs. Fields Development Corporation, filed as
Exhibit 10.34 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.15+ Lease Agreement, dated as of January 18, 1998, between 2855 E.
Cottonwood Parkway, L.C. and Mrs. Fields' Original Cookies, Inc.,
filed as Exhibit 10.35 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.16+ Amendment to Supply Agreement, dated as of June 19, 1995 between
Van Den Bergh Foods Company and Mrs. Fields, Inc., filed as Exhibit
10.37 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
<PAGE>
EXHIBIT (CONTINUED)
10.17+ Stock Acquisition Agreement, dated as of September 2, 1997, among
Mrs. Fields' Holding Company, Inc., Pretzel Time, Inc. and Martin
E. Lisiewski, filed as Exhibit 10.39 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.18+ License Agreement, dated as of March 1, 1992, between Mrs. Fields
Development Corporation and Marriott Corporation, filed as Exhibit
10.40 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
10.19+ License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp.,
filed as Exhibit 10.41 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on Form S-4 (No. 333-45179) and incorporated
by reference herein
10.20+ Stock Acquisition Agreement, dated as of September 2, 1997, among
Mrs. Fields' Holding Company, Inc., Pretzel Time, Inc., and Martin
E. Lisiewski, filed as Exhibit 10.43 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.21+ Franchise 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., filed as Exhibit
10.44 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
10.23+ Management Agreement, dated as of September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc., filed as
Exhibit 10.45 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.24+ Stock Purchase Agreement, dated as of September 2, 1997, between
Mrs. Fields' Holding Company, Inc. and Martin E. Lisiewski, filed
as Exhibit 10.46 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.25+ Shareholder Agreement, dated as of September 2, 1997, among Mrs.
Fields' Holding Company, Inc., Martin E. Lisiewski and Pretzel
Time, Inc., filed as Exhibit 10.47 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.26+ Employment Agreement, dated as of September 2, 1997, between
Pretzel Time, Inc. and Martin E. Lisiewski, filed as Exhibit 10.48
to the Mrs. Fields' Original Cookies, Inc. Registration Statement
on S-4 (No. 333-45179) and incorporated by reference herein
10.27+ Area Development Agreement, dated as of September 2, 1997, between
Pretzel Time, Inc. and Mrs. Fields' Original Cookies, Inc., filed
as Exhibit 10.49 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.28+ $500,000 Promissory Note, dated as of September 2, 1997, between
Martin E. Lisiewski and Mrs. Fields' Holding Company, Inc., filed
as Exhibit 10.50 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.29+ Exchange Agreement, dated September 2, 1997, between Mrs. Fields'
Holding Company, Inc. and Martin E. Lisiewski, filed as Exhibit
10.51 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
10.30+ Registration Rights Agreement, dated September 2, 1997, between
Mrs. Fields' Holding Company, Inc. and Martin E. Lisiewski, filed
as Exhibit 10.52 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.31+ Franchise Development Agreement, dated September 2, 1997, between
Mrs. Fields' Original Cookies, Inc. and Pretzel Time, Inc., filed
as Exhibit 10.53 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.32+ Asset 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., filed as Exhibit 10.53 to the
Mrs. Fields' Original Cookies, Inc. Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.33+ Exhibit A to the Developing Agent Agreement, dated September 2,
1997, between Pretzel Time, Inc. and Mrs. Fields' Original Cookies,
Inc., filed as Exhibit 10.54 to the Mrs. Fields' Original Cookies,
Inc. Registration Statement on S-4 (No. 333-45179) and incorporated
by reference herein
10.34** Uniform Franchise Offering Circular of Pretzel Time, Inc., as
amended on August 24, 1998
10.35** Uniform Franchise Offering Circular of Great American Cookie
Company, Inc., as amended on November 24,1998
<PAGE>
EXHIBIT (CONTINUED)
10.36+ Exhibit B to the Developing Agent Agreement, dated September 2,
1997, between Pretzel Time, Inc., and Mrs. Fields' Original
Cookies, Inc., filed as Exhibit 10.57 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.37+ Assignment of Assets and Assumption of Liabilities Agreement, dated
July 25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields'
Pretzel Concepts, Inc., filed as Exhibit 10.62 to the Mrs. Fields'
Original Cookies, Inc. Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.38+ First Amendment to Operating Agreement for UVEST, LLC, dated July
25, 1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST
Limited, filed as Exhibit 10.64 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.39+ First Amendment to Operating Agreement for LV-H&M, L.L.C., dated
July 25, 1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean
Jensen, filed as Exhibit 10.65 to the Mrs. Fields' Original
Cookies, Inc. Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.40+ Lease Agreement, dated March 2, 1995, between Price Development
Company, Limited Partnership and Mrs. Fields Cookies, filed as
Exhibit 10.69 to the Mrs. Fields' Original Cookies, Inc.
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.41+ Consulting Agreement, dated November 26, 1996, between Debra J.
Fields and Mrs. Fields' Original Cookies, Inc., filed as Exhibit
10.70 to the Mrs. Fields' Original Cookies, Inc. Registration
Statement on S-4 (No. 333-45179) and incorporated by reference
herein
10.42** Mrs. Fields' Holding Company, Inc. Director Stock Option Plan
10.43** Mrs. Fields' Holding Company, Inc. Employee Stock Option Plan
10.44** Mrs. Fields' Holding Company, Inc. Director Stock Purchase Plan
10.45+ Amended and Restated Loan Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National
Bank, filed as Exhibit 10.73 to the Mrs. Fields' Original Cookies,
Inc. Registration Statement on S-4 (No. 333-45179) and incorporated
by reference herein
10.46** Intellectual Property Security Agreement, dated as of February 28,
1998, between Mrs. Fields' Original Cookies, Inc. and LaSalle
National Bank
10.47** Pledge and Security Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National
Bank
10.48** Stockholders' Agreement, dated as of July 17, 1998, between Mrs.
Fields' Holding Company, Inc. and its Stockholders
10.49** Form of Settlement Agreement and Release, by and among Mrs. Fields'
Original Cookies, Inc., Capricorn Investors II, L.P., a Delaware
limited partnership, Great American Cookie Company, Inc., Cookies
USA, Inc., The Jordan Company, and the Franchisees parties thereto
10.50** Supply Agreement, dated as of March 30, 1998 between Mrs. Fields'
Original Cookies, Inc. and LBI Acquisition Corp. d/b/a Pennant
Foods.
12.1+ Computation of ratio of earnings to fixed charges of Mrs. Fields'
Holding Company, Inc.
21.1+ Subsidiaries of Mrs. Fields' Holding Company, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Weinstein Spira & Company, P.C.
23.4 Consent of PricewaterhouseCoopers LLP
23.5* Consent of Skadden,Arps. Slate, Meagher. & Flom LLP (included in
Exhibit 5.1)
23.6 Consent of Habif, Arogeti & Wynne, P.C.
23.7 Consent of BDO Siedman, LLP
23.8 Consent of AJ. Robbins, P.C.
23.9+ Consent of the Prior Management of Great American Cookie Company
24.1+ Power of Attorney of certain officers and directors of the Company,
included in Part II of the Registration Statement
25.1+ Form T-1 Statement of Eligibility of The Bank of New York to act as
trustee under the Indenture
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.
+ Filed Previously
** Incorporated by reference to the Mrs. Field's Original Cookies, Inc.
Registration Statement on Form S-4 (File No.333-67389)
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement on Form S-4.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
November 1, 1999
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-67393 of Mrs. Fields' Holding Company, Inc. of our report dated February 9,
1996, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
November 1, 1999
<PAGE>
[LETTERHEAD OF WEINSTEIN SPIRA APPEARS HERE]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use of our report dated August 17, 1998 on the
financial statements of Deblan Corporation included in Mrs. Feilds' Holding
Company, Inc. Registration Statement on Form S-4.
WEINSTEIN SPIRA & COMPANY P.C.
/S/Weinstein Spira & Company, P.C.
Houston, Texas
November 1, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 3 to Form S-4 (No. 333-67393) of Mrs.
Fields' Holding Company, Inc. of our report dated August 24, 1998 relating to
the financial statements of Cookies USA, Inc., which appears in such Prospectus.
We also consent to the references to us under the heading "Experts" in such
Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
November 1, 1999
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Mrs. Fields' Original Cookies, Inc., and
in the Prospectus constituting part of this registration Statement on Form S-4
of Mrs. Fields' Holding Company, Inc. of our report dated November 12, 1998 as
amended on February 4, 1999 relating to the financial statements of Cookie
Conglomerate, Inc. and its Affiliates, which appears in such documents.
/s/ Habif, Arogeti & Wynne, LLP
- ----------------------------------
Habif, Arogeti & Wynne, LLP
Atlanta, Georgia 30309-3837
November 1, 1999
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Mrs. Fields' Holding Company, Inc.
Salt Lake City, Utah
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement our report dated February 7, 1997, relating to the
consolidated financial statement of Pretzelmaker Holdings, Inc., for the period
from inception (February 24, 1995) to December 31, 1995 and for the year ended
December 31, 1996.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Denver, Colorado
November 1, 1999
<PAGE>
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
3033 EAST 1ST AVENUE, SUITE 201
DENVER, COLORADO
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment #3 of Form S-4 of Mrs. Fields' Holding
Company, Inc. of our report dated December 11, 1998 relating to the consolidated
financial statements of Pretzelmaker Holdings, Inc. and to the reference made to
our firm under the caption "Experts" which appear in such documents.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
Denver, Colorado
November 1, 1999
