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As filed with the Securities and Exchange Commission on November 16, 1998
Registration No.333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MRS. FIELDS' ORIGINAL COOKIES, INC. GREAT AMERICAN COOKIE COMPANY, INC. THE MRS. FIELDS' BRAND, INC.
(Exact name of Registrant as specified (Exact name of Registrant as specified (Exact Name of Registrant as specified
in its charter) in its charter) in its charter)
DELAWARE DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization) incorporation or organization)
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6749 6749 6749
(Primary Standard Industrial (Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number) Classification Code Number)
87-0552899 58-1295221 87-0563472
(I.R.S. Employer (I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.) Identification No.)
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2855 East Cottonwood Parkway, 2855 East Cottonwood Parkway, 2855 East Cottonwood Parkway,
Suite 400 Salt Lake City, Suite 400 Salt Lake City, Suite 400 Salt Lake City,
Utah 84121 Utah 84121 Utah 84121
(801) 736-5600 (801) 736-5600 (801) 736-5600
(Address, including zip code and (Address, including zip code and (Address, including zip code and
telephone number, including area code, telephone number, including telephone number, including area code,
of Registrant's principal executive area code, of Registrant's of Registrant's principal executive
offices) principal executive offices) offices)
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Michael Ward, Esq. Michael Ward, Esq. Michael Ward, Esq.
Vice President of Administration Great American Cookie Company, Inc. The Mrs. Fields' Brand, Inc.
Mrs. Fields' Original Cookies, Inc. 2855 East Cottonwood Parkway, 2855 East Cottonwood Parkway,
2855 East Cottonwood Parkway, Suite 400 Salt Lake City, Suite 400 Salt Lake City,
Suite 400 Salt Lake City, Utah 84121 Utah 84121
Utah 84121 (801) 736-5600 (801) 736-5600
(801) 736-5600 (Name, address, including zip (Name, address, including zip
(Name, address, including zip code, and code, and telephone number, code, and telephone number,
telephone area code, of agents for service) including area code, of including area code, of
telephone number, including area agents for service) agents for service)
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
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Approximate Date of Commencement 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.[_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Class of Securities to be Amount to be Offering Price Aggregate Amount of
Registered Registered Per Security (1) Offering Price (1) Registration Fee (1)
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10 1/8% Series B Senior Notes
due 2004 $53,725,000 100% $53,725,000 $14,935.55
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(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) promulgated under the
Securities Act of 1933, as amended.
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The Registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective
date until the Registrants shall file a further amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall
become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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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.
PROSPECTUS (Subject to completion)
Issued November 16, 1998
Offer for All Outstanding 10 1/8% Series C Senior
Notes due 2004 And 10 1/8% Series A Senior
Notes due 2004
in Exchange for 10 1/8% Series B Senior Notes due 2004,
Which Have Been Registered Under the Securities Act of 1933, As Amended, of
MRS. FIELDS' ORIGINAL COOKIES, INC.
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED IN THIS
PROSPECTUS, BY
GREAT AMERICAN COOKIE COMPANY, INC.
AND
THE MRS. FIELDS' BRAND, INC.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
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Mrs. Fields' Original Cookies, Inc. is offering a total of $53,725,000
10 1/8% Series B Senior Notes, which are registered with the Securities and
Exchange Commission, to all holders of 10 1/8% Series C Senior Notes and 10 1/8%
Series A Senior Notes of Mrs. Fields. Two subsidiaries of Mrs. Fields, Great
American Cookie Company, Inc. and The Mrs. Fields' Brand, Inc., are offering new
guarantees of the Series B Senior Notes in place of their guarantees of the
Series C Senior Notes and Series A Senior Notes. We refer to this Prospectus and
the Letter of Transmittal that accompanies it as the "Exchange Offer." We refer
to "New Senior Notes" as the 10 1/8% Series B Senior Notes being offered in the
Exchange Offer and "Old Senior Notes" as the outstanding Series C Senior Notes
and Series A Senior Notes that can be exchanged for New Senior Notes. We refer
to "Senior Notes" as any of the Company's 10 1/8% Senior Notes due 2004 issued
to date under the Indenture.
TERMS
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. New Senior Notes are identical to Old Senior Notes, . The Company can redeem 35% of the aggregate
except New Senior Notes are registered, do not have principal amount of all Senior Notes issued under
certain transfer restrictions and registration rights, the Indenture prior to December 1, 2001 at 110.125% of
and do not provide for additional payments in certain principal amount, with the cash proceeds of Public
circumstances Equity Offerings (as defined in this Prospectus)
. Senior unsecured debt securities . Holders can require the Company to repurchase their
. Fully and unconditionally guaranteed on a senior basis Senior Notes for 101% of principal amount if there is
. Guarantees are general unsecured obligations of the a Change of Control of the Company
Guarantors . New Senior Notes are offered to satisfy obligations
. Maturity at December 1, 2004 of the Company under the Registration Rights Agreement
. Interest payments are made on June 1 and December 1 described in this Prospectus
each year, beginning December 1, 1998 . New Senior Notes bear interest from the most recent date
. Redeemable at the Company's option at any time on or to which interest has been paid on the Old Senior
after December 1, 2001 at the prices set forth in this Notes or, if no interest has been paid on the Series C
Prospectus Senior Notes, from August 24, 1998
. No interest will be payable on Old Senior Notes
that are exchanged for New Senior Notes
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See "Description of Senior Notes" for more information about the Senior Notes.
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Old Senior Notes on , 1998.
INVESTING IN THE NEW SENIOR NOTES INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 19.
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.
The date of this Prospectus is , 1998.
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TABLE OF CONTENTS
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Page
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Forward-Looking Information.......................................................................4
Prospectus Summary................................................................................5
Summary Historical and Pro Forma Financial and Store Data....................................... 17
Risk Factors.....................................................................................19
The Transactions.................................................................................29
Use of Proceeds..................................................................................31
Capitalization...................................................................................32
The Exchange Offer...............................................................................33
Selected Historical Financial Data...............................................................40
Management's Discussion and Analysis of Financial Condition and Results of Operations............43
Where You Can Find More Information..............................................................67
Business.........................................................................................68
Management.......................................................................................83
Beneficial Ownership of Capital Stock............................................................88
Certain Relationships and Related Transactions...................................................89
Description of Senior Notes......................................................................92
Description of Certain Indebtedness.............................................................118
Plan of Distribution............................................................................120
Certain United States Federal Tax Considerations................................................120
Legal Matters...................................................................................121
Experts.........................................................................................121
Unaudited Pro Forma Condensed Combined Financial Statements.....................................P-1
Index to Historical Financial Statements........................................................F-1
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The registrants' principal executive offices are located at 2855 East
Cottonwood Parkway, Suite 400, Salt Lake City, Utah 84121, and their 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 New Senior Notes or soliciting offers to
exchange Old Senior Notes in any jurisdiction in which such an offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
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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. Such 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." The forward-looking statements include,
among other things, our expectations and estimates about the Company's business
operations following the Great American Transactions, the MFH Transactions, the
Other Recent Transactions and the Offering, including the integration of the
businesses of Great American with Mrs. Fields and our ability to achieve certain
cost savings and other synergies related to such transactions, and our
expectations and estimates about the Company's future financial performance,
including growth in net sales and earnings, cash flows from operations, capital
expenditures, the ability to refinance indebtedness, and the sale of assets.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us, including, among other things, risks described in the
"Risk Factors" section and the following:
. Our ability to combine the businesses of Great American and other
acquisitions with Mrs. Fields and to realize the expected benefits and
cost savings from the acquisitions of Great American and other
acquisitions;
. Performance by franchisees and licensees;
. Difficulties or delays in developing and introducing anticipated new
products or failure of customers to accept new product offerings;
. Changes in consumer preferences and our ability to adequately
anticipate such changes;
. The seasonal nature of the Company's operations;
. Changes in general economic and business conditions;
. Actions by competitors, including new product offerings and marketing
and promotional successes;
. Claims which might be made against the Company, including product
liability claims;
. Changes in business strategy, new product lines, changes in raw
ingredient and employee labor costs;
. Changes in the Company's relationships with its franchisees; and
licensees and
. Changes in mall customer traffic
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Prospectus may not occur.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus.
This summary is not complete and may not contain all of the information you
should consider before making a decision about whether to exchange Old Senior
Notes for the New Senior Notes. You should read the entire Prospectus
carefully, including the section entitled "Risk Factors." We use certain
defined terms in this Prospectus, including the following: "Mrs. Fields" or the
"Company" refers to Mrs. Fields' Original Cookies, Inc., a Delaware corporation;
"MFB" refers to The Mrs. Fields' Brand, Inc., a Delaware corporation; "Great
American" refers to Great American Cookie Company, Inc., a Delaware corporation;
"MFH" refers to Mrs. Fields' Holding Company, Inc., a Delaware corporation that
owns Mrs. Fields; the "Great American Acquisition" refers to the Company's
acquisition of Great American as a result of the Company's purchase of all of
the capital stock of Great American's parent, Cookies USA, Inc. ("Cookies USA");
"Pretzel Time" refers to Pretzel Time, Inc., a Pennsylvania corporation and a
70% owned subsidiary of the Company; and "H&M" refers to H&M Concepts Ltd. Co.,
an Idaho limited liability company and its subsidiaries.
Pro forma condensed combined statement of operations data included in this
Prospectus give effect to the Offering of the Series C Senior Notes as defined
in this Prospectus and the application of net proceeds therefrom and the Great
American Transactions (as defined herein), the MFH Offering and MFH Equity
Infusion each as defined herein (together, the "MFH Transactions"), and the
acquisitions of H&M and Pretzel Time and the related financing, as if each of
the Offering, the Great American Transactions, the MFH Transactions, and the
acquisitions of H&M and Pretzel Time had occurred on December 29, 1996 (the
first day of the most recently completed fiscal year).
THE COMPANY
Mrs. Fields is one of the largest retailers in the premium snack-food
industry (based on the number of units), with cookies and pretzels as its major
product lines. Mrs. Fields is the largest retailer of baked on-premises cookies
(based on the number of units) and the second largest retailer of baked on-
premises pretzels (based on the number of units) in the United States. Mrs.
Fields is one of the most widely recognized and respected brand names in the
premium cookie industry, with a 94% brand awareness among customers, 20% on an
unaided basis and 74% on an aided basis (based on a 1994 study commissioned by
the Company). The Company has recently developed a significant presence in the
rapidly growing, health-oriented pretzel market as a result of the acquisitions
of the pretzel businesses of Hot Sam Company, Inc., H&M (formerly the largest
Pretzel Time franchisee) and a 70% majority interest in Pretzel Time. As of
October 3, 1998, the Company's retail network consisted of 1,333 locations, of
which 1,021 were cookie stores and 312 were pretzel stores. Of the total 1,333
stores, 568 were Company-owned and 765 were franchised or licensed. The
Company's stores average approximately 600 to 700 square feet in size and are
located predominantly in shopping malls. The Company, through licensed
locations, also operates kiosks and carts at airports, universities, stadiums,
hospitals and office building lobbies. The Company's objective is to increase
sales and profitability by focusing on its higher-profitability stores in prime
locations ("core stores"). As a result, by the end of fiscal year 2000, the
Company plans to close or franchise approximately 101 Company-owned cookie
stores and 34 Company-owned pretzel stores that do not meet certain financial
and geographical criteria established by management after giving effect to the
Great American Transactions. For the fiscal year ended January 3, 1998 and the
39 weeks ended October 3, 1998, the Company generated pro forma net revenue and
EBITDA (as defined herein) of $191.3 million and $31.0 million and $126.9
million and $14.6 million, respectively.
COOKIES
The Company operates and franchises 1,021 retail cookie stores: 573 under
the Mrs. Fields brand, 128 under The Original Cookie Company, Incorporated
("Original Cookie") brand, and 320 under the Great American brand. As a result
of the Great American Acquisition, the Company has cookie stores in 46 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 31 malls. Management
believes that Mrs. Fields cookies are positioned in the premium quality, baked
on-premises market of what management believes to be the approximately
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$12 billion U.S. cookie industry. The Company offers over 50 different types of
cookies, brownies and muffins, which are baked continuously and served fresh
throughout the day. Baked products are made using only high quality ingredients,
and all dough is centrally manufactured and frozen 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, the
Company continually creates and tests new products to attract new customers and
satisfy current customers. The Company currently focuses its product development
on sugar-free dough and reduced-fat cookies and brownies.
Mrs. Fields Inc. ("MFI"), one of the predecessors of the Company, was
founded in 1977 by Debbi Fields and, following its initial success, embarked on
an aggressive national expansion program in the early 1980s. By the late 1980s,
however, MFI experienced financial difficulty as a result of excessive debt
levels, certain poor real estate locations, and a recessionary retailing
environment. In connection with a financial restructuring by its lenders, the
Company 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 the Company, which
involved the following key elements: (1) identifying non-core stores to close or
franchise, (2) introducing Company-wide operating procedures to improve store
operating margins, (3) developing a marketing strategy and promotional calendar
to turn around comparable store sales and (4) improving employee morale through
selective new senior hires, increased training and various incentive plans. The
Company reinvested the savings from the improved store operations in marketing
and other measures designed to improve comparable store sales.
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of MFI, Original Cookie and Hot Sam by MFH, a
subsidiary of Capricorn Investors II, L.P. ("Capricorn"). As of October 3, 1998,
Capricorn had invested more than $28 million in MFOC through MFH. Capricorn
retained Mr. Hodges as Chief Executive Officer of Mrs. Fields. Management
believes that Mrs. Fields has a more well-recognized brand name than Original
Cookie and that during fiscal year 1997 and the 39 weeks ended October 3, 1998,
Mrs. Fields stores achieved higher average revenue per core store than Original
Cookie stores ($351,000 versus $301,000). As a result, the Company intends to
continue selectively converting its core and to-be-franchised Original Cookie
stores to Mrs. Fields brand stores, which it believes will result in an increase
in net sales, comparable store sales and store contribution. The Company will
also test the success of converting selected Great American Company-owned stores
to Mrs. Fields brand stores. In addition, any Great American franchisee will
have the option to convert its stores to Mrs. Fields brand franchise stores at
its sole expense in areas where there is no overlap with existing Mrs. Fields
brand franchise stores.
PRETZELS
The Company operates and franchises 312 retail pretzel stores (226 under
the Pretzel Time name and 86 under the Hot Sam name), which offer "sweet dough"
soft pretzels and "Bavarian" style pretzels with a variety of toppings. Pretzel
Time's primary product is an all natural, hand-rolled soft pretzel, freshly
baked from scratch at each store location. Pretzel Time stores prepare pretzels
with a variety of flavors and specialty toppings, including cheddar cheese,
cream cheese and pizza sauce. The stores also offer soft drinks and freshly
squeezed lemonade. The Hot Sam pretzel stores specialize in the Bavarian style
pretzel. This product has declined in popularity in recent years as sweet dough
pretzel sales have grown dramatically. In addition, during fiscal year 1997 and
the 39 weeks ended October 3, 1998, Pretzel Time stores achieved higher average
revenue per core store than Hot Sam stores ($275,000 versus $240,000). As a
result, the Company intends to continue converting its core and to-be-franchised
Hot Sam stores to Pretzel Time stores, which it believes will result in an
increase in net sales, comparable store sales and store contribution.
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Management believes that retail pretzel stores have similar operating
characteristics to retail cookie stores that will permit some co-branding of the
Company's products. In addition, the retail pretzel business has grown more
quickly than the retail cookie business in recent years. The Company acquired
Hot Sam in connection with the acquisition of Original Cookie. In order to
expand its presence in the retail pretzel industry, the Company acquired the
business of H&M and 70% of the common stock of Pretzel Time. Pretzel Time is a
franchisor of 226 hand-rolled soft pretzel retail outlets, which are located in
shopping malls as well as in airports, sports arenas, amusement parks and resort
areas throughout the United States and Canada. The Company operates 95 Pretzel
Time stores as a franchisee, has rights as developing agent to develop Pretzel
Time stores in 18 states, Mexico, and four provinces in Canada.
BUSINESS STRATEGY
The Company's objective is to increase sales and profitability at its core
and franchised stores in prime locations by implementing the key elements of its
long-term business strategy. Percentage change in comparable store sales was
(0.9)% for the 39 weeks ended October 3, 1998 compared to 0.6% for the fiscal
year ended January 3, 1998 and (1.2)% for the fiscal year ended December 28,
1996. Franchising, licensing and other revenues increased by 23.5% for the
fiscal year ended January 3, 1998 over the fiscal year ended December 28, 1996
and by 59.8% for the 39 weeks ended October 3, 1998 compared to the 39 weeks
ended September 27, 1997. The key elements of the Company's business strategy
are as follows:
. Enhance Quality of Company-Owned Store Base. Since current management assumed
responsibility in 1994, the Company has focused on closing and franchising
Company-owned stores that do not meet certain financial and geographical
criteria. From June 1994 through October 3, 1998, the Company closed 171 Mrs.
Fields brand stores and franchised an additional 135 Mrs. Fields brand
stores. The Company has targeted 135 additional stores across all product
concepts to be either closed or franchised by the end of fiscal year 2000.
Such measures are expected to result in enhanced operating margins, as
unprofitable stores are closed and certain other stores are converted into
franchises, thereby increasing royalty payments and eliminating general and
administrative costs associated with such stores.
. Improve Productivity of Core Stores. The Company is embarking on a program to
improve the performance of its core stores by (i) expanding product offerings
to include breakfast items, such as muffins, croissants and bagels, and low-
fat cookies, brownies and muffins, (ii) raising the average ticket through
increased bundling of product offerings, (iii) promoting catering services by
individual stores to corporate customers, (iv) decreasing store expenses by
reducing waste in the cookie baking process and controlling the cost of
ingredients and supplies, (v) improving merchandising by enhancing product
presentation and refining product mix and (vi) increasing training and
various incentive programs for management and sales staff.
. Capitalize on the Strong "Mrs. Fields" Brand Name. Management believes that
the Mrs. Fields brand is the most widely recognized and respected brand name
in the retail premium cookie industry, with a 94% brand awareness among
consumers, 20% on an unaided basis and 74% on an aided basis (based on a 1994
study commissioned by the Company), and that Mrs. Fields brand stores, during
fiscal 1997 and the 39 weeks ended October 3, 1998, achieved higher average
revenue per core store than Original Cookie stores. As a result, the Company
intends to continue selectively converting its core and to-be-franchised
Original Cookie stores to Mrs. Fields brand stores, which it believes will
result in an increase in net sales, comparable store sales and store
contribution. The Company will also test the success of converting selected
Great American Company-owned stores to Mrs. Fields brand stores. In addition,
any Great American franchisee will have the option to convert its stores to
Mrs. Fields brand stores (at its sole expense) in areas where there is no
overlap with existing Mrs. Fields brand franchise stores. Original Cookie
stores represent 33% and Great American stores represent 28% of all Company-
owned cookie stores. The Company intends to further capitalize on the Mrs.
Fields brand name by (i) further developing and expanding new channels of
distribution for the Company's products, including kiosks and carts in malls,
airports, convention centers, office buildings, street fronts and sports
complexes, (ii) increasing the emphasis on its mail order business and (iii)
developing and capitalizing on licensing opportunities such as co-branding
the Mrs. Fields concept with prominent names in the retailing and food
service industry, expanding licensing agreements with the Company's existing
licensees, entering into new
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licensing agreements with food service operators (such as the Company's
existing arrangements with ARAMark, Host Marriott and United Airlines), and
developing product line extensions, such as frozen cookie dough and in-store
bakery products to be sold in supermarkets and other convenient locations.
. Develop Great American Brand. Management believes that the Great American
brand has high consumer awareness in the southeast United States, and
intends 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 its 70% controlling interest in Pretzel Time, the Company has 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 its core and to-be-franchised Hot Sam stores to Pretzel Time
stores. During fiscal year 1997 and the 39 weeks ended October 3, 1998,
Pretzel Time stores achieved higher average revenue per core store and store
contribution than Hot Sam stores. Hot Sam stores represent 48% of all
Company-owned pretzel stores. Management believes that the conversion to the
Pretzel Time name will result in an increase in net sales, comparable store
sales and store contribution for the Company's pretzel business. In addition,
the Company believes there are significant new Pretzel Time franchising
opportunities.
. Develop New Company-Owned and Franchised Stores. The Company plans to build
and franchise new stores, as well as carts and kiosks, in existing and new
markets. The Company has identified over 100 mall and non-traditional
locations, such as amusement parks and other entertainment centers that it
believes would be ideal for cookie and pretzel stores. By the end of fiscal
year 2000, the Company intends to franchise approximately 37 and 14 existing
cookie and pretzel stores, respectively. Beginning in fiscal year 1999, the
Company intends to add approximately 15 new Company-owned cookie and 10 new
Company-owned pretzel stores per year and to franchise approximately 25 new
cookie and 25 new pretzel stores per year. In addition to pursuing new store
development opportunities within the United States, the Company plans to grow
internationally by expanding its franchise operations. As of October 3, 1998,
there were 82 franchised Mrs. Fields brand stores open internationally.
. Realize Purchasing and Overhead Cost Savings. As a result of the Great
American Acquisition and the Franchise Acquisition (as defined herein), the
Company expects to realize significant cost savings from the elimination of
duplicative administrative functions, the consolidation of management
information systems and the reduction of the cost of food and other supplies
as a result of its enhanced purchasing power with vendors. Management
believes that incremental pre-tax cost savings would have totaled
approximately $4.1 million (including $2.2 million of general and
administrative cost savings and $1.9 million of cost savings related to
nonrecurring headquarters facilities and related expenses) for the year ended
January 3, 1998.
. Pursue Further Strategic Acquisitions of Related Businesses. The Company
intends to selectively pursue strategic acquisitions, in addition to the
Great American Acquisition, the Franchise Acquisition and the Other Recent
Transactions (as defined herein), in order to expand its geographic presence
and achieve operating efficiencies. The Company's management has demonstrated
its ability to identify and integrate new businesses through its acquisitions
of the cookie and pretzel businesses of Original Cookie and Hot Sam,
respectively, in September 1996 and the majority interest in Pretzel Time and
the business of H&M in 1997.
THE OFFERING AND THE TRANSACTIONS
The Offering. On August 24, 1998, the Company consummated the offering
(the "Offering") of the 10 1/8% Series C Senior Notes due 2004 (the "Series C
Senior Notes").
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The MFH Transactions. On August 24, 1998, MFH consummated a separate
offering (the "MFH Offering") of senior secured discount notes (the "MFH Senior
Notes") and warrants (the "MFH Warrants") and together with the MFH Senior
Notes, (the "MFH Units"). The MFH Senior Notes are senior obligations of MFH and
are secured by all of the issued and outstanding capital stock of the Company.
Concurrently, MFH contributed to the Company as a capital contribution the MFH
Equity Infusion, consisting of the entire net proceeds of the MFH Units,
approximately $29.1 million (the "MFH Equity Infusion").
The Great American Transactions. The Company used the proceeds of the
Offering, together with cash from other sources, including the MFH Equity
Infusion and available cash of Great American and the Company, (i) to finance
the acquisition of all of the outstanding capital stock and subordinated
indebtedness of Cookies USA, the parent of Great American, and to pay certain
liabilities of Great American (the "Great American Acquisition"), (ii) to
finance the acquisition (the "Franchise Acquisition") by the Company of two
Great American franchisees, Deblan Corporation ("Deblan") and Chocolate Chip
Cookies of Texas, Inc. ("Chocolate Chip"), together owning and operating 29
Great American franchise stores, (iii) to finance a tender offer and consent
solicitation (the "Great American Tender Offer") for all of the outstanding $40
million aggregate principal amount of Great American's 10 7/8% Senior Secured
Notes due 2001 (the "Great American Senior Notes"), and (iv) to finance the
Other Recent Transactions (as defined below) that had not yet been completed as
of the date of the Offering. Concurrently, the Company (i) caused Cookies USA to
be merged with and into the Company and (ii) caused the corporations being
purchased in the Franchise Acquisition to be merged with and into Great American
(the transactions in (i) and (ii), collectively, the "Mergers"). We refer to the
Great American Acquisition, the Franchise Acquisition, the Great American Tender
Offer, the Mergers and the Franchisee Agreement (as defined below) in this
Prospectus as the "Great American Transactions."
The Prior Transactions. On July 25, 1997, a subsidiary of MFH acquired
substantially all of the assets of H&M for aggregate consideration of $13.8
million (excluding the assumption of certain liabilities). On September 2, 1997,
MFH acquired 56.0% of the shares of common stock of Pretzel Time for an
aggregate purchase price of $4.2 million and extended a $500,000 loan to the
founder and minority stockholder of Pretzel Time. Concurrently with an offering
of $100 million 10 1/8% Series A Senior Notes in November 1997 (the "Prior
Offering"), (i) the Company received, as a contribution from MFH, the business
of H&M and 56.0% of the shares of common stock of Pretzel Time, (ii) the Company
received, as a contribution from MFH, all of the common stock of MFB, (iii)
various debt of the Company, MFB and MFH was refinanced, and (iv) the Company
paid a dividend of $1,065,000 and repaid an advance of $1,500,000 to MFH. On
January 2, 1998, the Company purchased an additional 4.0% of the shares of the
common stock of Pretzel Time. The foregoing transactions are referred to herein
as the "Prior Transactions."
The Prior Transactions, the MFH Transactions, and the Great American
Transactions are collectively referred to herein as the "Transactions." See "The
Transactions."
Increase in Pretzel Time Ownership. On June 12, 1998, the Company
acquired 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%.
Other Recent Transactions. In June 1998, the Company acquired six
additional Pretzel Time stores from a franchisee for a purchase price of
$657,000. In addition, the Company acquired one additional Pretzel Time store
from a franchisee for $242,000. The Company has entered into agreements to
acquire two cookie stores operating under other brand names, which the Company
intends to convert or develop into Mrs. Fields brand stores, for purchase prices
aggregating approximately $550,000. The Company intends to remodel the two
cookie stores at an aggregate estimated cost of $100,000. The Company also
purchased eight Great American stores from a Great American franchisee (the
"Combined Karp Entities") for a total purchase price of $1.9 million on
September 9, 1998. The franchisee was also a holder of certain securities of
Cookies USA that the Company purchased pursuant to the Purchase Agreement (as
defined in this Prospectus) and was a party to the Purchase Agreement. These
transactions are collectively referred to herein as the "Other Recent
Transactions."
9
<PAGE>
OVERVIEW OF GREAT AMERICAN
Great American, incorporated in 1977 and headquartered in Atlanta, Georgia,
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 October 3, 1998, Great American had 320 retail outlets
including 109 Great American-owned and 211 franchised retail units, operating
primarily in the southeastern and south central United States. Great American
derives its revenue principally from (i) the sale of cookies and beverages at
Great American-owned stores, (ii) the sale of proprietary batter to franchised
stores and (iii) 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-owned stores to
franchisees. For the fiscal year ended June 28, 1998, Great American had total
revenue of $37.3 million, and EBITDA of $8.9 million.
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, the Company believes 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.
RECENT DEVELOPMENTS
On October 5, 1998, MFOC purchased all of the retail cookie and related
business and operations of eleven Great American stores for an aggregate
purchase price of $2.8 million. The sellers of the stores were franchisees of
Great American. The acquisition was funded with increased borrowings of
$2.8 million.
The Company is currently in discussions with Pretzelmaker Holdings, Inc.
("Pretzelmaker") and the holders of all of Pretzelmaker's outstanding capital
stock regarding a possible acquisition by the Company of all outstanding
Pretzelmaker capital stock. The Company cannot be sure that a definitive
agreement to purchase Pretzelmaker will be signed, or that this transaction will
be completed.
10
<PAGE>
THE EXCHANGE OFFER
On August 24, 1998, the Company issued $40.0 million in aggregate principal
amount of 10 1/8% Series C Senior Notes (the "Series C Senior Notes"). The
Company had previously sold, on November 26, 1997, $100.0 million in principal
amount of 10 1/8% Series A Senior Notes, most of which have been exchanged for
registered securities of the Company (the "Old Series B Senior Notes"). We refer
to the remaining 10 1/8% Series A Senior Notes outstanding as the "Series A
Senior Notes," and we refer to the Series A Senior Notes and the Series C Senior
Notes collectively as the "Old Senior Notes." We refer to "Senior Notes" as any
of the Company's 10 1/8% Senior Notes due 2004 issued to date under the
Indenture. The Company sold Old Senior Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws, to enable the Company to raise funds more
quickly than necessarily would have been possible had the initial sale been
pursuant to an offering registered under the Securities Act. Jefferies & Company
and BT Alex. Brown Incorporated (the "Initial Purchasers"), as a condition to
their purchase of the Series C Senior Notes, requested that the Company agree to
commence the Exchange Offer following the Offering of the Series C Senior Notes.
The Old Senior Notes are, and the New Senior Notes will be, fully and
unconditionally guaranteed by MFB and Great American, the current Guarantors.
<TABLE>
<CAPTION>
<S> <C>
Securities Offered The Company is offering up to $53,725,000 of New Senior Notes.
The Exchange Offer....................................... The Company is offering the New Senior Notes in
exchange for $53,725,000 of Old Senior Notes (consisting of
$13,725,000 of Series A Senior Notes and $40,000,000 of
Series C Senior Notes). The Company agreed to offer the New
Senior Notes in a Registration Rights Agreement (the
"Registration Rights Agreement") among the Company, the
Guarantors and the Initial Purchasers of the Series C Senior
Notes. We describe the procedures for tendering Old Senior
Notes in "The Exchange Offer-Procedures for Tendering Old
Senior Notes."
Tenders; Expiration Date; Withdrawal..................... The Exchange Offer will expire at 12:00 Midnight,
New York City time, on , 1998, or on a later date
and time to which we extend the Exchange Offer, in which
case the Expiration Date will be the latest date and time to
which we extend the Exchange Offer. Each Holder tendering
Old Senior Notes must acknowledge that it is not engaging
in, and does not intend to engage in, a distribution of the
New Senior Notes. Holders may withdraw their tenders of Old
Senior Notes pursuant to the Exchange Offer at any time
prior to the Expiration Date. We will return any Old Senior
Note that we do not accept for exchange for any reason as
promptly as practicable after the Exchange Offer expires or
we terminate the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
United States Federal Income Tax Considerations......... The exchange pursuant to the Exchange Offer should
not result in any income, gain or loss to the Holders or the
Company for United States federal income tax purposes. See
"Certain United States Federal Income Tax Considerations."
Use of Proceeds.......................................... Neither the Company nor the Guarantors will receive
any cash proceeds from the issuance of the New Senior Notes
offered hereby. See "Use of Proceeds."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Exchange Agent........................................... The Bank of New York (the "Exchange Agent") is the
Exchange Agent for the Exchange Offer. You can find the
addresses, and telephone and facsimile numbers, of the
Exchange Agent in "The Exchange Offer--Exchange Agent" and in
the Letter of Transmittal.
Shelf Registration Statement............................. Under certain circumstances, certain Holders of
Senior Notes (including Holders who are not permitted to
participate in the Exchange Offer or who may not freely
resell New Senior Notes received in the Exchange Offer) may
require the Company to file, and cause to become effective,
a shelf registration statement under the Securities Act,
which would cover resales of Senior Notes by such Holders.
See "Description of the Senior Notes--Exchange Offer;
Registration Rights."
</TABLE>
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Senior Notes who do not exchange their Old Senior Notes for
New Senior Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Senior Notes as set forth in the legend
on the Old Senior Notes as a consequence of the issuance of the Old Senior Notes
pursuant to exemptions from, or in transactions not subject to, the Securities
Act and applicable state securities laws. In general, Holders may not offer or
sell Old Senior Notes, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Based on interpretation by
the staff of the Commission, as set forth in no-action letters issued to third
parties, we believe that New Senior Notes issued pursuant to the Exchange Offer
in exchange for Old Senior Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any Holder which is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Senior Notes are acquired in the ordinary
course of such Holder's business and such Holder, other than broker-dealers, has
no arrangement with any person to participate in the distribution of such New
Senior Notes. However, the Commission has not considered the Exchange Offer in
the context of a no-action letter and there can be no assurance that the staff
of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each Holder, other than a
broker-dealer, must at the request of the Company furnish a written
representation that it is not an affiliate of the Company, is not engaged in,
and does not intend to engage in, a distribution of such New Senior Notes and
has no arrangement or understanding to participate in a distribution of New
Senior Notes, and that it is acquiring the New Senior Notes in its ordinary
course of business. Each broker-dealer that receives New Senior Notes for its
own account in exchange for Old Senior Notes must acknowledge that such broker-
dealer acquired its Old Senior Notes as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such New Senior Notes. See "Plan of Distribution." In
addition, to comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register thereunder the New Senior Notes prior
to offering or selling such New Senior Notes. We have agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified therein,
prior to any public offering of Transfer Restricted Securities (as defined
herein) to register or qualify the Transfer Restricted Securities for offer or
sale under the securities laws of such jurisdictions as any Holder requests.
Unless a Holder so requests, the Company does not intend to register or qualify
the sale of the New Senior Notes in any such jurisdiction.
12
<PAGE>
SUMMARY DESCRIPTION OF THE NEW SENIOR NOTES
The terms of the New Senior Notes and the Old Senior Notes are identical in
all material respects, except (i) that the New Senior Notes have been registered
under the Securities Act, (ii) for certain transfer restrictions relating to the
Old Senior Notes and registration rights relating to the Series C Senior Notes
and (iii) that the New Senior Notes will not contain certain provisions relating
to an additional payment to be made to Holders of Series C Senior Notes under
certain circumstances relating to the timing of the Exchange Offer. The New
Senior Notes will bear interest from the most recent date to which interest has
been paid on the Old Senior Notes or, with respect to the Series C Senior Notes,
if no interest has been paid on the Series C Senior Notes, from August 24, 1998,
the date of original issuance of the Series C Senior Notes. Old Senior Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders whose Old Senior Notes are accepted
for exchange will not receive any payment in respect of such interest on such
Old Senior Notes otherwise payable on any interest payment date the record date
for which occurs on or after consummation of the Exchange Offer.
<TABLE>
<S> <C>
Securities Offered....................................... The Company is offering up to $53,725,000 in aggregate
principal amount of 10 1/8% Series B Senior Notes due
2004. The Company has registered the Series B Senior Notes
under the Securities Act.
Maturity Date............................................ December 1, 2004.
Interest Payment Dates................................... June 1 and December 1 of each year, commencing December 1,
1998.
Guarantee................................................ The New Senior Notes are fully and unconditionally
guaranteed (the "New Guarantees") on a senior basis by Great
American, MFB and, under certain circumstances, certain
existing and future subsidiaries of the Company
(collectively, the "Guarantors"). The Guarantees are general
unsecured obligations of the Guarantors, rank senior in
right of payment to all subordinated indebtedness of the
Guarantors and rank pari passu in right of payment with all
existing and future senior indebtedness of the Guarantors
(including Great American's and MFB's Guarantees (the "Old
Guarantees" and, together with the New Guarantees, the
"Guarantees") of any Old Senior Notes outstanding following
consummation of the Exchange Offer). See "Description of
Senior Notes--Guarantees."
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Ranking.................................................. The New Senior Notes are general unsecured obligations of
the Company, rank senior in right of payment to all subordinated
indebtedness of the Company and rank pari passu in right of payment with
all existing and future senior indebtedness of the Company (including any
Old Senior Notes that remain outstanding following completion of the
Exchange Offer). As of October 3, 1998, the Company (excluding its
subsidiaries) had approximately $0.3 million in indebtedness other than
the Old Senior Notes and the Old Series B Senior Notes. As of October 3,
1998, the aggregate amount of indebtedness of the Company's subsidiaries
was approximately $0.4 million and the aggregate liquidation preference
of mandatorily redeemable preferred stock of the Company's subsidiaries
was approximately $1.5 million, all of which was issued by a subsidiary
other than the Guarantors and effectively ranks senior in right of
payment to the Senior Notes.
Although the Indenture (as defined in this Prospectus) limits the ability
of the Company and its subsidiaries to incur additional indebtedness and
issue preferred stock, the Company is permitted to incur additional
indebtedness and issue preferred stock, including secured indebtedness,
under certain circumstances, which will effectively rank senior to the
Senior Notes with respect to the assets securing such indebtedness. See
"Risk Factors--Effective Subordination" and "Description of Senior
Notes--General."
Optional Redemption...................................... The Company has the option to redeem the Senior Notes, in whole or in
part, at any time on or after December 1, 2001, in cash at the redemption
prices set forth in this Prospectus, plus accrued and unpaid interest
thereon to the date of redemption. In addition, at any time prior to
December 1, 2001, the Company may on any one or more occasions redeem up
to an aggregate of 35% of the aggregate principal amount of Senior Notes
ever issued under the Indenture at a redemption price equal to 110.125%
of the principal amount thereof, plus accrued and unpaid interest thereon
to the redemption date, with the net cash proceeds of one or more Public
Equity Offerings; provided that at least 65% of the aggregate principal
amount of Senior Notes ever issued under the Indenture remains
outstanding immediately after the occurrence of any such redemption. See
"Description of Senior Notes--Optional Redemption."
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Change of Control........................................ Upon the occurrence of a Change of Control, each
Holder of Senior Notes will have the right to require the
Company to repurchase all or any part of such Holder's
Senior Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid
interest thereon to the date of repurchase. See "Description
of Senior Notes--Repurchase at the Option of Holders--Change
of Control." There can be no assurance that, in the event of
a Change of Control, the Company would have sufficient funds
to purchase all Senior Notes tendered. See "Risk
Factors--Inability to Repurchase Senior Notes Upon a Change
of Control."
Certain Covenants........................................ The Indenture contains certain covenants that limit,
among other things, the ability of the Company and its
subsidiaries to: (i) pay dividends, redeem capital stock or
make certain other restricted payments or investments; (ii)
incur additional indebtedness or issue preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of their assets; (iv) create liens on
assets; (v) engage in certain asset sales; and (vi) enter
into certain transactions with affiliates or related
persons. See "Description of Senior Notes--Certain Covenants."
Form, Denomination and Registration of Notes............. New Senior Notes exchanged for Old Senior Notes
will be eligible for trading through the facilities of the
Depository Trust Company ("DTC"). New Senior Notes traded
through the facilities of DTC will be represented by a
global note or notes in definitive, fully registered form
without interest coupons deposited with the trustee for the
New Senior Notes (the "Trustee") as custodian for and
registered in the name of a nominee of DTC. New Senior
Notes exchanged for Old Senior Notes which are in the form
of registered definitive certificates will be issued in the
form of registered definitive certificates until otherwise
directed by the Holders of such New Senior Notes. See
"Description of the Senior Notes-Book-Entry, Delivery and
Form."
Use of Proceeds.......................................... The Company will not receive any proceeds from the
Exchange Offer. The Company used the net proceeds of the
offering of the Old Senior Notes, together with funds from
other sources, to fund certain acquisitions and to pay
certain related fees and expenses. See "The Transactions"
and "Use of Proceeds."
</TABLE>
15
<PAGE>
RISK FACTORS
In addition to the information contained elsewhere in this Prospectus,
Holders of the Old Senior Notes should carefully consider the matters set forth
under "Risk Factors" commencing on page 19 before making a decision to tender
their Old Senior Notes in the Exchange Offer.
16
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND STORE DATA
The following table presents: (i) summary combined historical financial and
store data for Mrs. Fields' Original Cookies, Inc. and subsidiaries ("Mrs.
Fields") and its predecessors; namely, Mrs. Fields Inc. and subsidiaries, The
Original Cookie Company, Incorporated and the Carved-out Portion (pretzel
business) of Hot Sam Company, Inc. (collectively, the "Predecessors"), as of
December 30, 1995 and December 28, 1996 and for each of the two 52-week periods
then ended; (ii) summary consolidated historical financial and store data for
Mrs. Fields as of January 3, 1998, September 27, 1997 and October 3, 1998 and
for the 53 weeks, 39 weeks and 39 weeks then ended, respectively; and (iii)
summary combined pro forma financial and store data for Mrs. Fields, Great
American, Deblan, Chocolate Chip and the Combined Karp Entities (collectively,
the "Company") for the 53 weeks ended January 3, 1998 and the 39 weeks ended
October 3, 1998 as if each of the Offering, the Great American Transactions, the
MFH Transactions and the acquisitions of H&M and Pretzel Time had occurred as of
December 29, 1996. Except for data presented with respect to the Combined Karp
Entities, the summary pro forma data do not give effect to the Other Recent
Transactions. The historical results of operations for the 39 weeks ended
October 3, 1998 are not indicative of the results to be expected for the full
fiscal year of Mrs. Fields or the Company. The summary combined pro forma data
do not purport to represent what the Company's results actually would have been
had the Offering, the Great American Transactions and the MFH Transactions
occurred as of December 31, 1996 nor do such data purport to project the results
of the Company 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 the
related notes thereto, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MRS. FIELDS THE THE
AND PREDECESSORS(1) COMPANY MRS. FIELDS (1) COMPANY
-------------------------------------- ---------- ----------------- ------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA
COMBINED(2) CONSOLIDATED COMBINED CONSOLIDATED COMBINED
------------------------ ------------- ---------- ----------------- ------------------
53 WEEKS 53 WEEKS
52 WEEKS ENDED(3) ENDED(3) ENDED(3) 39 WEEKS ENDED(3)
------------------------ ------------ ----------- ------------------------------------
DECEMBER DECEMBER JANUARY JANUARY SEPTEMBER OCTOBER OCTOBER
30, 1995 28, 1996 3, 1998 3, 1998(4) 27, 1997 3, 1998 3, 1998(4)
----------- ---------- ------------ ----------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net store and batter sales............ $ 145,537 $ 123,930 $ 123,987 $ 178,494 $ 83,759 $ 89,938 $ 117,770
Net store and batter contribution(5) 19,654 19,133 25,087 37,116 13,214 11,804 19,390
Franchising, licensing and
other revenue, net.................. 5,993 5,278 6,520 12,770 3,767 6,021 9,167
General and administrative expenses... 24,828 20,557 16,730 25,332 10,803 12,621 18,747
Income (loss) from operations......... (1,091) 1,135 8,415 12,722 2,378 (314) 463
Net loss.............................. (4,464) (5,988) (974) (3,120) (3,224) (9,690) (12,236)
OTHER DATA:
Cash flows from operating activities.. (27) 6,784 919 4,311 791 676 (563)
Cash flows from investing activities.. 1,958 (22,716) (15,505) (16,119) (3,216) (34,315) (34,706)
Cash flows from financing activities.. (4,784) 18,793 24,164 23,745 (98) 22,498 22,215
Interest expense...................... 4,407 4,842 7,830 15,563 5,070 8,981 12,382
Total depreciation and amortization... 10,427 9,192 10,403 18,268 6,596 9,707 14,174
Capital expenditures.................. 4,714 3,892 4,678 N/A 3,216 5,616 N/A
EBITDA (6)............................ 9,336 10,327 18,818 30,990 8,974 9,393 14,637
Store contribution for stores in the
process of being closed or
franchised(5).................... $ (2,344) $ (1,933) $ (1,798) $ (1,761) $ (1,999) $ (2,125) $ (2,592)
Ratio of earnings to fixed
charges(7).......................... -- -- -- -- -- -- --
STORE DATA:
Percentage change in
comparable store sales(8)........... (1.6)% (1.2)% 0.6% N/A 1.3% (0.9)% N/A
Total Company-owned stores
open at end of period............... 540 482 481 598 496 568 568
Total franchised or licensed
stores open at end of period........ 415 418 553 767 540 765 765
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS
HISTORICAL
CONSOLIDATED
OCTOBER 3, 1998
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................................................................................ $ 5,146
Total assets ............................................................................................. 222,657
Mandatorily redeemable cumulative preferred stock of subsidiary .......................................... 1,171
Total debt and capital lease obligations, including current portion ...................................... 140,156
Total stockholder's equity ............................................................................... 50,131
</TABLE>
- --------------
(1) On September 17, 1996, Mrs. Fields' Original Cookies, Inc. completed the
acquisitions of substantially all of the assets and assumed certain
liabilities of the Predecessors. In order for the presentations to be
comparable for the periods presented, certain financial statement
information for the Predecessors has been reclassified to be consistent with
the Mrs. Fields historical financial statement presentation.
(2) Information reflects the combined results of the Predecessors for the fiscal
year 1995. Information for the fiscal year 1996 reflects the combined
results of the Predecessors (for the period December 31, 1995 through
September 17, 1996) and Mrs. Fields (for the period September 18, 1996
through December 28, 1996). Information for these periods for the
Predecessors and Mrs. Fields are set out separately in the "Selected
Historical Financial Data" but are combined here. This presentation is not
in conformity with generally accepted accounting principles.
(3) Mrs. Fields and its predecessors operate using a 52/53-week year ending near
December 31. Great American operates using a 52/53-week year ending near
June 30. Deblan operates using a year ending December 31. Chocolate Chip
operates using a year ending September 30. The entities that make up the
Combined Karp Entities have various fiscal year ends which have been recast
to December 31.
(4) The Company's combined pro forma data for the 53 weeks ended January 3, 1998
and the 39 weeks ended October 3, 1998 reflect the combined results of Mrs.
Fields, Great American, Deblan, Chocolate Chip, the Combined Karp Entities,
H&M and Pretzel Time assuming the acquisitions occurred on December 29,
1996. See "Unaudited Pro Forma Condensed Combined Financial Statements."
(5) Store contribution is determined by subtracting all store operating expenses
including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. 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.
(6) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, minority interest, preferred stock accretion and dividends of
subsidiaries and other income (expense). EBITDA is not intended to represent
cash flows from operations as defined by generally accepted accounting
principles and should not be considered as an alternative to net income
(loss) as an indicator of operating performance or to cash flows as a
measure of liquidity. EBITDA has been included herein because it is one of
the indicators by which Mrs. Fields assesses its financial performance and
its capacity to service its debt.
<TABLE>
<CAPTION>
MRS. FIELDS THE THE
AND PREDECESSORS COMPANY MRS. FIELDS COMPANY
---------------------------------------- ----------- --------------- ---------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA
COMBINED(2) CONSOLIDATED COMBINED CONSOLIDATED COMBINED
------------------------ --------------- ----------- --------------- ---------------
53 WEEKS 53 WEEKS
52 WEEKS ENDED ENDED ENDED 39 WEEKS ENDED
------------------------ ---------- ----------- --------------------------------------
DECEMBER DECEMBER JANUARY JANUARY SEPTEMBER OCTOBER OCTOBER
30, 1995 28, 1996 3, 1998 3, 1998 27, 1997 3, 1998 3, 1998
----------- ---------- --------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations ... $ (1,091) $ 1,135 $ 8,415 $ 12,722 $ 2,378 $ (314) $ 463
ADD:
Depreciation and amortization ... 10,427 9,192 10,403 18,268 6,596 9,707 14,174
EBITDA ............................... --------- -------- -------- -------- ------- ------- --------
$ 9,336 $ 10,327 $ 18,818 $ 30,990 $ 8,974 $ 9,393 $ 14,637
========= ======== ======== ======== ======= ======= ========
</TABLE>
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued and
net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For fiscal years 1995 and 1996, earnings were
insufficient to cover fixed charges by $3,960,000 and $3,985,000,
respectively. For the 53 weeks ended January 3, 1998, the 39 weeks ended
September 27, 1997 and the 39 weeks ended October 3, 1998, Mrs. Fields'
earnings were insufficient to cover fixed charges by $319,000, $3,045,000
and $9,397,000, respectively. For the 53 weeks ended January 3, 1998 and the
39 weeks ended October 3, 1998, pro forma combined earnings were
insufficient to cover pro forma combined fixed charges by $3,104,000 and
$12,345,000, respectively.
(8) The Company includes in comparable store sales only those stores that have
been in operation for a minimum of 24 consecutive months. The percentage
change in comparable store sales is calculated from the previous period.
18
<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 Old Senior Notes for New Senior Notes in the Exchange Offer.
Except for the first two risk factors described below, the risks factors
generally apply to New Senior Notes as well as Old Senior Notes. The risks
described below are not the only ones that could affect the Company or its
securities.
This Prospectus contains forward-looking statements. These statements
relate to future events or the Company's future performance, including financial
performance. 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. These statements
are only predictions. Actual events and results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined below. 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.
THERE CAN BE ADVERSE CONSEQUENCES IF YOU DO NOT EXCHANGE YOUR OLD SENIOR NOTES
The Company will issue New Senior Notes in exchange for the Old Senior
Notes after certain conditions are satisfied or the Company decides to waive the
conditions. The Company will only offer New Senior Notes to a Holder after The
Bank of New York, which is the Exchange Agent for the Exchange Offer, receives a
properly completed, signed Letter of Transmittal and all other required
documents from a Holder. Holders of Old Senior Notes should make sure they send
in the required documents in time for them to reach the Exchange Agent by the
expiration of the Exchange Offer. Neither the Exchange Agent nor the Company is
obligated to notify Holders that the Holders did not properly complete the
documents and take all the steps required to tender Old Senior Notes in the
Exchange Offer. If a Holder does not tender Old Senior Notes or if the Company
does not accept some Old Senior Notes, those Old Senior Notes will continue to
be subject to the provisions of the Indenture regarding transfer and exchange of
the Old Senior Notes, the existing restrictions upon transfer of the Old Senior
Notes that are set forth in the legend on the Old Senior Notes and in the
Offering Circular dated August 24, 1998 relating to the Old Senior Notes (the
"Offering Circular"). Except in certain limited circumstances that apply to
certain types of Holders of Old Senior Notes, the Company does not have to
register any additional Old Senior Notes under the Securities Act of 1933.
Unless they are registered or there is an exemption from the requirement to
register securities under the Securities Act of 1933 or state laws that apply to
the Old Senior Notes, the Old Senior Notes may not be offered or sold. The
Company does not currently expect to register the Old Senior Notes under the
Securities Act of 1933 or state securities laws.
If a large number of Old Senior Notes are exchanged for New Senior Notes,
it may be difficult for Holders of Old Senior Notes that are not exchanged in
the Exchange Offer to sell their Old Senior Notes.
Once the Exchange Offer has been completed, Holders of Old Senior Notes
will not be entitled to any increase in the interest rate on Old Senior Notes or
have any further rights to have their Old Senior Notes registered, except under
limited circumstances.
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THERE CAN BE ADVERSE CONSEQUENCES IF YOU EXCHANGE YOUR OLD SENIOR NOTES
The Company believes that the Holders of the New Senior Notes issued in
exchange for the Old Senior Notes in the Exchange Offer may offer those New
Senior Notes for resale, unless the Holder comes within the definition of an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, without registering the New Senior Notes or delivering a prospectus for the
New Senior Notes, as long as the Holders acquire the New Senior Notes in the
ordinary course of business and the Holders have no arrangement with any person
to participate in the distribution (within the meaning of the Securities Act) of
the New Senior Notes. The Company's belief is based on interpretations of no-
action letters that the Commission issued to third parties. Each Holder, other
than a broker-dealer, must tell the Company in writing at the Company's request
that it is not an affiliate of the Company, is not engaged in, and does not
intend to engage in, a distribution of such New Senior Notes and has no
arrangement or understanding to participate in a distribution of New Senior
Notes, and that it is acquiring the New Senior Notes in its ordinary course of
business. If any Holder is an affiliate of the Company, is engaged in
distribution of the New Senior Notes, intends to distribute the New Senior
Notes, or has an agreement to distribute the New Senior Notes the Holder will
receive in the Exchange Offer, the Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must register the New
Senior Notes and deliver a prospectus for the New Senior Notes before the Holder
resells the New Senior Notes. Each broker-dealer that receives New Senior Notes
for its own account in exchange for Old Senior Notes must acknowledge that the
broker-dealer acquired the Old Senior Notes in market-making activities or other
trading activities and that it will deliver a prospectus for the New Senior
Notes if it resells the New Senior Notes. Each broker-dealer that holds Old
Senior Notes acquired for its own account as a result of market-making
activities or other trading activities, and that receives New Senior Notes in
exchange for such Old Senior Notes in the Exchange Offer, may be an
"underwriter" within the meaning of the Securities Act in connection with any
resale of such New Senior Notes. The Letter of Transmittal states that an
underwriter who acknowledges that it acquired the Old Senior Notes in market-
making activities or other trading activities and delivers a prospectus will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Broker-dealers may use this Prospectus, as it may be amended or
supplemented from time to time, when they resell New Senior Notes received in
exchange for Old Senior Notes where such Old Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. We have agreed that starting on the date of consummation of the
Exchange Offer and ending on the close of business of the 120th day following
the date of consummation of the Exchange Offer, we will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, it may be necessary to qualify for sale or register
thereunder the New Senior Notes prior to offering or selling such New Senior
Notes. We have agreed, pursuant to the Registration Rights Agreement, subject
to certain limitations specified therein, prior to any public offering of
Transfer Restricted Securities (as defined herein) to register or qualify the
Transfer Restricted Securities for offer or sale under the securities laws of
such jurisdictions as any Holder requests. We do not intend to register or
qualify the sale of the New Senior Notes in any such jurisdiction unless it
receives a specific request from a Holder.
THE COMPANY HAS SUBSTANTIAL DEBT
The Company incurred a substantial amount of debt to finance the purchase
of Great American and the other companies and assets it acquired. The Company
continues to have a substantial amount of debt. As of October 3, 1998, the
Company on a consolidated basis, had total indebtedness, including capital lease
obligations, of $140.2 million (net of unamortized discount) and mandatorily
redeemable preferred stock having a book value of approximately $1.2 million
outstanding, together representing 73.8% of its total book capitalization. The
Company may take on more debt and issue preferred stock in the future, unless
doing so would violate limitations in the Indenture and the Company's existing
Credit Agreement (as defined in this Prospectus). See "Capitalization,"
"Unaudited Pro Forma Condensed Combined Financial Statements," "Selected
Historical Financial Data," "The Transactions" and "Description of Senior
Notes--Certain Covenants."
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The Company's ability to make scheduled payments of principal, or to pay
interest on, or to refinance its indebtedness (including the Senior Notes)
depends on its future performance. The Company's future performance depends
partly on general economic, financial, competitive, legislative, regulatory and
other factors beyond the Company's control. The Company cannot be sure that its
business will generate enough cash flows from operations or that future
borrowings will be available in an amount that will allow the Company to pay
principal and interest on its indebtedness, including the Senior Notes, or to
make necessary capital expenditures, or to allow the Company to obtain
refinancing on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The amount of debt that the Company has could have important consequences
to Holders of the Senior Notes, including, but not limited to, the following:
(i) a substantial portion of the Company's cash flows from operations will be
required to be dedicated to debt service and will not be available for other
purposes; (ii) the Company's ability to obtain additional financing in the
future could be limited; and (iii) the Indenture contains financial and
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds, dispose of assets or pay cash dividends. If the
Company does not comply with such covenants, there could be an event of default,
which, if not cured or waived, could have a material adverse effect on the
Company. In addition, the amount of debt that the Company has could prevent it
from repurchasing all Senior Notes tendered to it upon the occurrence of a
Change of Control. See "Description of Senior Notes--Repurchase at the Option of
Holders--Change of Control."
THE SENIOR NOTES ARE EFFECTIVELY SUBORDINATED TO OTHER DEBT
The Senior Notes are general unsecured obligations of the Company, rank
senior in right of payment to all subordinated indebtedness of the Company and
rank pari passu in right of payment to all existing and future senior
indebtedness of the Company. As of October 3, 1998, the Company (excluding its
subsidiaries) had $0.3 million in indebtedness other than the Senior Notes. The
Guarantors have unconditionally guaranteed the Senior Notes on a senior basis.
The Guarantees are general unsecured obligations of the Guarantors, rank senior
in right of payment to all subordinated indebtedness of the Guarantors and rank
pari passu in right of payment with all existing and future senior indebtedness
of the Guarantors. As of October 3, 1998, the aggregate amount of indebtedness
of the Company's subsidiaries was approximately $0.4 million and the aggregate
liquidation preference of mandatorily redeemable preferred stock of the
Company's subsidiaries was approximately $1.5 million, all of which was issued
by a subsidiary other than the Guarantors and effectively ranks senior in right
of payment to the Senior Notes. Although the Indenture limits the ability of the
Company and its subsidiaries to incur additional indebtedness and issue
preferred stock, the Company is permitted to incur additional indebtedness and
issue preferred stock, including secured indebtedness, under certain
circumstances, which effectively ranks senior to the Senior Notes with respect
to the assets securing such indebtedness. See "Description of Senior
Notes--General."
CREDIT AGREEMENT; PLEDGE OF ASSETS
The Company entered into an Amended and Restated Loan Agreement, as
amended, dated as of February 28, 1998 (the "Credit Agreement"), with LaSalle
National Bank (the "Bank") for $15.0 million. The Credit Agreement contains
certain restrictive covenants, which are substantially similar to those in the
Indenture, and requires the Company to comply with certain financial ratios.
Events beyond the Company's control may affect the ability of the Company to
comply with these and other provisions of the Credit Agreement. The breach of
any of these covenants or other violations of the terms of the Credit Agreement
could result in a default under the Credit Agreement, in which case, the Bank
could elect to declare all amounts borrowed under the Credit Agreement, together
with accrued interest, to be due and payable. If the Company cannot repay such
borrowings, the Bank could proceed against its collateral. The acceleration of
indebtedness under the Credit Agreement may constitute an event of default under
the Senior Notes which could also give rise to an acceleration under the Senior
Notes. If the indebtedness under the Credit Agreement is accelerated as a result
of a breach of a covenant, the Company cannot be sure that it would have enough
assets to repay in full such indebtedness and the other indebtedness of the
Company, including the Senior Notes, or that the Company could continue to
operate its business as a result of such acceleration. Great American and MFB
have guaranteed amounts under the Credit Agreement. In addition, the
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Company has pledged substantially all of its assets as security for amounts that
it may borrow under the Credit Agreement, including all of the capital stock of
Great American, MFB and the capital stock of Pretzel Time owned by the Company.
As a result, the Senior Notes will be effectively subordinated to the claims of
the Bank under the Credit Agreement (or any successor or additional financing)
with respect to the assets of the Company, including proceeds from those assets.
If there is a default on the Senior Notes, or a bankruptcy, liquidation or
reorganization of the Company, the Company would have to use its assets to make
payments under the Credit Agreement (or any successor or additional financing)
before the Company could use the assets to make payments on the Senior Notes. If
there is not enough collateral granted under the Credit Agreement (or any
successor or additional financing) to pay amounts owing under the Credit
Agreement, the Bank would be entitled to share with holders of the Senior Notes
and other claims on the Company. See "Description of Senior Notes" and
"Description of Certain Indebtedness."
Additionally, the Credit Agreement, which is designed to provide seasonal
working capital to the Company, will expire on March 31, 2001. The Company
cannot be sure that it will be able to extend or renew the Credit Agreement or
obtain alternative financing to meet its seasonal working capital needs when the
Credit Agreement expires. If the Company does not have a revolving credit
facility in place, the Company may not be able to satisfy its seasonal working
capital needs, which would have a material adverse effect on the Company and its
results of operations. Currently there are no amounts outstanding under the
Credit Agreement.
THE COMPANY'S STOCK HAS BEEN PLEDGED BY MFH
MFH, the parent of the Company, has pledged all of the outstanding common
stock of the Company to secure MFH's obligations under the MFH Senior Notes. If
MFH defaults on its MFH Senior Notes, there could be a foreclosure on the
Company's common stock, and the foreclosure would constitute a change of control
which would result in an event of default permitting acceleration under the
Credit Agreement and the Indenture.
THE COMPANY HAS A HISTORY OF NET LOSSES
Mrs. Fields and its predecessors have incurred net losses during the past
several years. Although the Company has put into place new business strategies
aimed at enhancing revenues and operating results and Mrs. Fields' Original
Cookies, Inc. has recorded positive EBITDA since its formation in September
1996, economic, financial, competitive, legal and other factors, many of which
are beyond the Company's control, can affect the Company's operations. The
Company cannot be sure that it will be able to put into place its planned
strategies without delay or that these strategies will result in future
profitability. See "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ABILITY TO INTEGRATE ACQUISITIONS
The Company has achieved growth through acquisitions and intends to
continue doing so. While the Company believes there are significant
opportunities for cost savings and volume efficiencies as a result of the Great
American Acquisition, the Franchise Acquisition, the acquisitions of the
majority interest of Pretzel Time and the business of H&M, and future
acquisitions, the Company cannot be sure of such results. Many factors beyond
the Company's control, such as general economic conditions, increased operating
costs, the response of the Company's customers or competitors, and regulatory
developments, can affect the ability of the Company to realize such economic
benefits from the Great American Acquisition, the Franchise Acquisition, prior
acquisitions and future acquisitions could also be affected by a number of
factors beyond the Company's control. The Company cannot be sure that the Great
American Acquisitions, the Franchise Acquisition, prior acquisitions, or future
acquisitions will result in the economic benefits that management expects on a
timely basis or at all. See "Business--Business Strategy."
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COMPANY DEPENDS ON REAL ESTATE LEASES; THE COMPANY HAS CONTINUING OBLIGATIONS
ON LEASES
The Company leases locations for all of its Company-owned stores and most
of its franchised stores and subleases these locations to its franchisees.
Accordingly, the Company is the primary obligor for payments under such leases.
The Company's success depends in part on its ability to secure leases in high
quality shopping malls at rents it believes to be reasonable. Approximately half
of the leases for Company-owned stores and franchised stores expire during the
next five years and generally do not provide for renewal options in favor of the
Company. In addition, the Company currently plans to open approximately 375 new
Company-owned and franchised stores over the next five years. Management
believes that the market for the type of locations historically leased by the
Company is highly competitive. Consequently, the Company cannot be sure that it
will succeed in obtaining such leases in the future at rents that it believes to
be reasonable or at all. Also, if certain locations turn out to be unprofitable,
the Company would remain obligated for lease payments if it decided to withdraw
from such locations. See "Business--Properties."
DEPENDENCE ON MALL TRAFFIC
The Company believes its customers view its products primarily as snack
treats, which are frequently "impulse" purchases. Accordingly, the Company
believes that the amount and proximity of pedestrian traffic near its stores
strongly influence its sales. In recent years, visits to major shopping malls,
where a large percentage of the Company's stores are located, have declined from
3.7 visits per month in 1989 to 3.0 visits per month in 1996, which trend has
had a negative impact on the Company's revenues. The Company cannot be sure that
this trend will not continue or that such trend can be offset by increased sales
per customer. A continued decline in mall traffic could adversely affect the
Company's financial condition and results of operations.
VOLATILITY IN COST OF INGREDIENTS
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 the Company's control. The Company recently
experienced a substantial increase in the cost of butter. Although the Company
believes that there are alternative suppliers of these ingredients, the Company
has no control over fluctuations in the price of commodities and the Company
cannot be sure that the Company will be able to pass on any price increases in
its product ingredients to its customers.
INTEGRATION OF INFORMATION SYSTEMS; YEAR 2000 COMPLIANCE
The Company has made a substantial investment in developing a customized,
sophisticated point-of-sale management information system (the "POS system"),
which gathers information transmitted daily to corporate headquarters from most
of the Mrs. Fields brand core stores. The POS system tracks sales from the point
of purchase through a central mid-range computer to store, district and
corporate management, allowing management to track performance data and react
quickly to developments at the store level. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Information
transmitted from the Company-owned stores on daily sales permits the Company,
among other things, to monitor performance across the network of stores. Most
Company-owned Mrs. Fields stores are equipped with a Sharp A570 or Sharp 3110
POS register and an IBM computer, enabling store managers to track and report
daily customer traffic counts, sales, average ticket, inventory levels and labor
costs. The Company is upgrading its back-office system to a Windows NT
environment and is currently upgrading all Mrs. Fields stores to Pentium 333
machines. The Company plans to install its upgraded back-office system, along
with the POS registers and Pentium 333 machines, in its core Original Cookie
stores, Hot Sam stores, Pretzel Time stores and certain Great American stores by
August 1999.
The Company believes that it can improve operating efficiencies by
introducing its improved system into all Company-owned core stores. The Company
cannot be sure that it will successfully integrate this system or that it can
achieve a fully integrated system within budget. Therefore, the Company cannot
be sure that its attempts to integrate the POS system will not adversely affect
its financial condition and results of operations.
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Management has assessed the Year 2000 issue and has determined that
all internal information technology ("IT") systems including financial software,
corporate networks, the AS400 system and all other systems are Year 2000
compliant with the exception of: (1) systems used for collecting and
communicating sales data from retail locations, and (2) internally developed
plant production and distribution software.
The Company is currently replacing its sales collection systems with
software and hardware that is Year 2000 compliant. This project is approximately
30% complete with final completion projected for August 1999. The estimated cost
of this project is $1.1 million and includes software development and new store
computers. The costs to complete this project are included in the Company's 1998
and 1999 budgets. Funding for this project is being provided by internal cash
flow and by a lease finance company.
Replacement of the plant production and distribution software will take
place in the first quarter of 1999 at an estimated cost of $50,000. No IT
projects have been deferred as a result of the Company's Year 2000 efforts.
Management is in the process of assessing Year 2000 issues with respect to
its significant vendors and financial institutions as to their compliance plans
and whether any Year 2000 issues will impede the ability of such vendors to
continue providing goods and services to the Company. Failure of the Company's
key suppliers to remedy their own Year 2000 issues could delay shipments of
essential products, thereby disrupting the Company's operations. Furthermore,
the Company relies on various service providers, such as utility and
telecommunication service companies, which are beyond the Company's control.
This assessment is approximately 20% complete with final completion anticipated
by the end of 1998. Based upon the results of the assessment to date, management
is not aware of any Year 2000 issues relating to its significant vendors,
financial institutions or its non-IT systems.
IMPACT OF MINIMUM WAGE INCREASE
Many of the Company's employees are paid an hourly wage based upon the
federal minimum wage. The federal minimum wage increased from $4.75 to $5.15 on
September 1, 1997. As of October 3, 1998, 1,507 of the Company's 5,134 employees
in Company-owned stores earned the federal minimum wage. The September 1, 1997
minimum wage increase has resulted in an increase of wages of approximately
$219,000 annually. The Company cannot be sure that it can fully absorb increased
labor costs through its efforts to increase efficiencies in other areas of its
operations. These increased labor costs could adversely affect the Company's
financial condition and results of operations.
DEPENDENCE UPON KEY FRANCHISEES
The Company depended upon 11 franchisees for 19.7 percent of its franchise
revenues for the 39 weeks ended October 3, 1998. For the same period, franchise
revenues made up 4.1 percent of the Company's total net revenues. The Company
cannot be sure that these franchise agreements will not be terminated. The
termination of these key franchise agreements may have an adverse affect on the
Company's financial condition and results of operations.
TRADEMARKS
The Company believes that its trademarks have significant value and are
important to the marketing of its retail outlets and products. Although the
Company's trademarks are registered in all 50 states and registered or pending
in many foreign countries, the Company cannot be sure that its trademarks cannot
be circumvented, or that its trademarks do not or will not violate the
proprietary rights of others, or that its trademarks would be upheld if
challenged or that the Company would not be prevented from using its trademarks.
Any challenge to the Company for its use of its trademarks could have an adverse
effect on the Company's financial condition and results of operations, through
either a negative ruling with regards to the Company's use, validity or
enforceability of its trademarks, or through the time consumed and the legal
costs of defending against such a claim. In addition, the Company cannot be sure
that it will have the financial resources necessary to enforce or defend its
trademarks.
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DEPENDENCE UPON KEY PERSONNEL
The success of the Company depends on the continued services of its senior
management, particularly Larry A. Hodges, the Company's President and Chief
Executive Officer. If Mr. Hodges or other senior managers of the Company left
the Company, there could be an adverse effect on the Company's operations. The
Company has entered into employment agreements with all of its senior managers.
In addition, the Company's continued growth depends, in part, on attracting and
retaining skilled managers and employees as well as management's ability to
effectively utilize its key personnel in light of recent and future
acquisitions. The Company cannot be sure that management's efforts to integrate,
utilize, attract and retain personnel will be successful. See "Management."
COMPETITION AND DEMOGRAPHIC TRENDS
The Company competes with other cookie and pretzel retailers, as well as
other confectionery, sweet snack and specialty food retailers, many of which
have greater resources than those of the Company. The specialty retail food and
snack industry is highly competitive with respect to price, service, location
and food quality. Consequently, the Company cannot be sure that it will compete
successfully with these other specialty food retailers. In addition to risks
from current competitors, the Company cannot be sure that it can successfully
compete with new competitors in the specialty foods or snack foods industry.
Changes in consumer preferences, tastes and eating habits, local, regional
and national economic conditions, demographic trends and mall traffic patterns
also affect the specialty foods or snack foods industry. Factors such as
increased food, labor and benefits costs and the availability of experienced
management and hourly employees may adversely affect the specialty retail
industry in general and the Company's outlets in particular. Consequently, the
Company's success will depend on its ability to recognize and react to such
trends. Any changes in these factors could adversely affect the profitability of
the Company. See "Business--Competition."
RISK OF ADVERSE PUBLICITY
The Company's ability to compete depends in part on maintaining its
reputation with the consumer. 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 the Company. Consequently, the Company cannot be sure that
such publicity will not negatively affect the Company's financial condition and
results of operations.
GOVERNMENT REGULATION; LITIGATION
Numerous governmental authorities have issued regulations that apply to the
Company and its 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 Administration administers regulations
that apply to the Company's products. If the Company fails 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, there could be an
adverse effect on the business, financial condition or results of operations of
the Company. Even if the Company obtains such regulatory approval, a marketed
product, its manufacturer and its manufacturing facilities are subject to
periodic inspection, and discovery of problems may adversely affect the business
of the Company.
In addition, the sale of franchises is regulated by various state laws as
well as by the Federal Trade Commission (the "FTC"). The FTC requires that
franchisors make extensive disclosure in a Uniform Franchise 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
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these agreements. While the Company believes that it is in compliance with
existing regulations, the Company cannot predict the effect of any future
legislation or regulation on its business operations or financial condition.
Additionally, bills have occasionally been introduced in Congress which would
provide for federal regulation of certain aspects of franchisor-franchisee
relationships.
In the ordinary course of business, the Company is involved in routine
litigation, including franchise disputes. Although the Company has not been
significantly adversely affected in the past by such litigation, there can be no
assurance as to the effect of any future disputes.
Although the Company is not currently subject to any product liability
litigation, there can be no assurance that product liability litigation will not
occur in the future involving the Company's products. The Company's quality
control program is designed to maintain high standards for the food and
materials and food preparation procedures used by Company-owned and franchised
stores. Products are periodically inspected by Company personnel at both the
point-of-sale locations and the manufacturing facilities to ensure that they
conform to the Company's standards. In addition to insurance of the Company's
suppliers, the Company maintains insurance relating to personal injury and
product liability in amounts that it considers adequate for the retail food
industry. While the Company has been able to obtain such insurance in the past,
the Company cannot be sure that it will be able to maintain these insurance
policies in the future. Consequently, any successful claim against the Company,
in an amount materially exceeding its coverage, could have a material adverse
effect on the Company's business, financial condition or results of operations.
All full-time store managers and assistant managers are able to enroll in a
group health insurance plan. However, there have been a number of proposals
before Congress which would require employers to provide health insurance for
all of their full-time and part-time employees. The approval of such proposals
could have a material adverse impact on the results of operations and financial
condition of the Company in particular and the specialty retail industry as a
whole.
CONTROLLING STOCKHOLDER
As of the date of this Prospectus, MFH owns all of the capital stock of the
Company. As a result, MFH is in a position to elect all of the Company's
directors who, in turn, elect all of the Company's executive officers, and to
amend the Company's certificate of incorporation and by-laws, effect corporate
transactions such as mergers and asset sales and otherwise control the
management and policies of the Company without the approval of any other
security holder (subject to the provisions of the Indenture). Accordingly, MFH
will be able to, directly or indirectly, control all of the affairs of the
Company. In connection with the MFH Offering, MFH pledged all of the capital
stock of the Company to The Bank of New York, as collateral agent. Capricorn
owns, and will continue to own, approximately 94% (or approximately 80% on a
fully diluted basis, after giving effect to the issuance of stock pursuant to
the MFH Warrants and issuances of stock pursuant to options currently issued to
directors and officers pursuant to the Plans (as defined herein)) of the capital
stock of MFH. Directors and officers of MFH and the Company own a majority of
the remaining capital stock of MFH and shares issuable pursuant to outstanding
options. See "Management--Option Grants and Exercises," "Board Compensation,"
"Ownership of Capital Stock" and "Certain Relationships and Related
Transactions."
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's operating results are subject to seasonal fluctuations.
Historically, the Company has realized its highest level of sales in the fourth
quarter due to increased mall traffic during the Christmas holiday season.
However, the Company cannot be sure that this seasonal trend will continue or
that the Company can continue to rely on increased sales during the fourth
quarter. If this seasonal trend changes, there may be an adverse effect on the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
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INABILITY TO REPURCHASE SENIOR NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Senior Notes may
require the Company to repurchase all or a portion of such Holder's Senior Notes
at 101% of the principal amount of the Senior Notes, together with the accrued
and unpaid interest, if any, and Liquidated Damages, if any, to the date of
repurchase. If a Change of Control were to occur, the Company may not have the
financial resources to repay all of its obligations under the Senior Notes and
the other indebtedness that would become payable upon such event. See
"Description of Senior Notes--Repurchase at the Option of Holders--Change of
Control."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Management believes that the indebtedness represented by the Senior Notes
and the Guarantees was incurred for proper purposes and in good faith, and that,
after the consummation of the Great American Transactions, the MFH Transactions
and the Offering and the application of the net proceeds therefrom, the Company
was solvent, had sufficient capital for carrying on its business and was able to
pay its debts as they mature. Notwithstanding management's belief, however, if a
court of competent jurisdiction in a suit by an unpaid creditor or a
representative of creditors (such as a trustee in bankruptcy or a debtor-in-
possession) were to find that, at the time of the incurrence of such
indebtedness, the Company was insolvent, was rendered insolvent by reason of
such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, or intended to hinder, delay or defraud its creditors, and that the
indebtedness was incurred for less than reasonably equivalent value, then such
court could, among other things, (i) void all or a portion of the Company's
obligations to the Holders of the Senior Notes, the effect of which would be
that the Holders of the Senior Notes may not be repaid in full, and/or (ii)
subordinate the Company's obligations to the Holders of the Senior Notes to
other existing and future indebtedness of the Company to a greater extent than
would otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Senior
Notes.
The Company's obligations under the Old Senior Notes were, and its
obligations under the New Senior Notes will be, unconditionally guaranteed,
jointly and severally, on a senior basis, by the Guarantors. Management believes
that the indebtedness represented by each of the Guarantees was incurred by the
Guarantors for proper purposes and in good faith, and that, after the
consummation of the Great American Transactions, the MFH Transactions and the
Offering, each of the Guarantors was solvent, had sufficient capital for
carrying on its business and was able to pay its debts as they mature.
Notwithstanding management's belief, however, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that,
at the time of the incurrence of such indebtedness, the Guarantors were
insolvent, were rendered insolvent by reason of such incurrence, were engaged in
a business or transaction for which their remaining assets constituted
unreasonably small capital, intended to incur, or believed that they would
incur, debts beyond their ability to pay such debts as they matured, or intended
to hinder, delay or defraud their creditors, and that the indebtedness was
incurred for less than reasonably equivalent value, then such court could, among
other things, (i) void all or a portion of the Guarantors' obligations to the
holders of the Senior Notes, the effect of which would be that the holders of
the Senior Notes may not be repaid in full, and/or (ii) subordinate the
Guarantors'
27
<PAGE>
obligations to the holders of the Senior Notes to other existing and future
indebtedness of the Guarantors to a greater extent than would otherwise be the
case, the effect of which would be to entitle such other creditors to be paid in
full before any payment could be made on the Senior Notes. Among other things, a
legal challenge to the Guarantees on fraudulent conveyance grounds may focus on
the benefits, if any, realized by the Guarantors as a result of the issuance by
the Company of the Senior Notes.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERS
The New Senior Notes are being offered only to the Holders of the Old
Senior Notes. The Series A Senior Notes were issued on November 26, 1997 and the
Series C Senior Notes were issued on August 24, 1998, to institutional investors
and certain accredited investors, and are eligible for trading in the Private
Offering, Resale and Trading through Automated Linkages ("PORTAL") Market of the
National Association of Securities Dealers, Inc., a screen-based automated
market for trading of securities eligible for resales under Rule 144A. To the
extent that the Old Senior Notes are tendered and accepted in the Exchange
Offer, the trading market for the remaining untendered Old Senior Notes could be
adversely affected.
There is no existing market for the New Senior Notes and there can be no
assurance regarding future development of a market for the New Senior Notes, or
the price at which such holders may be able to sell their New Senior Notes. If
such a market were to develop, the New Senior Notes could trade at prices that
may be higher or lower than the initial offering price of the Old Senior Notes.
Prevailing market prices from time to time will depend on many factors,
including then existing interest rates, the Company's operating results and the
market for similar securities. The Initial Purchasers currently make a market in
the Old Series B Senior Notes. The Initial Purchasers have advised the Company
that they currently intend to make a market in the New Senior Notes. The Initial
Purchasers are not obligated to do so, however, and any market making with
respect to the New Senior Notes may be discontinued at any time without notice.
Accordingly, even if a trading market for the New Senior Notes does develop
there can be no assurance as to the liquidity of that market. The Company does
not intend to apply for listing or quotation of the New Senior Notes on any
securities exchange or stock market.
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<PAGE>
THE TRANSACTIONS
Concurrently with the consummation of the Offering, the Company consummated
the Great American Transactions and the MFH Transactions. The Company used the
net proceeds of the Offering, along with cash from other sources, including the
MFH Equity Infusion and available cash of Mrs. Fields and Great American, to
complete the Great American Acquisition, the Franchise Acquisition, the Great
American Tender Offer and certain of the Other Recent Transactions and to pay
related expenses.
THE GREAT AMERICAN TRANSACTIONS
The proceeds of the Offering, together with cash from other sources,
including the MFH Equity Infusion and available cash of Great American and Mrs.
Fields, were used (i) to finance the Great American Acquisition, (ii) to finance
the Franchise Acquisition, (iii) to finance the Great American Tender Offer for
all of the outstanding $40.0 million aggregate principal amount of the Great
American Senior Notes, and (iv) to finance the Other Recent Transactions that
had not yet been completed as of the date of the Offering.
THE GREAT AMERICAN ACQUISITION AND THE GREAT AMERICAN TENDER OFFER
Pursuant to a Securities Purchase Agreement, dated as of August 13, 1998,
by and among Cookies USA, the individuals and entities identified therein as
sellers and the Company (the "Purchase Agreement"), the Company acquired all of
the outstanding capital stock and subordinated indebtedness of Cookies USA for
an aggregate purchase price of approximately $18.4 million. Concurrently, the
Company (i) caused Cookies USA to be merged with and into the Company and (ii)
caused the corporations purchased in the Franchise Acquisition to be merged with
and into Great American. Upon consummation of the Great American Acquisition and
the Mergers, Great American became a wholly owned subsidiary of the Company. As
of the expiration of the Great American Tender Offer at midnight on September
14, 1998, all Great American Senior Notes had been tendered. The Company has
accepted and paid the entire $40.0 million in aggregate principal amount of
Great American Senior Notes, and no Great American Senior Notes remain
outstanding. Upon the acquisition of Cookies USA and the merger of Cookies USA
into the Company, Great American contributed all of its owned stores to the
Company.
THE FRANCHISE ACQUISITION
Concurrently with the Purchase Agreement, the Company entered into
agreements with the stockholders of Deblan and Chocolate Chip, two of Great
American's franchisees (the "Selling Franchisees"), pursuant to which the
Company purchased a total of 29 Great American franchises for total
consideration of approximately $15.0 million (including the repayment of
approximately $0.6 million of debt). The Company acquired the franchises through
the acquisition of 100% of the capital stock of the two corporations through
which the Selling Franchisees held the franchises. In connection with the
Franchise Acquisition, certain debt on the balance sheet of one such corporation
was retired with cash on hand, and certain debt on the balance sheet of the
second corporation was retired with funds from the Selling Franchisee.
THE FRANCHISEE AGREEMENT
The Company entered into Settlement Agreements and Waivers (collectively,
the "Franchisee Agreement") with the Selling Franchisees and certain other Great
American franchisees. In addition to these franchisees, at least 80% in total of
the Great American franchisees have executed the Franchise Agreement. The Great
American franchisees that are parties to the Franchisee Agreement released,
subject to certain exceptions, all of their claims against the Company, Great
American, Capricorn and certain other parties, including claims that Great
American franchisees brought in 1997 to prevent a sale of Great American to the
Company. On August 24, 1998, a motion was filed dismissing with prejudice the
claims brought in the 1997 litigation. The Franchisee Agreement gives "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 (i)
either the Company or MFH 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 (a
29
<PAGE>
"Franchise Sale"), (ii) either the Company or MFH proposes to make an initial
public offering of its common stock (a "Qualifying Public Offering"), or (iii)
either the Company or MFH sells a controlling interest to an unaffiliated party
(a "Change of Control"), the Company will purchase all of the franchises of such
Great American franchisees, provided that their franchises have had positive
cash flow in the most recent twelve-month fiscal period and sales not more than
twenty percent (20%) below the fiscal period immediately preceding such period
(or the number of months it has been operating, if fewer than twelve). The
purchase price for the franchises will be five times their most recent twelve-
month EBITDA or, if the franchises have operated for fewer than twelve months,
the greater of five times their most recent EBITDA and documented development
cost for the stores. Great American franchisees that hold fewer than five Great
American franchises do not have tag-along rights but will have the right, upon
completion of the Franchise Sale, Qualifying Public Offering or 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 such
franchisee, or, in the case of a Qualifying Public Offering, shares of common
stock with an equivalent value. The form of payment will be at the election of
the Company. Pursuant to the Franchisee Agreement, the Company has also
undertaken, among other things, (i) to maintain the margin on batter sold to
Great American franchisees, (ii) to extend franchise agreements, and (iii) 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.
THE MFH TRANSACTIONS
Concurrently with the Offering, MFH consummated the MFH Offering of the MFH
Units. The MFH Senior Notes are senior obligations of MFH and are secured by all
of the issued and outstanding capital stock of the Company. MFH contributed to
MFOC as a capital contribution the MFH Equity Infusion, which was the entire net
proceeds of the MFH Units, approximately $29.1 million.
THE PRIOR TRANSACTIONS
On July 25, 1997, a subsidiary of MFH acquired substantially all of the
assets of H&M for aggregate consideration of $13.8 million (excluding the
assumption of certain liabilities). On September 2, 1997, MFH acquired 56.0% of
the shares of common stock of Pretzel Time for an aggregate purchase price of
$4.2 million and extended a $500,000 loan to the founder and minority
stockholder of Pretzel Time. Concurrently with the Prior Offering (i) the
Company received as a contribution from MFH the business of H&M and 56.0% of the
shares of common stock of Pretzel Time, (ii) the Company received as a
contribution from MFH all of the common stock of MFB, (iii) various debt of the
Company, MFB and MFH was refinanced, and (iv) the Company paid a dividend of
$1,065,000 and repaid an advance of $1,500,000 to MFH. On January 2, 1998, the
Company purchased an additional 4.0% of the shares of the common stock of
Pretzel Time.
INCREASE IN PRETZEL TIME OWNERSHIP
On June 12, 1998, the Company acquired 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%.
OTHER RECENT TRANSACTIONS
In June 1998, the Company acquired six additional Pretzel Time stores from
a franchisee for a purchase price of $657,000. In addition, the Company acquired
one additional Pretzel Time store from a franchisee for $242,000. The Company
has entered into agreements to acquire two cookie stores operating under other
brand names, which the Company intends to convert or develop into Mrs. Fields
brand stores at purchase prices aggregating approximately $550,000. The Company
intends to remodel the two cookie stores, at an aggregate estimated cost of
$100,000. The Company also purchased eight Great American stores (the "Combined
Karp Entities") from a Great American franchisee for a total purchase price of
$1.9 million on September 9, 1998. The franchisee was a holder of certain
securities of Cookies USA that were sold pursuant to the Purchase Agreement and
was a party to the Purchase Agreement.
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<PAGE>
USE OF PROCEEDS
Neither the Company nor the Guarantors will receive any cash proceeds
pursuant to the Exchange Offer. In consideration for issuing the New Senior
Notes as contemplated in this Prospectus, the Company will receive the Old
Senior Notes in like principal amount, the terms of which are identical in all
material respects to the New Senior Notes except (i) that the New Senior Notes
have been registered under the Securities Act, (ii) for certain transfer
restrictions relating to the Old Senior Notes and registration rights relating
to the Series C Senior Notes and (iii) that the New Senior Notes will not
contain certain provisions relating to an additional payment to be made to
Holders of the Old Senior Notes under certain circumstances relating to the
timing of the Exchange Offer. The Old Senior Notes surrendered in exchange for
New Senior Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the New Senior Notes will not result in any increase in
the indebtedness of the Company.
The net proceeds received by the Company from the Offering, after deducting
the underwriting discounts and commissions and estimated expenses of the
offering of the Old Notes, along with cash from other sources, including the MFH
Equity Infusion and existing Company cash, were approximately $85.1 million. Of
this amount, the Company used approximately $18.4 million for the Great American
acquisition, $41.6 million to pay for the Great American Senior Notes tendered
(including the tender offer premium of $1.6 million), $15.0 million to pay for
the Franchise Acquisition (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 certain of the Other Recent Transactions and approximately $5.0 million of
fees and expenses related to the Offering and the Transactions .
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<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of Mrs. Fields' Original Cookies, Inc. and subsidiaries at
October 3, 1998. This table should be read in conjunction with the historical
financial statements and related notes included elsewhere in this Registration
Statement. See "Selected Historical Financial Data."
<TABLE>
<CAPTION>
MRS. FIELDS'
ORIGINAL COOKIES, INC.
AND SUBSIDIARIES
AT OCTOBER 3, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and Cash Equivalents.............................................. $ 5,146
========
Credit Facility (1).................................................... $ --
---------
Debt and Capital Lease Obligations, including current portions:
10 1/8% Series A, B and C Senior Notes due 2004 (2)................ 140,000
Original issue discount on Series C Senior Notes................... (591)
Pretzel Time Debt.................................................. 440
Mrs. Fields' Original Cookies, Inc. Capital Lease Obligations...... 276
Great American Capital Lease Obligations........................... 31
---------
Total Debt and Capital Lease Obligations, including current portion.. 140,156
---------
Mandatorily Redeemable Preferred Stock of Pretzel Time (3)............. 1,171
---------
Stockholder's Equity:
Common Stock (4)................................................... --
Additional Paid-in Capital(5)...................................... 59,899
Accumulated Deficit................................................ (9,768)
---------
Total Stockholder's Equity......................................... 50,131
---------
Total Capitalization................................................... $191,458
=========
</TABLE>
________________
(1) Under the Indenture, the Company is permitted to have one or more credit
facilities pursuant to which it will be able to borrow up to a maximum
aggregate principal amount of $15.0 million on a secured basis. The
Company's Credit Agreement provides for a maximum commitment of up to $15.0
million secured by essentially all of the assets of the Company. As of
October 3, 1998, the Company had $12.7 million of available borrowings under
its credit facility. See "Description of Certain Indebtedness--Credit
Agreement."
(2) Includes $100.0 million of Series A and Old Series B 10 1/8% Senior Notes of
the Company and $40.0 million of Series C 10 1/8% Senior Notes.
(3) Liquidation preference as of October 3, 1998 was approximately $1.5 million.
(4) Less than $1,000.
(5) Gives effect to the MFH Equity Infusion of $29.1 million.
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<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD SENIOR NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Senior Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 12:00
Midnight, New York City time, on , 1998; provided, however, that if the
Company in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this Prospectus, $53,725,000 principal amount of the Old
Senior Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1998 to all Holders of Old
Senior Notes known to the Company. The Company's obligation to accept Old
Senior Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Certain Conditions to the Exchange Offer"
below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Senior Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Senior Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Senior Notes not accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
Old Senior Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Senior Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "--Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Senior Notes as
promptly as practicable, such notice in the case of any extension to be issued
by means of a press release or other public announcement no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD SENIOR NOTES
The tender to the Company of Old Senior Notes by a Holder thereof as set
forth below and the Company's acceptance of them will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in the Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to tender
Old Senior Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal or (in the case of a book-entry
transfer) an Agent's Message in lieu of such Letter of Transmittal, to The Bank
of New York (the "Exchange Agent") at the address set forth below under
"Exchange Agent" on or prior to the Expiration Date. In addition, either (i)
certificates for such Old Senior Notes must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Old Senior Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date with the Letter of Transmittal or an Agent's
Message in lieu of such Letter of Transmittal, or (iii) the Holder must comply
with the guaranteed delivery procedures described below. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility to and
received by the Exchange Agent and forming a part of a Book Entry Confirmation,
which states that the Book Entry Transfer Facility has received an express
acknowledgement from the tendering participant, which acknowledgement states
that such participant has received and agrees to be
33
<PAGE>
bound by the Letter of Transmittal and that the Company may enforce such Letter
of Transmittal against such participant. The method of delivery of Old Senior
Notes, Letters of Transmittal and all other required documents is at the
election and risk of the holders. If such delivery is by mail, it is recommended
that registered mail, properly insured, with return receipt requested, be used.
In all cases, sufficient time should be allowed to assure timely delivery. No
Letters of Transmittal or Old Senior Notes should be sent to the Company.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Senior Notes surrendered for
exchange pursuant thereto are tendered (i) by a Holder of the Old Senior Notes
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Senior Notes are registered in the name of a person
other than a signer of the Letter of Transmittal, the Old Senior Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered national securities exchange with the signature thereon guaranteed by
an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Senior Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Old Senior Note not properly tendered or to not
accept any particular Old Senior Note which acceptance might, in the judgment of
the Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange Offer
as to any particular Old Senior Note either before or after the Expiration Date
(including the right to waive the ineligibility of any Holder who seeks to
tender Old Senior Notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Old Senior Notes
either before or after the Expiration Date (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parities. Unless waived, any defects or irregularities in connection with
tenders of Old Senior Notes for exchange must be cured within such reasonable
period of time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give notification
of any defect or irregularity with respect to any tender of Old Senior Notes for
exchange, nor shall any of them incur any liability for failure to give such
notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered Holder or Holders of Old Senior Notes, such Old Senior Notes must
be endorsed or accompanied by powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the Old
Senior Notes.
If the Letter of Transmittal or any Old Senior Notes or powers of attorneys
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among other
things, the New Senior Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Senior Notes, whether or not such person is the Holder and that neither the
Holder nor such other person has any arrangement or understanding with any
person to participate in the distribution of the New Senior Notes. If any
Holder or any such other person is an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company, is engaged in or intends to engage in or has
an arrangement or understanding with any person to participate in a distribution
of such New Senior Notes to be acquired pursuant to the Exchange Offer, such
Holder or any such other person (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii)
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<PAGE>
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Senior Notes for its own account in exchange for Old Senior
Notes, where such Old Senior Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Senior Notes. See "Plan of Distribution." The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
ACCEPTANCE OF OLD SENIOR NOTES FOR EXCHANGE; DELIVERY OF NEW SENIOR NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Senior
Notes properly tendered and will issue the New Senior Notes promptly after
acceptance of the Old Senior Notes. See "--Certain Conditions to the Exchange
Offer" below. For purposes of the Exchange Offer, the Company shall be deemed
to have accepted properly tendered Old Senior Notes for exchange when, as and if
the Company has given oral (promptly confirmed in writing) or written notice
thereof to the Exchange Agent.
For each Old Senior Note accepted for exchange, the Holder of such Old
Senior Note will receive a New Senior Note having a principal amount equal to
that of the surrendered Old Senior Note. Accordingly, registered Holders of New
Senior Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid or, if no interest has
been paid, from November 26, 1997, in the case of the Series A Senior Notes, or
August 24, 1998, in the case of the Series C Senior Notes. Old Senior Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Pursuant to the Registration Rights
Agreement, certain additional payments are required to be made to Holders of Old
Senior Notes under certain circumstances relating to the timing of the Exchange
Offer.
In all cases, issuance of New Senior Notes for Old Senior Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Old Senior
Notes or a timely Book-Entry Confirmation of such Old Senior Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility, (ii) a properly
completed and duly executed Letter of Transmittal or an Agent's Message in lieu
thereof and (iii) all other required documents. If any tendered Old Senior
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Old Senior Notes are submitted for a greater principal
amount than the Holder desires to exchange, such unaccepted or non-exchanged Old
Senior Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Senior Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such non-exchanged Old Senior Notes will
be credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFERS
The Exchange Agent will make a request to establish an account with respect
to the Old Senior Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer Facility
systems must make book-entry delivery of Old Senior Notes by causing the Book-
Entry Transfer Facility to transfer such Old Senior Notes in the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. Such participant should transmit its acceptance to the
Book-Entry Transfer Facility on or prior to the Expiration Date or comply with
the guaranteed delivery procedures described below. The Book-Entry Transfer
Facility will verify such acceptance, execute a book-entry transfer of the
tendered Old Senior Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility and then send to the Exchange Agent confirmation of such book-
entry transfer, including an Agent's Message confirming that the Book Entry
Transfer Facility has received an express acknowledgement from such participant
that such participant has received and agrees to be bound by the Letter of
Transmittal and that the Company may enforce the Letter of
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<PAGE>
Transmittal against such participant. However, although delivery of Old Senior
Notes may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the Letter of Transmittal or facsimile thereof or an Agent's Message
in lieu thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under "Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a Holder of the Old Senior Notes desires to tender such Old Senior Notes
and the Old Senior Notes are not immediately available, or time will not permit
such Holder's Old Senior Notes or other required documents to reach the Exchange
Agent before the Expiration Date, or the Holder cannot complete the procedure
for book-entry transfer on a timely basis, a tender may be effected if (i) the
tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent received from such Eligible Institution a Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the Holder of the Old Senior Notes and the amount of Old
Senior Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Senior Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, together with a
properly completed and duly executed appropriate Letter of Transmittal (or
facsimile thereof or Agent's Message in lieu thereof) with any required
signature guarantees and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Senior Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
together with a properly completed and duly executed appropriate Letter of
Transmittal (or facsimile thereof or Agent's Message in lieu thereof) with any
required signature guarantees and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Holders may withdraw tenders of Old Senior Notes at any time prior to 12:00
Midnight, New York City time, on the Expiration Date. For a withdrawal to be
effective, the Exchange Agent must receive a written notice of withdrawal at one
of the addresses set forth below under "--Exchange Agent." Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old
Senior Notes to be withdrawn, (ii) identify the Old Senior Notes to be
withdrawn (including the principal amount of such Old Senior Notes), and (iii)
(where certificates for Old Senior Notes have been transmitted) specify the name
in which such Old Senior Notes are registered, if different from that of the
withdrawing Holder. If certificates for Old Senior Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Senior Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Senior Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company whose determination shall be final and binding on all parties. Any
Old Senior Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Senior Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the Holder thereof without cost to such Holder (or, in the case
of Old Senior Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above such Old Senior Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Senior Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Senior Notes may be retendered by
following one of the procedures described under "--Procedures for Tendering Old
Senior Notes" above at any time on or prior to 12:00 Midnight, New York City
time, on the Expiration Date.
36
<PAGE>
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Senior Notes in
exchange for, any Old Senior Notes and may terminate or amend the Exchange
Offer, if at any time before the acceptance of such Old Senior Notes:
(i) any federal law, statute, rule or regulation shall have been
adopted or enacted which, in the judgment of the Company, would
reasonably be expected to impair its ability to proceed with the
Exchange Offer;
(ii) if any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture
Act of 1939, as amended; or
(iii) there shall occur a change in the current interpretation
by the staff of the Commission which permits the New Senior Notes
issued pursuant to the Exchange Offer in exchange for Old Senior Notes
to be offered for resale, resold and otherwise transferred by Holders
thereof (other than broker-dealers and any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that
such New Senior Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement or understanding
with any person to participate in the distribution of such New Senior
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
Main Delivery to: The Bank of New York,
As Exchange Agent
By Mail, By Hand and Overnight Courier: By Facsimile:
(For Eligible Institutions Only)
The Bank of New York (212) 815-6339
101 Barclay Street 7 East
New York, New York 10286 Confirm by telephone:
Attention: Odell Romeo (212) 815-6337
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
37
<PAGE>
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer except for reimbursement of mailing
expenses.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $250,000.
TRANSFER TAXES
Holders who tender their Old Senior Notes for exchange will not be
obligated to pay transfer taxes in connection therewith. If, however, New
Senior Notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Old Senior Notes tendered, or if
a transfer tax is imposed for any reason other than the exchange of Old Senior
Notes in connection with the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering Holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering Holder.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD SENIOR NOTES
Issuance of the New Senior Notes in exchange for the Old Senior Notes
pursuant to the Exchange Offer will be made following the prior satisfaction, or
waiver, of the conditions set forth in "--Certain Conditions to the Exchange
Offer" and only after a timely receipt by the Exchange Agent of such Old Senior
Notes, a properly completed and duly executed Letter of Transmittal in respect
of such Old Senior Notes and all other required documents. Therefore, Holders
of Old Senior Notes desiring to tender such Old Senior Notes in exchange for New
Senior Notes should allow sufficient time to ensure timely delivery. Neither
the Exchange Agent nor the Company is under any duty to give notification of
defects or irregularities with respect to the tenders of Old Senior Notes for
exchange. Old Senior Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the provisions of the Indenture regarding transfer and exchange of
the Old Senior Notes, the existing restrictions upon transfer thereof set forth
in the legend on the Old Senior Notes and in the Offering Circular relating to
the Old Senior Notes. Except in certain limited circumstances with respect to
certain types of Holders of Old Senior Notes, the Company will have no further
obligation to provide for the registration under the Securities Act of such Old
Senior Notes. See "Description of the Notes--Exchange Offer; Registration
Rights." In general, Old Senior Notes, unless registered under the Securities
Act, may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will take any action to
register the Old Senior Notes under the Securities Act or blue sky laws.
To the extent that Old Senior Notes are tendered and accepted in the
Exchange Offer, a Holder's ability to sell untendered Old Senior Notes could be
adversely affected.
Upon consummation of the Exchange Offer, Holders of the Old Senior Notes
will not be entitled to any increase in the interest rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Description of the Notes--Exchange Offer;
Registration Rights."
Holders of the New Senior Notes and any Old Senior Notes which remain
outstanding after consummation of the Exchange Offer will vote together as a
single class for purposes of determining whether Holders of the requisite
percentage thereof have taken certain actions or exercised certain rights under
the Indenture.
38
<PAGE>
CONSEQUENCES OF EXCHANGING OLD SENIOR NOTES
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Company believes that New Senior
Notes issued pursuant to the Exchange Offer in exchange for Old Senior Notes may
be offered for resale, resold or otherwise transferred by Holders thereof (other
than any Holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Senior Notes are acquired in the ordinary course of such Holder's business and
such Holder, other than broker-dealers, has no arrangement with any person to
participate in the distribution of such New Senior Notes. However, the
Commission has not considered the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would make
a similar determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must at the request of
the Company furnish a written representation that it is not an affiliate of the
Company, is not engaged in, and does not intend to engage in, a distribution of
such New Senior Notes and has no arrangement or understanding to participate in
a distribution of New Senior Notes, and that it is acquiring the New Senior
Notes in its ordinary course of business. Each broker-dealer that receives New
Senior Notes for its own account in exchange for Old Senior Notes must
acknowledge that such Old Senior Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities and that it will
deliver a prospectus in connection with any resale of such New Senior Notes.
See "Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, it may be necessary to qualify for sale or register
thereunder the New Senior Notes prior to offering or selling such New Senior
Notes. The Company has agreed, pursuant to the Registration Rights Agreement,
subject to certain limitations specified therein, prior to any public offering
of Transfer Restricted Securities (as defined herein) to register or qualify the
Transfer Restricted Securities for offer or sale under the securities laws of
such jurisdictions as any Holder requests. Unless a Holder so requests, the
Company does not intend to register or qualify the sale of the New Senior Notes
in any such jurisdiction.
39
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents historical financial data for Mrs. Fields'
Original Cookies, Inc. and subsidiaries ("Mrs. Fields") and its predecessors;
namely, Mrs. Fields Inc. and subsidiaries ("Mrs. Fields Inc."), The Original
Cookie Company, Incorporated ("Original Cookie") and the Carved-out Portion
(pretzel business) of Hot Sam Company, Inc. ("Hot Sam") (collectively, the
"Predecessors"), as of the dates and for the periods indicated. The results of
operations for the periods December 31, 1995 through September 17, 1996 and
September 18, 1996 through December 28, 1996 and the 39 weeks ended September
27, 1997 and October 3, 1998 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 and its Predecessors. Due to the
acquisitions of the net assets of Mrs. Fields Inc., Original Cookie and Hot Sam
on September 17, 1996, the financial data is not comparable for all periods.
However, in order for the presentations to be meaningful for the periods
presented, certain statement of operations information for the Predecessors has
been reclassified to be consistent with the Mrs. Fields historical financial
statement presentation. The selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements and the
related notes thereto, 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(1) SAM COMPANY, INC. (COMBINED)(1)
------------------------------------------ --------------------------------------------
DECEMBER DECEMBER
52 WEEKS ENDED(2) 31, 1995 52 WEEKS ENDED(2) 31, 1995
------------------------------- THROUGH ------------------------------- THROUGH
DECEMBER DECEMBER DECEMBER SEPTEMBER DECEMBER DECEMBER DECEMBER SEPTEMBER
31, 1993 31, 1994 30, 1995 17,1996(2) 31, 1993 31, 1994 30, 1995 17,1996(2)
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net store sales..................... $ 98,601 $ 87,863 $ 59,956 $ 29,674 $ 87,956 $ 89,648 $ 85,581 $ 54,366
Net store contribution(3)........... 17,005 8,083 6,591 3,797 16,081 13,912 13,063 5,854
Franchising, licensing and other
revenue, net....................... 3,993 7,241 5,993 3,786 -- -- -- --
General and administrative
expenses........................... 21,521 16,379 15,612 8,984 8,536 12,546 9,216 7,538
Income (loss) from operations....... (1,251) (1,691) (3,526) (1,742) 4,004 (750) 2,435 (2,772)
Net loss............................ (2,243) (5,320) (2,368) (2,304) (333) (5,355) (2,096) (5,645)
OTHER DATA:
Cash flows from operating
activities......................... 5,839 1,728 (4,478) (447) (1,041) 3,699 4,451 (378)
Cash flows from investing
activities......................... (2,962) (2,030) 2,526 (385) (9,019) (3,779) (568) (1,200)
Cash flows from financing
activities......................... (2,496) (732) (185) (58) 7,052 3,134 (4,599) (1,380)
Interest expense.................... 1,088 2,155 51 80 4,172 4,381 4,356 2,895
Total depreciation and
amortization....................... 4,728 4,415 3,525 1,911 6,668 7,423 6,902 4,937
Capital expenditures................ 3,856 4,895 4,146 1,054 8,791 3,779 568 1,200
EBITDA(4)........................... 3,477 2,724 (1) 169 10,672 6,673 9,337 2,165
Store contribution for stores in
the process of being closed or
franchised(3)...................... $ 6,424 $ 319 $ (802) $ (695) $ 933 $ (542) $ (1,542) $ (1,751)
Ratio of earnings to fixed
charges(5)......................... -- -- -- -- -- -- -- --
BALANCE SHEET DATA:
Working capital (deficit)........... $ (2,673) $ (1,067) $ (3,114) $ (21,704) $ (2,023) $ (46) $ 128 $ (3,640)
Total assets........................ 36,838 30,128 23,033 19,144 75,777 74,490 66,282 59,024
Debt and capital lease obligations,
including current portion.......... 87,549 22,850 21,226 21,224 33,822 36,956 32,357 30,977
Total stockholders' equity
(deficit).......................... (66,645) (25,419) (28,017) (30,318) 30,038 24,684 22,588 16,943
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS(1)
------------------------------------------------------------
SEPTEMBER 18, 53 WEEKS 39 WEEKS 39 WEEKS
1996 THROUGH ENDED ENDED ENDED
DECEMBER 28, JANUARY 3, SEPTEMBER 27, OCTOBER 3,
1996(2) 1998(2) 1997(2) 1998(2)
------------ ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net store and batter sales......................................... $ 39,890 $123,987 $ 83,759 $ 89,938
Net store contribution(3).......................................... 9,482 25,087 13,214 11,804
Franchising, licensing and other revenue, net...................... 1,492 6,520 3,767 6,021
General and administrative expenses................................ 4,035 16,730 10,803 12,621
Income (loss) from operations...................................... 5,649 8,415 2,378 (314)
Net income (loss).................................................. 1,961 (974) (3,224) (9,690)
OTHER DATA:
Cash flows from operating activities............................... 7,609 919 791 676
Cash flows from investing activities............................... (21,131) (15,505) (3,216) (34,315)
Cash flows from financing activities............................... 20,231 24,164 (98) 22,498
Interest expense................................................... 1,867 7,830 5,070 8,981
Total depreciation and amortization................................ 2,344 10,403 6,596 9,707
Capital expenditures............................................... 1,638 4,678 3,216 5,616
EBITDA(4).......................................................... 7,993 18,818 8,974 9,393
Store contribution for stores in the process of being closed or
franchised(3)................................................ $ 513 $ (1,798) $ (1,999) $ (2,125)
Ratio of earnings to fixed charges(5).............................. 2.85x -- -- --
BALANCE SHEET DATA:
Working capital (deficit).......................................... $ (2,889) $ 13,133 $ (16,966) $ (2,276)
Total assets....................................................... 110,055 149,684 125,470 222,657
Mandatorily redeemable cumulative preferred stock of subsidiaries.. 3,597 902 4,589 1,171
Debt and capital lease obligations, including current portion...... 67,563 101,081 78,084 140,156
Total stockholder's equity......................................... 16,961 30,765 27,664 50,131
</TABLE>
______________
(1) On September 17, 1996, Mrs. Fields completed the acquisitions of
substantially all of the assets and assumed certain liabilities of the
Predecessors. As a result of purchase accounting adjustments related to the
acquisitions, the Mrs. Fields' financial statements are not directly
comparable to the Predecessors' financial statements.
(2) Mrs. Fields and its Predecessors operate using a 52/53-week year ending near
December 31.
(3) Store contribution is determined by subtracting all store operating expenses
including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. Store contribution for stores in the process of being closed or
franchised as a separate caption is not in accordance with generally
accepted accounting principles. Store contribution may not be comparable to
other similarly titled measures.
(4) EBITDA consists of earnings before depreciation, amortization, interest,
income taxes, minority interest, preferred stock accretion and dividends of
subsidiaries and other income (expense). EBITDA is not intended to represent
cash flows from operations as defined by generally accepted accounting
principles and should not be considered as an alternative to net income
(loss) as an indicator of operating performance or to cash flows as a
measure of liquidity. EBITDA has been included herein because it is one of
the indicators upon which Mrs. Fields assesses its financial performance and
its capacity to service its debt (see footnote 5 below). EBITDA may not be
comparable to similarly titled measures reported by other companies.
<TABLE>
<CAPTION>
PREDECESSORS
---------------------------------------------------------------------------------------------
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT
MRS. FIELDS INC. AND SUBSIDIARIES(1) SAM COMPANY, INC. (COMBINED)(1)
---------------------------------------------- ---------------------------------------------
DECEMBER DECEMBER
52 WEEKS ENDED(2) 31, 1995 52 WEEKS ENDED (2) 31,1995
-------------------------------- THROUGH -------------------------------- THROUGH
DECEMBER DECEMBER DECEMBER SEPTEMBER DECEMBER DECEMBER DECEMBER SEPTEMBER
31, 1993 31, 1994 30, 1995 17, 1996(2) 31, 1993 31, 1994 30, 1995 17, 1996(2)
-------- -------- -------- ---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations... $ (1,251) $ (1,691) $ (3,526) $ (1,742) $ 4,004 $ (750) $ 2,435 $ (2,772)
ADD:
Depreciation and amortization... 4,728 4,415 3,525 1,911 6,668 7,423 6,902 4,937
--------- --------- --------- --------- --------- --------- --------- ---------
EBITDA........................... $ 3,477 $ 2,724 $ (1) $ 169 $ 10,672 $ 6,673 $ 9,337 $ 2,165
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
(see notes continued on page 42)
41
<PAGE>
<TABLE>
<CAPTION>
MRS. FIELDS (1)
----------------------------------------------------------
SEPTEMBER 18, 53 WEEKS 39 WEEKS 39 WEEKS
1996 THROUGH ENDED ENDED ENDED
DECEMBER 28, JANUARY 3, SEPTEMBER 27, OCTOBER 3,
1996 (2) 1998 (2) 1997(2) 1998(2)
------------ ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) from operations...... $ 5,649 $ 8,415 $2,378 $ (314)
ADD:
Depreciation and amortization...... 2,344 10,403 6,596 9,707
-------- -------- ------ ------
EBITDA.............................. $ 7,993 $ 18,818 $8,974 $9,393
======== ======== ====== ======
</TABLE>
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued and
net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For fiscal years 1993, 1994 and 1995 and the period
December 31, 1995 through September 17, 1996, Mrs. Fields Inc. and
subsidiaries' earnings were insufficient to cover fixed charges by
$2,028,000, $5,129,000, $2,127,000 and $2,099,000, respectively. For fiscal
years 1993, 1994 and 1995 and the period December 31, 1995 through September
17, 1996, 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 53 weeks ended January 3, 1998, the 39 weeks ended
September 27, 1997 and the 39 weeks ended October 3, 1998, Mrs. Fields'
earnings were insufficient to cover fixed charges by $319,000, $3,045,000
and $9,397,000, respectively.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In 1996, an investor group led by Capricorn Investors II, L.P.
("Capricorn") formed Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields'
Brand, Inc. (collectively, "Mrs. Fields" or the "Company") as subsidiaries of
Mrs. Fields' Holding Company, Inc. ("MFH").
On September 17, 1996, the Company initiated operations when it purchased
substantially all of the assets and assumed certain liabilities of Mrs. Fields
Inc. and subsidiaries, The Original Cookie Company, Incorporated ("Original
Cookie"), and the pretzel business of Hot Sam Company, Inc. ("Hot Sam").
The Company set out to increase sales and profitability of its cookie and
pretzel operations by implementing key elements of its business plan coupled
with strategic acquisitions. A key element of the business plan is closing or
franchising certain Company-owned stores that do not meet specific financial and
geographical criteria established by management. Implementation of this element
of the business plan is expected to result in enhanced operating margins as
these stores are franchised or closed. Stores not planned for franchise or
closure are referred to as "core" stores. Core stores will continue to be
operated by the Company into the foreseeable future. As a result of converting
certain stores to franchises, royalty revenues are expected to increase and
general and administrative expenses associated with operating those stores are
expected to be reduced.
The Company is pursuing growth in both its cookie and pretzel businesses through
strategic acquisitions. Management expects that significant operating synergies,
expense leveraging and geographic market share can be achieved through targeted
acquisitions. On July 25, 1997, a subsidiary of MFH, Mrs. Fields' Pretzel
Concepts, Inc. ("MFPC") acquired substantially all of the assets and assumed
certain liabilities of H&M Concepts Ltd. Co. ("H&M"), the largest franchisee of
Pretzel Time, Inc.("Pretzel Time"). On September 2, 1997, MFH acquired 56% of
the common stock of Pretzel Time, the franchisor of the Pretzel Time concept.
The acquisitions of H&M and Pretzel Time are collectively referred to as the
"Pretzel Acquisitions".
On November 26, 1997, the Company received as a contribution from MFH, the
business of MFPC and 56% of the shares of common stock of Pretzel Time (the
"Pretzel Contributions"). On that same date the Company received as a
contribution from MFH, all of the common stock of The Mrs. Fields' Brand, Inc.
On January 2, 1998 and June 12, 1998, the Company acquired an additional 4% and
10%, respectively, of Pretzel Time common stock, bringing the Company's total
ownership to 70%.
On August 24, 1998, the Company acquired all of the outstanding capital
stock and subordinated indebtedness of Cookies USA, the parent company of Great
American Cookie Company, Inc. ("Great American") for an aggregate purchase price
of $18.4 million. Concurrently, Cookies USA was merged with and into the
Company, at which time Great American became a wholly owned subsidiary of the
Company. At the same time the Company also purchased the stock of two Great
American franchisees, Deblan Corporation ("Deblan") and Chocolate Chip Cookies
of Texas, Inc. ("Chocolate Chip"), 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, the Company acquired eight Great American franchise stores
(the "Combined Karp Entities") from a Great American franchisee, for a purchase
price of $1.9 million. These transactions are collectively referred to as the
("Cookie Acquisitions").
43
<PAGE>
RECENT DEVELOPMENTS
On October 5, 1998, the Company purchased all of the retail cookie and
related business and operations of eleven Great American franchise stores from a
Great American franchisee for an aggregate purchase price of $2.8 million.
The Company is currently in discussions with Pretzelmaker Holdings, Inc.
("Pretzelmaker") and the holders of all of Pretzelmaker's outstanding capital
stock regarding a possible acquisition by the Company of all outstanding
Pretzelmaker capital stock. The Company cannot be sure that a definitive
agreement to purchase Pretzelmaker will be signed, or that this transaction will
be completed.
YEAR 2000
Management has assessed the Year 2000 issue and has determined that all
internal IT systems including financial software, corporate networks, the AS400
system and all other systems are Year 2000 compliant with the exception of: (1)
systems used for collecting and communicating sales data from retail locations,
and (2) internally developed plant production and distribution software.
The Company is currently replacing its sales collection systems with
software and hardware that is Year 2000 compliant. This project is approximately
30% complete with final completion projected for August 1999. The estimated cost
of this project is $1.9 million and includes software development and new store
computers and registers. The costs to complete this project are included in the
Company's 1998 and 1999 budgets. Funding for this project is being provided by
internal cash flow and by a lease finance company.
Replacement of the plant production and distribution software will take
place in the first quarter of 1999 at an estimated cost of $50,000. No IT
projects have been deferred as a result of the Company's Year 2000 efforts.
Management is in the process of assessing Year 2000 issues with respect to
its significant vendors and financial institutions as to their compliance plans
and whether any Year 2000 issues will impede the ability of such vendors to
continue providing goods and services to the Company. Failure of the Company's
key suppliers to remedy their own Year 2000 issues could delay shipments of
essential products, thereby disrupting the Company's operations. Furthermore,
the Company relies on various service providers, such as utility and
telecommunication service companies, which are beyond the Company's control.
This assessment is approximately 20% complete with final completion anticipated
by the end of 1998. Based upon the results of the assessment to date, management
is not aware of any Year 2000 issues relating to its significant vendors,
financial institutions or its non-IT systems.
44
<PAGE>
RESULTS OF OPERATIONS OF MRS. FIELDS AND ITS PREDECESSORS
The following table sets forth, for the periods indicated, certain
information relating to the operations of Mrs. Fields and its Predecessors
expressed in thousands of dollars and percentage changes from period to period.
Annual data in the table reflects the combined results of the Predecessors for
fiscal year 1995, the combined results of the Predecessors (for the period
December 31, 1995 through September 17, 1996) and Mrs. Fields (for the period
September 18, 1996 through December 28, 1996), the consolidated results of Mrs.
Fields for the 53 weeks ended January 3, 1998 ("fiscal year 1997"), the 39 weeks
ended September 27, 1997 and October 3, 1998. In order for the presentations to
be comparable, certain historical financial statement information for the
Predecessors has been reclassified to be consistent with the Mrs. Fields
historical financial statement presentation.
<TABLE>
<CAPTION>
% OF FOR THE 53 % OF
FOR THE 52 CHANGE WEEKS CHANGE
WEEKS ENDED FROM ENDED FROM
-----------------------
DECEMBER DECEMBER 1995 TO JANUARY 1996 TO
30, 1995 28, 1996 1996 3, 1998 1997
-------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net store and batter sales............. $ 145,537 $ 123,930 (14.8)% $123,987 -- %
Franchising revenues................... 1,870 2,414 29.1 3,574 48.1
Licensing revenues..................... 2,031 1,656 (18.5) 2,028 22.5
Other revenue, net..................... 2,092 1,208 (42.3) 918 (24.0)
--------- --------- --------
Total revenues........................ 151,530 129,208 (14.7) 130,507 1.0
--------- --------- --------
Operating costs and expenses:
Selling and store occupancy costs...... 83,997 69,209 (17.6) 66,832 (3.4)
Food cost of sales..................... 33,369 29,115 (12.7) 28,127 (3.4)
General and administrative expenses.... 24,828 20,557 (17.2) 16,730 (18.6)
Depreciation and amortization.......... 10,427 9,192 (11.8) 10,403 13.2
--------- --------- --------
Total operating costs and
expenses............................ 152,621 128,073 (16.1) 122,092 (4.7)
Interest expense.......................... (4,407) (4,842) 9.9 (7,830) 61.7
Interest income........................... 88 141 60.2 246 74.4
Other income (expense).................... 946 (2,422) (356.0) (1,805) (25.5)
--------- --------- --------
Net loss.................................. $ (4,464) $ (5,988) 34.1% $ (974) (83.7)%
========= ========= ========
SUPPLEMENTAL INFORMATION:
CORE STORES:
Net store and batter sales................ $ 93,775 $ 93,235 (0.6)% $104,316 11.9%
--------- --------- --------
Operating costs and expenses:
Selling and store occupancy costs...... 44,495 44,963 1.1 50,858 13.1
Food cost of sales..................... 21,703 22,274 2.6 22,677 1.8
Depreciation and amortization.......... 5,579 4,932 (11.6) 3,896 (21.0)
--------- --------- --------
Total operating costs and expenses.... 71,777 72,169 0.5 77,431 7.3
--------- --------- --------
Core store contribution................... $ 21,998 $ 21,066 (4.2)% $ 26,885 27.6%
========= ========= ========
STORES IN THE PROCESS OF BEING CLOSED
OR FRANCHISED:
Net store sales........................... $ 51,762 $ 30,695 (40.7)% $ 19,671 (35.9)%
--------- --------- --------
Operating costs and expenses:
Selling and store occupancy costs...... 39,502 24,246 (38.6) 15,974 (34.1)
Food cost of sales..................... 11,666 6,841 (41.4) 5,450 (20.3)
Depreciation and amortization.......... 2,938 1,541 (47.5) 45 (97.1)
--------- --------- --------
Total operating costs and expenses.... 54,106 32,628 (39.7) 21,469 (34.2)
--------- --------- --------
Stores in the process of being closed or
franchised contribution............... $ (2,344) $ (1,933) (17.5) $ (1,798) (7.0)
========= ========= ========
EBITDA.................................... $ 9,336 $ 10,327 10.6% $ 18,818 82.2%
========= ========= ========
<CAPTION>
% OF
FOR THE 39 CHANGE
WEEKS ENDED FROM
------------------------
SEPTEMBER OCTOBER 1997 TO
27, 1997 3, 1998 1998
---------- ---------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net store and batter sales............. $ 83,759 $ 89,938 7.4%
Franchising revenues................... 2,201 3,884 76.5
Licensing revenues..................... 1,215 1,081 (11.0)
Other revenue, net..................... 351 1,056 200.9
---------- ------------
Total revenues........................ 87,526 95,959 9.6
---------- ------------
Operating costs and expenses:
Selling and store occupancy costs...... 48,200 52,357 8.6
Food cost of sales..................... 19,549 21,588 10.4
General and administrative expenses.... 10,803 12,621 16.8
Depreciation and amortization..........
6,596 9,707 47.2
Total operating costs and ---------- ------------
expenses............................
Interest expense.......................... 85,148 96,273 13.1
Interest income........................... (5,070) (8,981) 77.1
Other income (expense).................... 153 530 246.4
(685) (925) 35.0
Net loss.................................. ---------- ------------
$ (3,224) $ (9,690) 200.6%
========== ============
SUPPLEMENTAL INFORMATION:
CORE STORES:
Net store and batter sales................ 69,713 $ 79,094 13.5%
---------- ------------
Operating costs and expenses:
Selling and store occupancy costs...... 36,222 42,826 18.2
Food cost of sales..................... 15,536 18,500 19.1
Depreciation and amortization.......... 2,742 3,839 40.0
---------- ------------
Total operating costs and expenses.... 54,500 65,165 19.6
---------- ------------
Core store contribution................... 15,213 $ 13,929 (8.4)
========== ============
STORES IN THE PROCESS OF BEING CLOSED
OR FRANCHISED:
Net store sales........................... 14,046 $ 10,844 (22.8)%
---------- ------------
Operating costs and expenses:
Selling and store occupancy costs...... 11,978 9,531 (20.4)
Food cost of sales..................... 4,013 3,088 (23.1)
Depreciation and amortization.......... 54 350 548.1
---------- ------------
Total operating costs and expenses.... 16,045 12,969 (19.2)
---------- ------------
Stores in the process of being closed or
franchised contribution............... $ (1,999) $ (2,125) 6.3
========== ============
EBITDA.................................... $ 8,974 $ 9,393 4.7%
========== ============
</TABLE>
45
<PAGE>
39 WEEKS ENDED OCTOBER 3, 1998 COMPARED TO THE 39 WEEKS ENDED SEPTEMBER 27, 1997
COMPANY-OWNED AND FRANCHISED OR LICENSED STORE ACTIVITY
As of October 3, 1998, there were 568 Company-owned stores and 765
franchised or licensed stores in operation. The store activity for the 39 weeks
ended September 27, 1997 and October 3, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1997 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)....... 84 205 116 278
Stores closed (including relocations)........................ (4) (86) (9) (65)
Non-core (exit plan) stores closed (September 18, 1996
forward)................................................. (63) -- (21) --
Stores sold to franchisees................................... (3) 3 (4) 4
Non-core (exit plan) stores franchised (September 18, 1996
forward)................................................. (4) 4 (13) 13
Stores acquired from franchisees............................. 4 (4) 18 (18)
---- ---- ---- ----
Stores open as of the end of the period....................... 496 540 568 765
==== ==== ==== ====
</TABLE>
REVENUES
Net Stores Sales. Total net store sales increased $6,179,000, or 7.4%, from
$83,759,000 to $89,938,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997.
Net store sales from core stores and batter sales increased $9,381,000, or
13.5%, from $69,713,000 to $79,094,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. The increase in net store
sales from core stores was primarily attributable to (i) the operation of 69
Pretzel Time core stores acquired in connection with the Pretzel Acquisitions in
July 1997 (ii) the operation of 52 Great American stores acquired in connection
with the Cookie Acquisitions in August and September 1998 and (iii) batter sales
to Great American franchisees. This increase in net store sales from core stores
was offset in part by the negative effect of a calendar shift. The Company's
year end was December 28 in 1996 and January 3, 1998 in 1997. As a result, the
New Year's holiday week fell in the first quarter of 1997 and again in the
fourth quarter of 1997. The first quarter of 1998 did not benefit from the New
Year's holiday sales. Had this holiday been in the first quarter of 1998, net
store sales from core stores would have been approximately $800,000 greater or
$79,894,000.
On a comparable store basis (adjusted for the calendar shift), system-wide
core store sales were down 1.0% during the 39 weeks ended October 3, 1998
compared to the same period in 1997.
Net store sales from stores in the process of being closed or franchised
decreased $3,202,000, or 22.8%, from $14,046,000 to $10,844,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997. This
decrease results from closing 21 stores and franchising 13 stores during the 39
weeks ended October 3, 1998 and the effect of closing or franchising 79 stores
subsequent to December 28, 1996 and prior to the 39 week period ended October 3,
1998.
Franchising Revenues. Franchising revenues increased $1,683,000, or 76.5%,
from $2,201,000 to $3,884,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997. The increase in franchising revenues was
primarily attributable to royalties earned from 141 Pretzel Time franchised
stores obtained in connection with the Pretzel Acquisitions in 1997 and the 211
Great American franchised stores obtained in connection with the Cookie
Acquisitions in August and September 1998.
46
<PAGE>
Licensing Revenues. Licensing revenues decreased $134,000, or 11.0%, from
$1,215,000 to $1,081,000 for the 39 weeks ended October 3, 1998 compared to the
39 weeks ended September 27, 1997. The decrease in licensing revenues was
primarily attributable to a dry mix license fee earned during the 39 weeks ended
September 27, 1997 that did not recur in the 39 weeks ended October 3, 1998.
Other Revenue, net. Other revenue, net, increased $705,000, or 200.9%, from
$351,000 to $1,056,000 for the 39 weeks ended October 3, 1998 compared to the 39
weeks ended September 27, 1997. The increase in other revenue, net, was
primarily attributable to area development fees earned from certain franchised
stores obtained in 1997, an increase in contribution from the Company's mail
order division and miscellaneous other income.
Total Revenues. Total revenues increased by $8,433,000, or 9.6%, from
$87,526,000 to $95,959,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997 due to the reasons discussed above.
OPERATING COSTS AND EXPENSES
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $4,157,000, or 8.6%, from $48,200,000 to $52,357,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997.
Selling and store occupancy costs for core stores increased by $6,604,000,
or 18.2%, from $36,222,000 to $42,826,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. Within this overall increase,
selling expenses for core stores increased by $4,158,000, or 20.0%, from
$20,804,000 to $24,962,000 for the 39 weeks ended October 3, 1998 compared to
the 39 weeks ended September 27, 1997. The increase in selling expenses was
primarily attributable to the 69 Pretzel Time core stores acquired in connection
with the Pretzel Acquisitions in 1997, the 52 Great American core stores
acquired in connection with the Cookie Acquisitions in August and September
1998, and the effect of the minimum wage increasing to $5.15 from $4.75 on
September 1, 1997. Store occupancy costs for core stores increased $2,446,000,
or 15.9%, from $15,418,000 to $17,864,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. The increase in store
occupancy costs was primarily attributable to the increase in the number of
stores discussed above, the Company reacquiring 18 core stores from franchisees
during the 39 weeks ended October 3, 1998 and lease renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $2,447,000, or 20.4%, from $11,978,000 to $9,531,000 for
the 39 weeks ended October 3, 1998 compared to the 39 weeks ended September 27,
1997. This decrease was primarily the result of closing 21 stores and
franchising 13 stores during the 39 weeks ended October 3, 1998 and the effect
of closing or franchising 79 stores subsequent to December 28, 1996 and prior to
the 39 week period ended October 3, 1998.
Food Cost of Sales. Total food cost of sales increased $2,039,000, or
10.4%, from $19,549,000 to $21,588,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997.
Food cost of sales for core stores increased $2,964,000, or 19.1%, from
$15,536,000 to $18,500,000 for the 39 weeks ended October 3, 1998. This increase
was primarily the result of the addition of 69 Pretzel Time core stores in July
1997 and 52 Great American core stores acquired in connection with the Cookie
Acquisitions in August 1998. Food 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 and the increasing cost of butter. Butter
is one of the main ingredients in a variety of the Company's products and is a
condiment for other products. The price of butter has increased from $0.78/lb.
at the beginning of 1997 to a peak of $2.92/lb. in September 1998.
The market for butter has been in a highly volatile state. During the last
week of September 1998, the price of butter increased to $2.92/lb. from
$2.05/lb. Management believes that the increased butter costs will continue to
negatively impact food cost of sales for the remainder of 1998. Additionally,
distribution costs increased during the 13 weeks ended October 3, 1998 as the
Company changed distributors to improve product availability and the reliability
of service to the stores.
47
<PAGE>
Food cost of sales for stores in the process of being closed or franchised
decreased $925,000, or 23.1%, from $4,013,000 to $3,088,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997. This
decrease was primarily the result of closing 21 stores and franchising 13 stores
during the 39 weeks ended October 3, 1998 and the effect of closing or
franchising 79 stores subsequent to December 28, 1996 and prior to the 39 week
period ended October 3, 1998.
General and Administrative Expenses. General and administrative expenses
increased $1,818,000, or 16.8%, from $10,803,000 to $12,621,000 for the 39 weeks
ended October 3, 1998 compared to the 39 weeks ended September 27, 1997. The
increase in general and administrative expenses was primarily attributable to
the Pretzel Acquisitions in 1997 and the Cookie Acquisitions in 1998.
Depreciation and Amortization. Total depreciation and amortization expense
increased by $3,111,000, or 47.2%, from $6,596,000 to $9,707,000 for the 39
weeks ended October 3, 1998 compared to the 39 weeks ended September 27, 1997.
This increase was primarily attributable to increased goodwill from the Pretzel
Acquisitions in 1997 and the Cookie Acquisitions in 1998.
Depreciation and amortization expense for core stores increased $1,097,000,
or 40.0%, from $2,742,000 to $3,839,000 for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. This increase in depreciation
and amortization expense was primarily attributable to the addition of 69
Pretzel Time core stores in July 1997 and 52 Great American core stores in
August and September 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $11,125,000, or 13.1%, from $85,148,000 to $96,273,000 for the 39
weeks ended October 3, 1998 compared to the 39 weeks ended September 27, 1997,
for the reasons discussed above.
Interest Expense. Interest expense increased $3,911,000, or 77.1%, from
$5,070,000 to $8,981,000 for the 39 weeks ended October 3, 1998 compared to the
39 weeks ended September 27, 1997. This increase was primarily attributable to
interest expense on the $100,000,000 high yield notes that were placed in
November 1997 and the $40,000,000 high yield notes placed in August 1998.
Interest Income. Interest income increased $377,000, or 246.4%, from
$153,000 to $530,000 for the 39 weeks ended October 3, 1998 compared to the 39
weeks ended September 27, 1997. This increase was primarily the result of
interest earned on excess cash provided by the $100,000,000 high yield notes
that were placed in November 1997 and the $40,000,000 high yield notes placed in
August 1998.
Other Expenses. Other expenses increased $240,000, or 35.0%, from $685,000
to $925,000 for the 39 weeks ended October 3, 1998 compared to the 39 weeks
ended September 27, 1997. This increase was primarily attributable to minority
interest from the Pretzel Acquisitions in 1997 and acquisition expenses incurred
during the 39 weeks ended October 3, 1998.
Net Loss. The net loss increased by $6,466,000, or 200.6%, from $3,224,000
to $9,690,000 for the 39 weeks ended October 3, 1998 compared to the 39 weeks
ended September 27, 1997 due to the combination of factors described above.
Contribution from Core Stores. Contribution from core stores decreased by
$1,284,000, or 8.4%, from $15,213,000 to $13,929,000 for the 39 weeks ended
October 3, 1998 compared to the 39 weeks ended September 27, 1997. Contribution
from core stores was negatively impacted by a 1.0% decline in comparable store
sales and by the increases in selling and store occupancy costs, food cost of
sales and depreciation and amortization described above. Contribution from core
stores was also negatively impacted by a calendar shift whereby the Company's
year end was December 28 for 1996 and January 3, 1998 for 1997. As a result, the
New Year's holiday week fell in the first quarter of 1997 and again in the
fourth quarter 1997. The first quarter of 1998 did not benefit from the New
Year's holiday sales. Had this holiday been in the first quarter of 1998,
contribution from core stores would have been approximately $600,000 greater or
$14,529,000.
48
<PAGE>
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 increased by $126,000, or 6.3%, from $1,999,000 to $2,125,000 for
the 39 weeks ended October 3, 1998 compared to the 39 weeks ended September 27,
1997. The increase in negative contribution was primarily attributable to the
addition of 52 stores from the Cookie Acquisitions in August and September 1998,
offset in part by closing 21 stores and franchising 13 stores during the 13
weeks ended October 3, 1998. In addition, 79 stores were closed or franchised
subsequent to December 28, 1996 and prior to the 39 week period ended October 3,
1998.
EBITDA. Earnings before interest, taxes, depreciation and amortization,
preferred stock accretion and dividends of subsidiaries, minority interest and
other income (expense) ("EBITDA") is presented as management believes that
certain investors find it to be a useful tool for measuring the ability to
service debt. EBITDA does not represent net income or cash flows from operations
as these terms are defined by generally accepted accounting principles and does
not necessarily indicate whether cash flows have been or will be sufficient to
fund cash needs. EBITDA increased by $419,000, or 4.7%, from $8,974,000 to
$9,393,000 for the 39 weeks ended October 3, 1998 compared to the 39 weeks ended
September 27, 1997 for the reasons discussed above. Had the New Year's holiday
week been in the first quarter of 1998, EBITDA would have been approximately
$600,000 greater, or $9,993,000.
53 WEEKS ENDED JANUARY 3, 1998 ("FISCAL YEAR 1997") COMPARED TO THE 52 WEEKS
ENDED DECEMBER 28, 1996 ("FISCAL YEAR 1996") (COMPRISED OF THE MFI, 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>
1996 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) (10) (89)
Non-core (exit plan) stores closed (September 18, 1996
forward)................................................... (17) -- (70) --
Stores sold to franchisees...................................... (9) 9 (3) 3
Non-core (exit plan) stores franchised (September 18, 1996
forward)................................................... (3) 3 (9) 9
Stores acquired from franchisees................................ 5 (5) 5 (5)
---- ---- ---- ----
Stores open as of the end of the fiscal year.................... 482 418 481 553
==== ==== ==== ====
</TABLE>
49
<PAGE>
The activity reflected above resulted in 26,572 and 25,520 Company-owned
equivalent store weeks and 21,658 and 25,732 franchisee/licensee equivalent
store weeks during the 52 weeks ended December 28, 1996 and the 53 weeks ended
January 3, 1998, respectively.
REVENUES
Net Store Sales. Total net store sales increased $57,000, or less than
1.0%, from $123,930,000 to $123,987,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996.
Net store sales from core stores increased $11,081,000, or 11.9%, from
$93,235,000 to $104,316,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996. The increase in net store sales from core
stores was primarily attributable to the operation of Pretzel Time core stores
obtained in connection with the Pretzel Acquisitions in July 1997 and an
increase in average transaction amounts resulting from the introduction of
product line extensions and aggressive marketing initiatives, offset in part by
declining transaction counts in certain concepts. Also, three new core stores
were opened and five stores were acquired from franchises during the 53 weeks
ended January 3, 1998.
On a comparable store basis (adjusted for the calendar shift), system-wide
core 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 70 stores and
franchising seven (net) stores during fiscal 1997 and the full year effect of
closing 56 stores and franchising seven (net) stores during fiscal year 1996.
Franchising Revenues. Franchising revenues increased $1,160,000, or 48.1%,
from $2,414,000 to $3,574,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996. The increase in franchising revenues was
primarily attributable to royalties earned from Pretzel Time franchised stores
obtained in connection with the Pretzel Acquisitions coupled with 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.
Other Revenue, Net. Other revenue, net decreased $290,000, or 24.0%, from
$1,208,000 to $918,000 for the 53 weeks ended January 3, 1998 compared to the 52
weeks ended December 28, 1996. The decrease in other revenue, net is primarily
attributable to a favorable adjustment resulting from the Company re-negotiating
a contract with one of its vendors during the 52 weeks ended December 28, 1996
that did not recur during the 53 weeks ended January 3, 1998.
Total Revenues. Total revenues increased by $1,299,000, or 1.0%, from
$129,208,000 to $130,507,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996, for the reasons discussed above.
OPERATING COSTS AND EXPENSES
Selling and Store Occupancy Costs. Total selling and store occupancy costs
decreased $2,377,000, or 3.4%, from $69,209,000 to $66,832,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
50
<PAGE>
Selling and store occupancy costs for core stores increased by $5,895,000,
or 13.1%, from $44,963,000 to $50,858,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. Within this overall increase,
selling expenses increased by $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 store occupancy costs was
primarily attributable to the addition of Pretzel Time core stores in July 1997,
and the opening of three core stores and acquiring five stores from franchises
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 70 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.
Food Cost of Sales. Total food cost of sales decreased $988,000, or 3.4%,
from $29,115,000 to $28,127,000 for the 53 weeks ended January 3, 1998 compared
to the 52 weeks ended December 28, 1996.
Food cost of sales for core stores increased $403,000, or 1.8%, from
$22,274,000 to $22,677,000 for the 53 weeks ended January 3, 1998. This increase
is primarily the result of the addition of Pretzel Time core stores in July 1997
(which stores have a lower food cost of sales than cookie stores), offset by an
aggressive product waste control program which was uniformly applied to all
concepts early in the year. Additionally, the Company re-negotiated certain
vendor contracts to capitalize on the Company's economies of scale.
Food cost of sales for stores in the process of being closed or franchised
decreased $1,391,000, or 20.3%, from $6,841,000 to $5,450,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996. This
decrease is primarily the result of closing 70 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 $3,827,000, or 18.6%, from $20,557,000 to $16,730,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996. The
decrease in general and administrative expenses was primarily attributable to
the cost savings achieved by combining the operations of MFI and subsidiaries,
Original Cookie and Hot Sam and Pretzel Time which resulted in: (i) reduced
headcount with corresponding decreases in administrative salaries and benefits;
(ii) decreased professional service fees, including legal and accounting
services, and; (iii) decreased corporate office expenditures, including general
insurance, repairs and maintenance and utilities as a direct result of closing
the Original Cookie and Hot Sam headquarters in Cleveland, Ohio, the Pretzel
Time headquarters in Harrisburg, Pennsylvania and the H&M headquarters in Boise,
Idaho.
Depreciation and Amortization Expense. Total depreciation and
amortization expense increased by $1,211,000, or 13.2%, from $9,192,000 to
$10,403,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996.
Depreciation and amortization expense for core stores decreased $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 the Company recording the
acquired assets of MFI 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 core stores in July 1997, three newly opened
core stores and five stores acquired from franchises in fiscal year 1997.
51
<PAGE>
Total Operating Costs and Expenses. Total operating costs and expenses
decreased by $5,981,000, or 4.7%, from $128,073,000 to $122,092,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996,
for the reasons discussed above.
Interest Expense. Interest expense increased $2,988,000, or 61.7%, from
$4,842,000 to $7,830,000 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 MFI and subsidiaries, Original Cookie and Hot Sam on
September 17, 1996.
Other Expenses. Other expenses decreased $617,000, or 25.5%, from
$2,422,000 to $1,805,000 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 $5,014,000, or 83.7%, from $5,988,000
to $974,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996. The net loss equaled 0.7% of total revenues during the
53 weeks ended January 3, 1998 compared to 4.6% 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 MFI and subsidiaries, Original
Cookie and Hot Sam, cost savings associated with the Pretzel Acquisitions and
improved store operations.
Contribution from Core Stores. The contribution from core stores increased
by $5,819,000, or 27.6%, from $21,066,000 to $26,885,000 for the 53 weeks ended
January 3, 1998 compared to the 52 weeks ended December 28, 1996 due to the
combination of the factors described above.
Negative Contribution from Stores in the Process of Being Closed or
Franchised. The negative contribution from stores in the process of being
closed or franchised decreased by $135,000, or 7.0%, from $1,933,000 to
$1,798,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks ended
December 28, 1996. The decrease in negative contribution was primarily
attributable to closing 70 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.
EBITDA. EBITDA is presented as management believes that certain investors
find it to be a useful tool for measuring the ability to service debt. EBITDA
does not represent net income or cash flows from operations as these terms are
defined by generally accepted accounting principles and does not necessarily
indicate whether cash flows have been or will be sufficient to fund cash needs.
EBITDA increased by $8,491,000, or 82.2%, from $10,327,000 to $18,818,000 for
the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28,
1996, for the reasons described above.
52
<PAGE>
FISCAL YEAR ENDED DECEMBER 28, 1996 (COMPRISED OF THE MFI, 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) COMPARED TO THE 52 WEEKS ENDED DECEMBER 30, 1995 ("FISCAL
YEAR 1995")
COMPANY-OWNED AND FRANCHISED OR LICENSED STORE ACTIVITY
As of December 28, 1996, there were 482 Company-owned stores and 418
franchised or licensed stores in operation. The store activity for the 52 weeks
ended December 30, 1995 and the 52 weeks ended December 28, 1996 is summarized
as follows:
<TABLE>
<CAPTION>
1995 1996
--------------------------- ----------------------------
COMPANY- FRANCHISED COMPANY- FRANCHISED
OWNED OR LICENSED OWNED OR LICENSED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the fiscal year............ 669 324 540 415
Stores opened (including relocations)......................... 4 69 5 118
Stores closed (including relocations)......................... (51) (60) (39) (122)
Non-core (exit plan) stores closed (September 18, 1996
forward)................................................. -- -- (17) --
Stores sold to franchisees.................................... (83) 83 (9) 9
Non-core (exit plan) stores franchised (September 18, 1996
forward)................................................. -- -- (3) 3
Stores acquired from franchisees.............................. 1 (1) 5 (5)
---- ----- ---- -----
Stores open as of the end of the fiscal year.................. 540 415 482 418
==== ===== ==== =====
</TABLE>
The activity reflected above resulted in 31,434 and 26,572 Company-owned
equivalent store weeks and 19,214 and 21,658 franchisee/licensee equivalent
store weeks during the fiscal years 1995 and 1996, respectively.
REVENUES
Net Store Sales. Total net store sales decreased $21,607,000, or 14.8%,
from $145,537,000 to $123,930,000 for fiscal year 1996 compared to fiscal year
1995.
Net store sales from core stores decreased $540,000, or 0.6%, from
$93,775,000 to $93,235,000 for fiscal year 1996 compared to fiscal year 1995.
The decrease in net store sales from core stores was primarily attributable to a
decline in customer counts from fiscal year 1995 to fiscal year 1996, partially
offset by an increase in the average ticket price resulting from retail pricing
increases and aggressive marketing initiatives.
On a comparable store basis, system-wide core store sales were down 0.7%
for fiscal year 1996 compared to fiscal year 1995.
Net store sales from stores in the process of being closed or franchised
decreased $21,067,000, or 40.7%, from $51,762,000 to $30,695,000 for fiscal year
1996 compared to fiscal year 1995. This decrease is primarily the result of
closing 56 stores and franchising seven (net) stores during the year.
Franchising Revenues. Franchising revenues increased $544,000, or 29.1%,
from $1,870,000 to $2,414,000 for fiscal year 1996 compared to fiscal year 1995.
The increase in franchising revenues was primarily attributable to a full year
of royalty revenues from the 83 stores franchised in 1995, royalties earned from
new franchised stores in 1996 and development fees for new franchised locations.
Licensing Revenues. Licensing revenues decreased $375,000, or 18.5%, from
$2,031,000 to $1,656,000 for fiscal year 1996 compared to fiscal year 1995. The
decrease in licensing revenue is primarily attributable to licensing fees earned
in fiscal year 1995 that did not recur in fiscal year 1996.
53
<PAGE>
Other Revenue, net. Other revenue, net decreased $884,000, or 42.3%, from
$2,092,000 to $1,208,000 for fiscal year 1996 compared to fiscal year 1995. The
decrease in other revenue, net is primarily attributable to favorable insurance
adjustments in fiscal year 1995 that did not recur in fiscal year 1996.
Total Revenues. Total revenues decreased $22,322,000, or 14.7%, from
$151,530,000 to $129,208,000 for fiscal year 1996 compared to fiscal year 1995,
for the reasons discussed above.
OPERATING COSTS AND EXPENSES
Selling and Store Occupancy Costs. Total selling and store occupancy costs
decreased $14,788,000, or 17.6%, from $83,997,000 during fiscal year 1995 to
$69,209,000 during fiscal year 1996.
Selling and store occupancy costs for core stores increased by $468,000, or
1.1%, from $44,495,000 during fiscal year 1995 to $44,963,000 during fiscal year
1996. Within this overall increase, selling expenses decreased by $330,000, or
1.3%, from $25,980,000 to $25,650,000 for fiscal year 1996 compared to fiscal
year 1995. Store occupancy costs increased $792,000, or 4.3%, from $18,521,000
to $19,313,000 for fiscal year 1996 compared to fiscal year 1995. The increase
in store occupancy costs was primarily attributable to the opening of five core
stores and acquiring five stores from franchisees during fiscal year 1996 and
renewed lease rent increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $15,256,000, or 38.6%, from $39,502,000 to $24,246,000
for fiscal year 1996 compared to fiscal year 1995. This decrease is primarily
the result of closing 56 stores and franchising seven (net) stores during the
period.
Food Cost of Sales. Total food cost of sales decreased $4,254,000, or
12.7%, from $33,369,000 during fiscal year 1995 to $29,115,000 during fiscal
year 1996.
Food cost of sales for core stores increased $571,000, or 2.6%, from
$21,703,000 during fiscal year 1995 to $22,274,000 during fiscal year 1996. The
increase was primarily attributable to an increase in the costs of butter of
40.8% over 1995, and an increase in distribution costs as a result of the
Company changing its distribution channels for its Mrs. Fields brand stores.
Additionally, management introduced several product line extensions, some with
higher food costs, in an effort to offset the decline in customer counts.
Food cost of sales for stores in the process of being closed or franchised
decreased $4,825,000, or 41.4%, from $11,666,000 to $6,841,000 for fiscal year
1996 compared to fiscal year 1995. This decrease is primarily the result of
closing 56 stores and franchising seven (net) stores during the period.
General and Administrative Expenses. General and administrative expenses
decreased $4,271,000, or 17.2%, from $24,828,000 to $20,557,000 for fiscal year
1996 compared to fiscal year 1995. The decrease in general and administrative
expenses was primarily attributable to the cost savings achieved by combining
the operations of MFI and subsidiaries, Original Cookie and Hot Sam which
resulted in: (i) reduced headcount with corresponding decreases in
administrative salaries and benefits; (ii) decreased professional service fees,
including legal and accounting services; and (iii) decreased corporate office
expenditures, including general insurance, repairs and maintenance and utilities
as a direct result of closing the Original Cookie and Hot Sam headquarters
building in Cleveland, Ohio.
Depreciation and Amortization Expense. Total depreciation and amortization
expense decreased $1,235,000, or 11.8%, from $10,427,000 during fiscal year 1995
to $9,192,000 during fiscal year 1996.
54
<PAGE>
Depreciation and amortization expense for core stores decreased $647,000,
or 11.6%, from $5,579,000 to $4,932,000 for fiscal year 1996 compared to fiscal
year 1995. The decrease in depreciation and amortization expense was primarily
attributable to the Company recording the acquired assets of MFI and
subsidiaries, Original Cookie and Hot Sam at their fair values, in accordance
with purchase accounting, resulting in an overall reduction to the store asset
base.
Total Operating Costs and Expenses. Total operating costs and expenses
decreased $24,548,000, or 16.1%, from $152,621,000 during fiscal year 1995 to
$128,073,000 during fiscal year 1996, for the reasons described above.
Interest Expense. Interest expense increased $435,000, or 9.9%, from
$4,407,000 to $4,842,000 for fiscal year 1996 compared to fiscal year 1995. This
increase was primarily attributable to an increase in interest expense due to
increased borrowings as a result of the purchase of the assets of MFI and
subsidiaries, Original Cookie and Hot Sam on September 17, 1996.
Other Income (Expenses). Other income (expenses) decreased $3,368,000, or
356.0%, from $946,000 to $(2,422,000) for fiscal year 1996 compared to fiscal
year 1995. This decrease is primarily attributable to the Company recognizing a
loss on the sale of existing Company-owned stores to franchisees during the 52
weeks ended December 28, 1996 compared to gain recognized on the sale of
existing Company-owned stores to franchisees during 52 weeks ended December 30,
1995. Additionally, the income tax provision increased during the 52 weeks ended
December 28, 1996 primarily due to the Company's profitability from the date the
Company initiated operations (September 18, 1996) through December 28, 1996.
Net Loss. The net loss increased by $1,524,000, or 34.1%, from $4,464,000
to $5,988,000 for fiscal year 1996 compared to fiscal year 1995. The net loss
equaled 4.6% of total revenues during 1996 compared to 2.9% of total revenues
during fiscal year 1995. The increase in net loss is in part due to an increase
in interest expense as a result of the increased borrowings to facilitate the
purchase of MFI and subsidiaries, Original Cookie and Hot Sam, net of a
reduction in the income tax provision.
Contribution from Core Stores. The contribution from core stores decreased
by $932,000, or 4.2%, from $21,998,000 to $21,066,000 for fiscal year 1996
compared to fiscal year 1995 due to the combination of the factors described
above.
Negative Contribution from Stores in the Process of Being Closed or
Franchised. The negative contribution from stores in the process of being
closed or franchised decreased by $411,000, or 17.5%, from $2,344,000 to
$1,933,000 for fiscal year 1996 compared to fiscal year 1995. The decrease in
negative contribution was primarily attributable to closing 56 stores and
franchising seven (net) stores during the year.
EBITDA. EBITDA is presented as management believes that certain investors
find it to be a useful tool for measuring the ability to service debt. EBITDA
does not represent net income or cash flows from operations as these terms are
defined by generally accepted accounting principles and does not indicate
whether cash flows have been or will be sufficient to fund cash needs. EBITDA
increased by $991,000, or 10.6%, from $9,336,000 to $10,327,000 for fiscal year
1996 compared to fiscal year 1995, for the reasons described above.
55
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and available borrowings under the Company's existing
revolving credit facilities. At October 3, 1998, the Company had $5.1 million of
cash and $12.7 million of available borrowings under its credit facility. It is
expected that the Company's principal uses of cash will be to provide working
capital, finance capital expenditures (including acquisitions and store closure
costs), meet debt service requirements and other general corporate purposes. The
Company is highly leveraged. Based on current operations and anticipated cost
savings, the Company believes that its sources of liquidity will be adequate to
meet its anticipated requirements for working capital, capital expenditures
(including acquisitions and store closure costs), scheduled debt service
requirements and other general corporate purposes. There can be no assurance,
however, that the Company's business will continue to generate cash flows at or
above current levels or that cost savings can be achieved.
OCTOBER 3, 1998 COMPARED TO JANUARY 3, 1998
As of October 3, 1998, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $12,658,000, a decrease of 36.7%, or
$7,340,000, from January 3, 1998 when liquid assets were $19,998,000. Cash
decreased $11,141,000, or 68.4%, to $5,146,000 at October 3, 1998 from
$16,287,000 at January 3, 1998. This decrease was primarily the result of cash
used for the Cookie Acquisitions in August and September 1998, capital
expenditures of $5,616,000 relating to store remodels and renovations and
interest payments of $6,291,000 primarily relating to the $100,000,000 high
yield notes which were put into place in November 1997, offset in part, by
$530,000 in interest income earned during the period on excess cash.
Current assets decreased by $4,298,000, or 14.9%, to $24,525,000 at October
3, 1998 from $28,823,000 at January 3, 1998. This decrease was primarily the
result of a decrease in cash of $11,141,000, offset by an increase in accounts
receivable of $3,801,000 and an increase in inventories of $1,690,000.
Long-term assets increased $77,271,000, or 63.9%, to $198,132,000 at
October 3, 1998 from $120,861,000 at January 3, 1998. This increase was
primarily the result of an increase in property and equipment and goodwill
related to the Cookie Acquisitions.
Current liabilities increased by $11,111,000, or 70.8%, to $26,801,000 at
October 3, 1998 from $15,690,000 at January 3, 1998. This increase is due to an
increase in accounts payable, accrued interest payable, accrued salaries, wages
and benefits, and accrued liabilities offset by a decrease in store closure
reserves, deferred income and sales taxes payable.
The Company's working capital decreased by $15,409,000, or 117.3%, to
($2,276,000) at October 3, 1998 from $13,133,000 at January 3, 1998, for the
reasons described above.
The Company generated $676,000 of cash from operating activities during the
39 weeks ended October 3, 1998, primarily from store sales and franchising and
licensing revenues less costs and expenses incurred to generate the store sales
and franchising and licensing revenues and less interest paid on the
$100,000,000 high yield notes.
The Company utilized $34,315,000 of cash from investing activities during
the 39 weeks ended October 3, 1998, primarily for the Cookie Acquisitions,
capital expenditures relating to store remodels and for renovations.
The Company generated $22,498,000 of cash from financing activities during
the 39 weeks ended October 3, 1998, primarily from the issuance of new high
yield notes and an equity infusion from MFH net of principal payments to retire
Great American long-term debt and payment of acquisition costs.
56
<PAGE>
The specialty cookie and pretzel businesses do not require the maintenance
of significant receivables or inventories; however, the Company continually
invests in its business by upgrading and remodeling stores and adding new
stores, carts, and kiosks as opportunities arise. Investments in these long-term
assets, which are key to generating current sales, reduce the Company's working
capital. During the 39 weeks ended October 3, 1998 and September 27, 1997, the
Company expended $5,616,000 and $3,216,000, respectively for capital assets and
expects to expend approximately $7,800,000 for all of 1998. Management
anticipates that these expenditures will be funded with cash generated from
operations and short-term borrowings under its credit facility as needed.
INFLATION
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of the Company'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 the Company's employees are paid
hourly wages at the Federal minimum wage level. Minimum wage increases will
negatively impact the Company'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.
SEASONALITY
The Company's sales and store contribution are highly seasonal given the
significant impact of its mall-based locations. The Company's sales tend to
mirror customer traffic flow trends in malls which increase significantly during
the fourth quarter (primarily between Thanksgiving and the end of the calendar
year). Holiday gift purchases are also a significant factor in increased sales
in the fourth quarter.
The seasonality effect on store contribution is even more significant than
on sales. The impact on store contribution is more significant due to the fixed
nature of certain store level costs (occupancy costs, store manager salaries,
etc.). Once these fixed costs are covered by store sales, the flow through of
sales to store contribution becomes greater. Accordingly, the fourth quarter is
a key determinant to overall profitability for the year.
57
<PAGE>
The following table presents certain unaudited historical quarterly
financial data for Mrs. Fields for fiscal years 1995, 1996 and 1997, and through
the third fiscal quarter of 1998.
<TABLE>
<CAPTION>
FIRST SECOND THIRD
QUARTER QUARTER QUARTER FOURTH
(13 WEEKS) (13 WEEKS) (13 WEEKS) QUARTER(1) TOTAL YEAR
---------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total sales
1997................................. $27,642 $26,198 $29,920(2) $40,227(2) $123,987
1996................................. $29,361 $28,640 $29,598 $36,331 $123,930
1995................................. $36,819 $34,723 $34,053 $39,942 $145,537
% of total store sales
1997................................. 22.3% 21.1% 24.1%(2) 32.5%(2) 100.0%
1996................................. 23.7% 23.1% 23.9% 29.3% 100.0%
1995................................. 25.3% 23.9% 23.4% 27.4% 100.0%
Total store cash contribution (3)
1997................................. $ 4,854 $ 4,694 $ 6,699(2) $12,781(2) $ 29,028
1996................................. $ 4,355 $ 4,484 $ 6,830 $ 9,937 $ 25,606
1995................................. $ 5,349 $ 5,692 $ 5,839 $11,291 $ 28,171
% of total store contribution
1997................................. 16.7% 16.2% 23.1%(2) 44.0%(2) 100.0%
1996................................. 17.0% 17.5% 26.7% 38.8% 100.0%
1995................................. 19.0% 20.2% 20.7% 40.1% 100.0%
</TABLE>
_____________
(1) Fourth quarter 1995, 1996 and 1997 consists of 13 weeks, 13 weeks and 14
weeks, respectively.
(2) Includes the Pretzel Acquisitions.
(3) Total store contribution before store depreciation and amortization.
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
(collectively, "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 thereto of Cookies USA, Inc. and subsidiary
contained elsewhere in this Prospectus.
58
<PAGE>
References to the beliefs of the management of Great American or Cookies
USA in this discussion are to management prior to the Great American 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 aggregate, 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.
59
<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 the Company's 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. On a comparable store basis (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%. On a comparable store basis (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 sales decreased approximately $729,000, or
45.5%, 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 1998 FISCAL 1997
----------- -----------
<S> <C> <C>
Number of licenses sold to franchisees
- existing stores......................................................... 15 12
- new stores.............................................................. 5 12
Cash and notes from sale of existing stores................................ $1,980,000 $2,045,000
Less: net book value of existing stores sold............................... 1,235,000 818,000
---------- ----------
Revenue from sale of existing stores....................................... 745,000 1,227,000
---------- ----------
Revenue from license fees for new stores................................... 125,000 300,000
Revenue from other fees.................................................... 3,000 75,000
---------- ----------
Revenue from license fees
for new stores and other fees............................................. 128,000 375,000
---------- ----------
Total revenue from sale of existing
and new stores to franchisees............................................. $ 873,000 $1,602,000
========== ==========
</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 the Company for the benefit of
franchisees and (b) an increase in sales of miscellaneous supplies to
franchise stores, offset by (b) an increase in batter discounts given
to franchisees as a result of increased batter sales to franchisees in
fiscal 1998.
60
<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.
OTHER EXPENSES, NET
Other expenses, net, decreased approximately $104,000, or 1.7%, during the
fiscal year ended June 28, 1998 compared to the fiscal year ended June 29, 1997.
The decrease was primarily attributable to an increase in interest income.
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.
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<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. On a comparable store basis, (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 comparable store sales volume 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. On a comparable store basis (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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<PAGE>
Revenue from franchise sales increased approximately $445,000, or 38.5%,
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)
---------- ----------
Gain from sales of existing stores......................................... 861,000 1,227,000
---------- ----------
License fees for new stores..................................................... 275,000 300,000
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
========== ==========
</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.
SELLING, GENERAL AND ADMINISTRATIVE
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.
63
<PAGE>
OTHER EXPENSES, NET
Other expenses, net decreased approximately $193,000, or 3.1%, during
fiscal year 1997 compared to fiscal year 1996. The decrease was primarily
attributable to an increase in interest income.
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.................... 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.
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. On a comparable store basis, (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.
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<PAGE>
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%. On a comparable store basis
(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 sales 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)
----------- ----------
Gain from sales of existing stores....................................... 1,212,000 861,000
----------- ----------
License fees for new stores................................................... 280,000 275,000
Other fees.................................................................... 56,000 21,000
----------- ----------
Revenue from license fees for new stores and other fees.................. 336,000 296,000
----------- ----------
Total......................................................................... $ 1,548,00 $1,157,000
=========== ==========
</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 (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 certain leasehold improvements. The effect of this change in
estimate was to increase fiscal year 1996 depreciation for Great American-owned
stores by $130,000.
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.
65
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
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 $45,000, or 0.7%, during fiscal
year 1996 compared to fiscal year 1995. The increase was primarily attributable
to (a) a decrease in interest income due to lower average cash balances, and (b)
an increase in interest expense due to an increase in capital lease obligations.
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 (b)
a $118,000 decrease in state and federal income tax benefit, and (c) a $45,000
increase in other expenses, net.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company files reports and other information with the Securities and
Exchange Commission (the "Commission") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). We have agreed that, whether or not it is
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 (the "Trustee"),
to each Holder of Senior Notes and to each prospective purchaser of Senior Notes
identified to the Company by an Initial Purchaser (as defined in this
Prospectus), annual and quarterly financial statements substantially equivalent
to financial statements that would be included in reports filed with the
Commission, if the Company were subject to the reporting and other informational
requirements of the Exchange Act.
The Company, Great American and "MFB", the Guarantors of the Senior Notes,
have filed with the Commission a registration statement on Form S-4 (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the New Senior Notes offered hereby. This Prospectus, which
forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company, the
Guarantors and the New Senior Notes offered hereby, reference is made to the
Registration Statement, with respect to any statements made in this Prospectus
concerning the provisions of certain documents, we refer you to the copy of such
document filed as an exhibit to the Registration Statement otherwise filed with
the Commission.
Great American intends to submit separately and MFB has separately
submitted to the staff of the Commission no-action requests that Great American
and MFB not be subject to the informational requirements of the Exchange Act in
connection with the New Senior Notes. If the Commission grants these requests,
Great American and MFB would not be required to make such filings but the
Company, as the issuer of the New Senior Notes, would be required to include
summarized financial information regarding Great American and MFB in the
periodic reports and certain other documents that the Company files with the
Commission. If this request is not granted, Great American and MFB would be
required to file with the Commission such periodic reports, but would not be
required to file proxy or information statements. You may read and copy the
Registration Statement, the exhibits forming a part thereof and the reports and
other information filed by the Company, Great American and MFB 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 may also be accessed electronically
on the Commission's home page on the Internet (http://www.sec.gov).
If the Company is not required to be subject to the reporting requirements
of the Exchange Act in the future, the Company will be required under the
Indenture pursuant to which the Old Senior Notes were, and the New Senior Notes
will be, issued to furnish the Holders of the New Senior Notes with (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's independent
public accountants and (ii) all current reports that would be required to be
filed with the Commission on Form 8-K if the Company were required to file such
reports, in each case, within the time periods specified in the Commission's
rules and regulations.
67
<PAGE>
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' Original Cookies, 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 ,1998.
68
<PAGE>
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, with a 94% brand awareness among customers, 20% on an unaided basis
and 74% on an aided basis (based on a 1994 study commissioned by the Company).
The Company has recently developed a significant presence in the rapidly
growing, health-oriented pretzel segment as a result of the acquisitions of the
pretzel businesses of Hot Sam and H&M (formerly the largest Pretzel Time
franchisee) and a 70% majority interest in Pretzel Time. As of October 3, 1998,
the Company's retail network consisted of 1,333 locations, of which 1,021 were
cookie stores and 312 were pretzel stores. Of the total 1,333 stores, 568 were
Company-owned and 765 were franchised or licensed. The Company's stores average
approximately 600 to 700 square feet in size and are located predominantly in
shopping malls. The Company, through licensed locations, also operates kiosks
and carts at airports, universities, stadiums, hospitals and office building
lobbies. The Company's objective is to increase sales and profitability by
focusing on its higher-profitability stores in prime locations ("core stores").
As a result, by the end of fiscal year 2000, the Company plans to close or
franchise approximately 101 Company-owned cookie stores and 34 Company-owned
pretzel stores that do not meet certain financial and geographical criteria
established by management after giving effect to the Great American
Transactions. For the year ended January 3, 1998 and the 39 weeks ended October
3, 1998, the Company generated pro forma net revenue and EBITDA of $191.3
million and $31.0 million, and $126.9 million and $14.6 million, respectively.
COOKIES
The Company operates and franchises 1,021 retail cookie stores: 573 under
the Mrs. Fields brand, 128 under the Original Cookie brand and 320 under the
Great American brand. As a result of the Great American Acquisition, the Company
has cookie stores in 46 states, with Great American 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 31 malls. Management believes that Mrs. Fields is positioned in the
premium quality, baked on-premises segment of the approximately $12 billion U.S.
cookie industry. The Company offers over 50 different types of cookies, brownies
and muffins, which are baked continuously and served fresh throughout the day.
Baked products are made using only high quality ingredients, and all dough is
centrally manufactured and frozen 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, the Company
continually creates and tests new products to attract new customers and satisfy
current customers. Product development is currently focused on sugar-free dough
and reduced-fat cookies and brownies.
MFI, one of the predecessors of the Company, was founded in 1977 by Debbi
Fields and, following its initial success, embarked on an aggressive national
expansion program in the early 1980s. By the late 1980s, however, MFI
experienced financial difficulty as a result of excessive debt levels, certain
poor real estate locations, and a recessionary retailing environment. In
connection with a financial restructuring by its lenders, the Company 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 the Company, which involved the following
key elements: (1) identifying non-core stores to close or franchise, (2)
introducing Company-wide operating procedures to improve store operating
margins, (3) developing a marketing strategy and promotional calendar to turn
around comparable store sales and (4) improving employee morale through
selective new senior hires, increased training and various incentive plans. The
Company reinvested the savings from the improved store operations in marketing
and other measures designed to improve comparable store sales.
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<PAGE>
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of MFI, Original Cookie and Hot Sam by MFH, a
subsidiary of Capricorn. As of October 3, 1998, Capricorn had invested more than
$28 million in the Company through MFH. Capricorn retained Mr. Hodges as Chief
Executive Officer of Mrs. Fields. Management believes that Mrs. Fields has a
more well-recognized brand name than Original Cookie and that Mrs. Fields stores
have, during fiscal year 1997 and the 39 weeks ended October 3, 1998, achieved
higher average revenue per core store than Original Cookie stores ($351,000
versus $301,000). As a result, the Company intends to continue selectively
converting its core and to-be-franchised Original Cookie stores to Mrs. Fields
brand stores, which it believes will result in an increase in net sales,
comparable store sales and store contribution. The Company 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.
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 October 3, 1998,
Great American had 320 in-line stores including 109 Great American-operated and
211 franchised retail units, operating primarily in the southeastern and south
central United States, generating $109.3 million in estimated system-wide annual
sales for the 52-week period ended June 28, 1998. Great American derives its
revenue principally from (i) the sale of cookies and beverages at Great
American-operated stores, (ii) the sale of proprietary batter to franchised
stores and (iii) 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, the Company believes 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
The Company operates and franchises 312 retail pretzel stores (226 under
the Pretzel Time brand and 86 under the Hot Sam 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 1997 and the 39 weeks ended October 3, 1998, achieved
higher average revenue per core store than Hot Sam stores ($275,000 versus
$240,000). As a result, the Company intends to continue converting its core and
to-be-franchised Hot Sam stores to Pretzel Time stores, which it believes will
result in an increase in net sales, comparable store sales and store
contribution.
Management believes that retail pretzel stores have similar operating
characteristics to retail cookie stores that will permit some co-branding of the
Company's products. In addition, the retail pretzel business has grown more
quickly than the retail cookie business in recent years. Hot Sam was acquired by
the Company in connection with the acquisition of Original Cookie. In order to
expand its presence in the retail pretzel industry, the Company recently
acquired the business of H&M and 70% of the common stock of Pretzel Time.
Pretzel Time is a franchisor of 226 hand-rolled soft pretzel retail outlets,
which are located in shopping malls as well as in airports, sports arenas,
amusement parks and resort areas throughout the United States and Canada. The
Company operates 95 of Pretzel Time's stores as franchisee and has rights as
developing agent to develop Pretzel Time stores in 18 states, Mexico, and four
provinces in Canada.
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<PAGE>
BUSINESS STRATEGY
The Company's objective is to increase sales and profitability at its core
and franchised stores in prime locations by implementing the key elements of its
long-term business strategy. Percentage change in comparable store sales was
(0.9)% for the 39 weeks ended October 3, 1998 compared to 0.6% for the fiscal
year ended January 3, 1998 from a negative 1.2% for the fiscal year ended
December 28, 1996. In addition, franchising, licensing and other revenues
increased by 23.5% for the fiscal year ended January 3, 1998 over the fiscal
year ended December 28, 1996 and by 59.8% for the 39 weeks ended October 3, 1998
compared to the 39 weeks ended September 27, 1997. The key elements of the
Company's business strategy are as follows:
. Enhance Quality of Company-Owned Store Base. Since current management
assumed responsibility in 1994, the Company has focused on closing and
franchising Company-owned stores that do not meet certain financial and
geographical criteria. From June 1994 through October 3, 1998, the Company
closed 171 Mrs. Fields brand stores and franchised an additional 135 Mrs.
Fields brand stores. The Company has targeted 135 additional stores across
all product concepts to be either closed or franchised by the end of 2000.
Such measures are expected to result in enhanced operating margins, as
unprofitable stores are closed and certain other stores are converted into
franchises, thereby increasing royalty payments and eliminating general and
administrative costs associated with such stores.
. Improve Productivity of Core Stores. The Company is embarking on a program
to improve the performance of its core stores by (i) expanding product
offerings to include breakfast items, such as muffins, croissants and
bagels, and low-fat cookies, brownies and muffins, (ii) raising the average
ticket through increased bundling of product offerings, (iii) promoting
catering services by individual stores to corporate customers, (iv)
decreasing store expenses by reducing waste in the cookie baking process
and controlling the cost of ingredients and supplies, (v) improving
merchandising by enhancing product presentation and refining product mix
and (vi) increasing training and various incentive programs for management
and sales staff.
. Capitalize on the Strong "Mrs. Fields" Brand Name. Management believes that
the Mrs. Fields brand is the most widely recognized and respected brand
name in the retail premium cookie industry, with a 94% brand awareness
among consumers, 20% on an unaided basis and 74% on an aided basis (based
on a 1994 study commissioned by the Company), and that Mrs. Fields brand
stores, for fiscal year 1997 and the 39 weeks ended October 3, 1998,
achieved higher average revenue per core store than Original Cookie stores.
As a result, the Company intends to continue selectively converting its
core and to-be-franchised Original Cookie stores to Mrs. Fields brand
stores, which it believes will result in an increase in net sales,
comparable store sales and store contribution. The Company 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 33% and Great American
stores represent 28% of all Company-owned cookie stores. In addition, the
Company intends to further capitalize on the Mrs. Fields brand name by (i)
further developing and expanding new channels of distribution for the
Company's products, including kiosks and carts in malls, airports,
convention centers, office buildings, street fronts and sports complexes,
(ii) increasing the emphasis on the mail order business and (iii)
developing and capitalizing on licensing opportunities such as co-branding
the Mrs. Fields concept with prominent names in the retailing and food
service industry, expanding licensing agreements with the Company's
existing licensees, entering into new licensing agreements with food
service operators (such as the Company's existing arrangements with
ARAMark, Host Marriott and United Airlines), and developing product line
extensions, such as frozen cookie dough and in-store bakery products to be
sold in supermarkets and other convenient locations.
. Develop Great American Brand. Management believes that the Great American
brand has high consumer awareness in the southeast United States, and
intends 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.
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. Capitalize on the Strong "Pretzel Time" Brand Name. Through the acquisition
of its 70% controlling interest in Pretzel Time, the Company has 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 its core and to-be-franchised Hot Sam stores to
Pretzel Time stores. Pretzel Time stores have, during fiscal year 1997,
achieved higher average revenue per core store and store contribution than
Hot Sam stores ($275,000 vs. $240,000). Hot Sam stores represent 48% of all
Company-owned pretzel stores. Management believes that the conversion to
the Pretzel Time name will result in an increase in net sales, comparable
store sales and store contribution for the Company's pretzel business. In
addition, the Company believes there are significant new Pretzel Time
franchising opportunities.
. Develop New Company-Owned and Franchised Stores. The Company plans to build
and franchise new stores, as well as carts and kiosks, in existing and new
markets. The Company has identified over 100 mall and non-traditional
locations, such as amusement parks and other entertainment centers, that it
believes would be ideal for cookie and pretzel stores. By the end of
fiscal year 2000, the Company intends to franchise approximately 37 and 14
existing cookie and pretzel stores, respectively. Beginning in fiscal year
1999, the Company intends to add approximately 15 new Company-owned cookie
and 10 new Company-owned pretzel stores per year and to franchise
approximately 25 new cookie and 25 new pretzel stores per year. In addition
to pursuing new store development opportunities within the United States,
the Company plans to grow internationally by expanding its franchise
operations. As of October 3, 1998, there were 82 franchised Mrs. Fields
brand stores open internationally.
. Realize Purchasing and Overhead Cost Savings. As a result of the Great
American Acquisition and the Franchise Acquisition, the Company expects to
realize significant cost savings from the elimination of duplicative
administrative functions, the consolidation of management information
systems and the reduction of the cost of food and other supplies as a
result of its enhanced purchasing power with vendors. Management believes
that incremental pre-tax cost savings would have totaled approximately $4.1
million (including $2.2 million of general and administrative cost savings
and $1.9 million of cost savings related to nonnecessary headquarters
facilities and related expenses) for the year ended January 3, 1998.
. Pursue Further Strategic Acquisitions of Related Businesses. The Company
intends to selectively pursue strategic acquisitions, in addition to the
Great American Acquisition, the Franchise Acquisition and the Other Recent
Transactions, in order to expand its geographic presence and achieve
operating efficiencies. The Company's management has demonstrated its
ability to identify and integrate new businesses through its acquisitions
of the cookie and pretzel businesses of Original Cookie and Hot Sam,
respectively, in September 1996 and the majority interest in Pretzel Time
and the business of H&M in 1997.
PRODUCT OFFERINGS
The Company's product offerings consist primarily of (i) fresh baked
cookies, brownies, muffins, and other baked goods and (ii) fresh baked sweet
dough and "Bavarian" style pretzels. During the fiscal year 1997, pro forma for
the Great American Acquisition and the Franchise Acquisition, the Company's
revenue mix consisted of the following:
<TABLE>
<S> <C>
Cookies and Brownies............................... 60%
Pretzels........................................... 20%
Beverages.......................................... 18%
Other.............................................. 2%
</TABLE>
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Cookies. The primary products of the Company's cookie stores are a
variety of cookies, which are baked in view of customers throughout the day.
Secondary product lines include several varieties of brownies, muffins, other
baked goods, gourmet coffees, frozen drinks and other beverages. Mrs. Fields
stores, Original Cookie stores and Great American stores also sell decorated
cookies ("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. The Company plans to utilize Great American's superior expertise in
baking and marketing cookie cakes to enhance sales of the existing cookie cakes
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 the Company. 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, the Company offers
a wide variety of fresh-baked pretzels. Pretzels have become a popular snack due
to consumers' attraction to salted snacks and the increased demand for snacks
that are low in fat and cholesterol.
Hot Sam is the largest U.S. retailer of fresh-baked "Bavarian" style
pretzels. Pretzel Time stores offer all natural, hand-rolled sweet dough
pretzels prepared with a variety of flavors and special toppings, including
cheddar cheese, cream cheese and pizza sauce. In addition, Pretzel Time stores
offer specialty pretzels and related products, such as cinnamon pretzels and
cinnamon twists, as well as several recently introduced pretzel products, such
as pretzel dogs, chocolate chip pretzels and caramel crunch pretzels.
Product Development. The Company maintains a product development
department which continually creates and tests new products to attract new
customers and revitalize the interest of current customers. Once a new product
is identified, the Company develops prototypes to determine the initial formula.
For Mrs. Fields products, the formula is then scaled up for test production runs
at one or more approved facilities. Once the product has been successfully
produced, ingredient specifications, formulas, manufacturing processes, finished
product specifications, shelf life, storage and distribution procedures are
established. The new product is either immediately launched throughout the
system, as in the case of seasonal items or simple line extensions, or test
marketed in a limited number of stores. After a trial period to evaluate both
consumer response and store operations' ability to handle the new product, it is
fully commercialized, modified or discontinued. The Company continually reviews
its product mix in an effort to maximize daytime offerings and profitability.
For example, new muffin flavors, bagels, croissants and a revitalized coffee
program were recently introduced to enhance morning offerings, as cookies begin
selling primarily after mid-day.
In the cookie business, product development efforts are currently focused
on a fresh-baked, sugar-free cookie dough and other products, such as low-fat
brownies, reduced-fat cookies and seasonal items that are designed to capitalize
on consumer trends and draw interest to the Company's store locations. In the
pretzel business, the Company has been testing "made-from-scratch" hand rolled
pretzels, which serve as a platform for a variety of other products, such as
jalapeno, cinnamon raisin and garlic pretzels with a sweet dough base, meat and
cheese filled pretzel pockets and pretzelwiches (pretzel bun sandwiches).
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STORE OPERATIONS
Store Base. As of October 3, 1998, the Company's store portfolio
consisted of 568 Company-owned stores, 523 domestic franchised locations, 82
international franchised locations and 160 licensed locations. By concept, the
stores are distributed as follows:
<TABLE>
<CAPTION>
COMPANY-OWNED
------------------------------------
TO BE DOMESTIC INTERNATIONAL
CORE CLOSED TO BE FRANCHISED FRANCHISED FRANCHISED LICENSED TOTAL
----- ------ ---------- ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Mrs. Fields............ 136 6 8 181 82 160 573
Original Cookie........ 98 12 18 -- -- -- 128
Great American......... 52 46 11 211 -- -- 320
--- -- -- --- -- --- -----
Cookie Subtotal........ 286 64 37 392 82 160 1,021
--- -- -- --- -- --- -----
Pretzel Time........... 84 11 -- 131 -- -- 226
Hot Sam................ 63 9 14 -- -- -- 86
--- -- -- --- -- --- -----
Pretzel Subtotal....... 147 20 14 131 -- -- 312
--- -- -- --- -- --- -----
Totals................. 433 84 51 523 82 160 1,333
=== == == === == === =====
</TABLE>
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As of October 3, 1998, the Company's 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....................................... 83 54 16 153 12.25%
Texas............................................ 48 44 5 97 7.77%
Florida.......................................... 30 40 14 84 6.75%
New York......................................... 39 21 16 76 6.08%
Ohio............................................. 53 8 10 71 5.68%
Illinois......................................... 33 18 9 60 4.80%
Michigan......................................... 35 11 3 49 3.92%
Georgia.......................................... 17 22 3 42 3.36%
Missouri......................................... 8 33 1 42 3.37%
Pennsylvania..................................... 18 11 12 41 3.28%
Virginia......................................... 20 14 3 37 2.96%
New Jersey....................................... 12 13 8 33 2.64%
North Carolina................................... 3 25 3 31 2.48%
Indiana.......................................... 14 9 4 27 2.16%
Tennessee........................................ 4 20 3 27 2.16%
Arizona.......................................... 14 9 3 26 2.08%
Colorado......................................... 4 12 8 24 1.92%
Connecticut...................................... 6 12 5 23 1.84%
Maryland......................................... 10 9 4 23 1.84%
Massachusetts.................................... 12 6 5 23 1.84%
Wisconsin........................................ 20 3 -- 23 1.84%
Louisiana........................................ 9 9 2 20 1.60%
Washington....................................... 11 9 -- 20 1.60%
Alabama.......................................... -- 15 3 18 1.44%
South Carolina................................... 4 12 2 18 1.44%
Utah............................................. 7 9 1 17 1.36%
Minnesota........................................ 4 10 -- 14 1.12%
Nevada........................................... 3 4 7 14 1.12%
Iowa............................................. 4 9 -- 13 1.04%
Oklahoma......................................... 5 5 2 12 0.96%
Kansas........................................... 5 4 1 10 0.80%
Kentucky......................................... 3 6 1 10 0.80%
West Virginia.................................... 4 5 1 10 0.80%
</TABLE>
Configuration. The Company has developed a number of retail
configurations that have wide application and adaptability to a variety of
retail environments. In addition to the stores that have been designed for prime
mall locations, the Company has developed other formats intended to extend its
presence within and beyond mall locations. The introduction of frozen dough
technology has led to a number of new store configurations, expanded product
offerings in smaller outlets and non-traditional formats.
Cookie Stores. All stores are uniformly designed in accordance with the
Mrs. Fields, 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 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.
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The Company and its franchisees and licensees also operate cookie kiosks
and carts in certain malls on a year-round basis. Kiosks have 100 to 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. The Company plans to add
baking equipment to carts and kiosks in malls, airports, convention centers,
office buildings, street fronts and sports complexes, giving these outlets
greater flexibility in the products they can offer. All designs contain retail
display, small freezers and cash registers. The Company sees expansion
opportunities from the use of carts, which create incremental revenue at a
relatively low cost in certain locations.
All of the retail store configurations are executed to include the same
high-quality marketing, merchandising and design features which customers have
come to expect from the Company. The store designs are bright with high-profile
trademark identity. All products are baked throughout the day on the premises
with ovens located in full view of the customer to support the "fresh-baked"
image.
Pretzel Stores. Hot Sam stores are uniformly designed in accordance with
the Hot Sam brand, making extensive use of tile, stained wood, lighting and
point-of-sale displays intended to create an upscale, open and inviting look.
Stores also attractively and efficiently display their products using custom-
made showcases. The typical Company-owned pretzel store is about 500 square
feet.
Pretzel Time outlets have an average size of 700 square feet in both kiosks
and store locations. Pretzel Time stores are designed to enable customers to
enjoy watching the pretzels being rolled, twisted and baked, which underscores
freshness and lends to the concept's growing appeal.
Location and Leasing. Locational possibilities include any high
pedestrian traffic areas, including second locations within malls, airport
concourses, office building lobbies, hospitals, universities, stadiums, and
supermarket foyers. Taking the impulse nature of its business into
consideration, the Company tries to locate its outlets in areas of high
pedestrian traffic, with easy proximity to pedestrian traffic flow and at a
distance from other food providers of any kind.
The majority of the Company's stores are located in shopping malls, with
the vast majority of Mrs. Fields brand stores in malls falling into the "A" and
"B" classifications, or the better-quality malls in the country. As of October
3, 1998, the Company, including franchise locations, has a presence in 90% of
the top 150 (as measured in sales per foot) "A" and "B" malls in the country.
Malls in "A" and "B" classifications generally have the following
characteristics:
. Size greater than 700,000 square feet
. Sales per square foot greater than $300
. Population density greater than 150,000 people within a five-mile radius
. Median family income greater than $50,000
. Generally supported by national fashion anchor tenants
. Located to minimize competition from other malls
Great American stores are located primarily in high-traffic "B" malls.
Marketing and Advertising. The Company's in-house marketing department
and an outside promotional agency market products emphasizing product sampling,
local store marketing and brand name identification. The Company advertises 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 the Company experimented with an advertising campaign with
nationally televised commercials during peak holiday periods. The Company
cultivates local customer loyalty by offering regular 20% discounts to employees
in malls where stores are located and occasional other discounts. The Company
historically has spent relatively little on paid advertising, relying mainly
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on in-store signage, promotions and the public relations of Debbi Fields, who
makes store visits and local media appearances throughout the country and
internationally for the Company. In addition to posters and display of products,
the Company promotes products by offering special packaging and selling other
promotional items. A recent promotion for the Company's 20th anniversary
featured a tie-in with the popular Peanuts characters from the syndicated comic
strip, a sweepstakes, and gifts with purchases. The Company is currently working
on developing catered corporate accounts for both Company-owned and franchised
stores and will be building awareness of products geared toward corporate
accounts at the store level for the local market area and through catalogue
sales. The Company also promotes its products as gifts, particularly at holiday
time.
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. The Company's mail order division markets a variety
of fresh-baked and other gift items through its mail order gift catalogue using
toll free telephone numbers, including "1-800-COOKIES." The mail order division
had $3.8 million in revenues during fiscal year 1997. The Company believes that
there is significant potential in the mail order business and is developing this
division by targeting both corporate customers and individuals with a history of
purchases at Mrs. Fields stores. Sales from the mail order division for the
fiscal year 1997 have increased approximately 61% over sales for the comparable
previous period.
Customer Profile. The Company believes that its products are best
targeted to a demographic profile which is relatively young, with upper-middle
income levels. At the time of a May 1994 study, 66% of Mrs. Fields' customers
were female and 34% were male, the mean age of a customer was 35.1 years of age,
and 57% of customers had a household income of $50,000 or more. The Company
believes that this demographic profile remains valid.
Seasonality. The Company's sales and profitability in both the cookie
business and the pretzel business are subject to seasonal fluctuation and are
traditionally higher during the Thanksgiving and Christmas holiday season and
other gift-giving holidays due to increased mall traffic and holiday gift
purchases.
SUPPLIES AND DISTRIBUTION
Ingredients and Supplies. The Company relies primarily on outside
suppliers and distributors for the ingredients used in its products and other
items used in its stores. Mrs. Fields stores receive frozen products, made
according to proprietary recipes of the Company, from the Company's primary
supplier, Pennant Food Corp. ("Pennant"). Pennant uses stringent quality
controls in testing ingredients and manufacturing, and products are not released
for distribution unless they pass all quality control steps, including an
evaluation of the finished baked product. Pennant's contract for making frozen
products for the Company is renewable every three years. 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. The
Company has identified alternative suppliers for frozen dough at Mrs. Fields and
Hot Sam. Pretzel Time stores buy a proprietary dry mix from selected
distributors and mix and bake pretzels at individual stores. Pretzel Time
franchisees buy from various distributors.
Most supplies other than dough (such as beverages and paper products) are
ordered from distributors by either the Company or the franchisee and are
directly shipped to the store. The Company sells exclusively Coca-Cola soft
drinks in Mrs. Fields, Original Cookie, Pretzel Time, Hot Sam and Great American
stores under agreements with Coca-Cola USA Fountain.
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Great American stores receive "ready to bake" refrigerated batter from a
batter facility in Atlanta, which the Company 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 (such as beverages and paper products)
are ordered from third-party vendors by Great American or the franchisee and are
shipped directly to the store.
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. The Company 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
The Company has made a substantial investment in developing its point-of-
sale ("POS") system, which gathers information transmitted daily to corporate
headquarters from most of the Mrs. Fields brand core stores. The POS system
tracks sales from the point of purchase through a central mid-range computer to
store, district and corporate management, allowing management to track
performance data and react quickly to developments at the store level.
Information transmitted from the Company-owned stores on daily sales permits the
Company, among other things, to monitor performance across the network of
stores. Most Company-owned Mrs. Fields stores are equipped with a Sharp A570 or
Sharp 3110 POS register and an IBM computer, enabling store managers to track
and report daily customer traffic counts, sales, average ticket, inventory
levels and labor costs. The Company is upgrading its back-office system to a
Windows NT environment and is currently upgrading all Mrs. Fields stores to
Pentium 333 machines. The Company plans to install its upgraded back-office
system, along with the POS registers and Pentium 333 machines, in its core
Original Cookie stores, Hot Sam stores, Pretzel Time stores and certain Great
American stores by August 1999.
The Company believes that it can improve operating efficiencies by
introducing its improved system into all acquired Company-owned stores. The
Company cannot be sure that it will successfully integrate this system or that
it can achieve a fully integrated system within budget. Therefore, the Company
cannot be sure that its attempts to integrate the POS system will not adversely
affect its financial condition and results of operations.
Management has assessed the Year 2000 issue and has determined that all
internal IT systems including financial software, corporate networks, the AS400
system and all other systems are Year 2000 compliant with the exception of: (1)
systems used for collecting and communicating sales data from retail locations,
and (2) internally developed plant production and distribution software.
The Company is currently replacing its sales collection systems with
software and hardware that is Year 2000 compliant. This project is approximately
30% complete with final completion projected for August 1999. The estimated cost
of this project is $1.1 million and includes software development and new store
computers. The costs to complete this project are included in the Company's 1998
and 1999 budgets. Funding for this project is being provided by internal cash
flow and by a lease finance company.
Replacement of the plant production and distribution software will take
place in the first quarter of 1999 at an estimated cost of $50,000. No IT
projects have been deferred as a result of the Company's Year 2000 efforts.
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Management is in the process of assessing Year 2000 issues with respect to
its significant vendors and financial institutions as to their compliance plans
and whether any Year 2000 issues will impede the ability of such vendors to
continue providing goods and services to the Company. Failure of the Company's
key suppliers to remedy their own Year 2000 issues could delay shipments of
essential products, thereby disrupting the Company's operations. Furthermore,
the Company relies on various service providers, such as utility and
telecommunication service companies, which are beyond the Company's control.
This assessment is approximately 20% complete with final completion anticipated
by the end of 1998. Based upon the results of the assessment to date, management
is not aware of any Year 2000 issues relating to its significant vendors,
financial institutions or its non-IT systems.
STORE MANAGEMENT
Management Structure. The Company monitors all Company-owned stores with
a regionally based staff of district sales managers. District sales managers are
responsible for monitoring all cookie and pretzel stores in their territory.
Until recently, a separate staff of regionally based franchise operations
consultants had monitored franchisees. The Company plans 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. The Company believes that its incentive and other programs for
management have achieved a strong retention rate for managers. Without giving
effect to the Great American Acquisition, 72% of the Company's district sales
managers have been with the Company for at least four years (67% for over five
years), and 51% of the Company's store managers have been with the Company for
at least four years (40% for over five years).
Training. The Company believes store managers are a critical component in
creating an effective retail environment, and accordingly has developed ongoing
programs to improve the quality and effectiveness of its store managers and to
increase retention rates. New store managers are required to attend a two-week
training program at the Company's Salt Lake City training facility and ongoing
training courses in new products, standards, and procedures are available
throughout the year to all Company personnel. 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.
FRANCHISE OPERATIONS
In accordance with the Company's business strategy, the Company has been
selling, and expects to continue to sell, selected Company-owned stores to
franchisees to reduce costs, increase profitability and provide for liquidity
and development of additional stores in the future. The Company also is actively
seeking to franchise new stores.
Cookie Business. Each franchisee pays the Company an initial licensing
fee of $25,000 per Mrs. Fields store location and is responsible for funding the
building-out of the new store and purchasing initial dough inventory and
supplies, at a total cost of approximately $200,000 (including the initial
franchise fee), although the cost of opening a new store can vary based on
individual operating and location costs. The Company also charges franchisees a
fee to handle equipment purchases and to provide other assistance in helping the
franchisee to set up operations. After a store is set up, a franchisee pays
royalty fees to the Company of 6% of the franchised store's annual gross sales,
and an advertising fee of 1% of annual gross sales. The Company does not
currently anticipate franchising Original Cookie stores.
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Franchisees come from a wide variety of business backgrounds and bring with
them different operating styles and business objectives. Among the Company's
franchisees are full-time store operators, passive investors, retired
professionals and people seeking a second source of income. The majority of Mrs.
Fields franchisees own one store. As of October 3, 1998, the five largest Mrs.
Fields franchisees operated 61 stores, and the largest Mrs. Fields franchisee
operated 14 stores.
Each Great American franchisee pays the Company an initial licensing fee of
$25,000 per store and is responsible for funding the build-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), although 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. The Company also charges franchisees a fee to purchase
equipment and to provide other assistance in helping the franchisee to set up
operations.
Pretzel Business. The Company does not franchise Hot Sam stores. The
Company is a franchisee of 94 Pretzel Time stores, with rights to sub-franchise,
if desired. Each franchisee pays Pretzel Time an initial licensing fee of
$25,000 per new Pretzel Time store location and will be responsible for funding
the building-out of the new store and supplies, at a total cost of approximately
$190,000 to $240,000 (including the initial franchise fee), although the cost of
opening a new store can vary based on individual operating and location costs.
Pretzel Time also charges franchisees a fee to handle equipment purchases and to
provide other assistance in helping the franchisee to set up operations. After a
store is set up, a franchisee pays royalty fees to Pretzel Time of 7% of the
franchised store's annual gross sales, and a marketing fee of 1% of annual gross
sales.
Franchisee Recruiting and Training. The Company has been successful in
recruiting franchisees and completing franchise transactions and believes it
will continue to realize significant cash flow from franchising by (i)
emphasizing the use of proprietary dough that minimizes product quality issues
and ensures a consistent product across all outlets, (ii) frequent quality,
service and cleanliness evaluations of franchised stores by operations support
staff and (iii) initial and continuing training of franchisees to improve their
financial and retail sales skills.
The Company believes its franchisees are a critical component in creating
an effective retail environment, and accordingly makes its ongoing programs
available to franchisees to improve their quality and effectiveness. Franchisees
are required to attend a two-week training program at the Company's Salt Lake
City training facility and ongoing training courses in new products, standards,
and procedures are available throughout the year to all franchisee personnel.
LICENSING
In the past few years, the Company has utilized a "branding" strategy which
has capitalized on the highly-recognized Mrs. Fields brand to build traffic,
expand sales, improve market share, and to increase profits through cultivating
alternative channels of distribution. The following is a comprehensive list of
branding strategies, with examples of current licensees within the Company's
system:
Concept Licensing. The Company has developed a licensing program for non-
mall retail outlets that enables the Company to enter difficult-to-reach markets
and facilitate brand exposure through "presence" and "prestige" marketing. The
Company's licensees duplicate the Mrs. Fields store concept and purchase dough
from the Company's various distributors. Several of these licensees are contract
management companies that manage and operate food service in host locations. The
Company's licensees and their respective distribution channels include Host
Marriott (airports and travel plazas), ARAMark (stadiums and convention centers)
and Holiday Inn Worldwide (hotels).
80
<PAGE>
Retail Licensing. The Company plans to capitalize on its brand awareness
and the perception of quality among consumers to expand the product line to
include products sold in other retail environments, including refrigerated
dough, dry-mix and non-food products, and other applications outside the
original scope of the Company's retail cookie store concept. A current example
is Legacy Brands, which has the exclusive North American rights to retail frozen
dough and offers Mrs. Fields Cookies frozen dough throughout the supermarket
industry. Another licensee is Wham-O, Inc., which has a license to market the
Mrs. Fields Baking Oven for children sold in most toy stores and through mass
merchandisers.
Supply Licensing. The Company currently has arrangements with United
Airlines and TWA under which its mail order division sells cookies to the
airlines and allows the airlines to promote the Mrs. Fields brand and products
to its first-class customers. The Company is pursuing similar relationships to
compete with other manufacturers' brands selling in this channel of business.
COMPETITION
The Company competes for both leasing opportunities and customers with
other cookie and pretzel retailers, as well as other confectionery, sweet snack
and specialty food retailers, including cinnamon rolls, yogurt, ice cream, baked
goods and candy shops. The specialty retail food and snack industry is highly
competitive with respect to price, service, location and food quality, and there
are many well-established competitors with greater resources than those of the
Company. The Company competes with these retailers on the basis of price,
quality, location and service. The Company faces competition from a wide variety
of sources, including such companies as Cinnabon, Inc., TCBY Yogurt Inc., Auntie
Anne's Soft Pretzels, PretzelMaker and Baskin-Robbins 31 Flavors.
PROPERTIES
As of October 3, 1998, the Company leased 1,029 retail stores, of which 445
were subleased to franchisees under terms which cover all obligations of the
Company thereunder. Under its franchise agreements, the Company has certain
rights to gain control of a retail site in the event of default under the lease
or the franchise agreement. Most of the Company's operating leases provide for
the payment of lease rents plus real estate taxes, utilities, insurance, common
area charges and certain other expenses, as well as contingent rents which
generally range from 8% to 10% of net retail store sales in excess of stipulated
amounts. See "Risk Factors--Dependence on Real Estate Leases; Continuing
Obligations on Leases."
The Company recently signed a new lease for 31,000 square feet of office
space in Salt Lake City, Utah, which it uses as its corporate headquarters. The
Company also leases approximately 20,000 square feet of office space in Salt
Lake City, Utah for its product development, training and mail order operations.
The Company owns 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. The Company acquired this
facility in the Great American Acquisition. Great American's headquarters have
been transferred to Salt Lake City since the Great American Acquisition.
EMPLOYEES
As of October 3, 1998, the Company had approximately 5,134 employees in
Company-owned stores, of whom approximately 930 were store managers and
assistant store managers, 58 were full-time sales assistants and 4,146 were
part-time sales assistants. The typical Company store employs five to thirteen
employees. During the period from November through February, the Company may
hire as many as 750 additional part-time employees to handle additional mall
traffic. Most employees are paid on an hourly basis, except store managers. The
Company's employees are not unionized. The Company has never experienced any
significant work stoppages and believes that its employee relations are good.
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<PAGE>
Many of the Company's employees are paid hourly rates based upon the
federal minimum wage. The federal minimum wage increased from $4.75 to $5.15 on
September 1, 1997. As of October 3, 1998, 1,507 of the Company's 5,134 employees
in Company-owned stores earned the federal minimum wage. The September 1, 1997
minimum wage increase is expected to negatively impact the Company's labor
costs, increasing wages by approximately $219,000 annually, but management
believes this impact can be negated in the long-term through increased
efficiencies in its operations and, as necessary, through retail price
increases.
TRADEMARKS
The Company is the holder of numerous trademarks that have been federally
registered in the United States and in other countries located throughout the
world. The Company is a party to disputes with respect to trademarks none of
which, in the opinion of management of the Company, is material to the Company's
business, financial condition or results of operations.
LEGAL PROCEEDINGS; GOVERNMENT REGULATION
In the ordinary course of business, the Company is involved in routine
litigation, including franchise disputes and trademark disputes. Except as
described below, the Company is not a party to any legal proceedings which, in
the opinion of management of the Company, after consultation with legal counsel,
is material to the Company's business, financial condition or results of
operations.
In connection with the initial discussions relating to the Great American
Acquisition, on or about September 12, 1997, nine franchisees of Great American
filed an action challenging a possible acquisition of Great American by the
Company. Pursuant to the Franchisee Agreement, certain Great American
franchisees released all claims with respect to this litigation, and it was a
condition of the Great American Acquisition that this litigation be dismissed
with prejudice. A motion dismissing the litigation with prejudice was filed on
August 24, 1998. See "The Transaction--The Great American Transactions."
The Company's stores and products are subject to regulation by numerous
governmental authorities, including, without limitation, federal, state and
local laws and regulations governing health, sanitation, environmental
protection, safety and hiring and employment practices.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of Mrs. Fields as of November 1, 1998. The directors are
also directors of MFH.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Larry A. Hodges................. 49 Director, President and Chief Executive Officer
L. Tim Pierce................... 47 Senior Vice President, Chief Financial Officer and Secretary
Pat W. Knotts................... 43 Senior Vice President of Operations
Garry Remington................. 47 Senior Vice President of Real Estate
Michael R. Ward................. 40 Vice President of Administration and Legal Department
Herbert S. Winokur, Jr.......... 54 Chairman of the Board of Directors
Richard Ferry................... 61 Director
Debbi Fields.................... 42 Director
Nat Gregory..................... 50 Director
Walker Lewis.................... 54 Director
Peter Mullin.................... 57 Director
Gilbert Osnos................... 69 Director
</TABLE>
Mr. Hodges has been President and Chief Executive Officer of MFI and Mrs.
Fields since March 1994, and a Director of Mrs. Fields and MFH 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. Pierce has been Senior Vice President of MFI and Mrs. Fields since
December 1991, and Chief Financial Officer since August 1993. He was appointed
Corporate Secretary in April 1995. Since joining MFI in 1988 and prior to
becoming Senior Vice President, Mr. Pierce had served as Vice President of
Finance. He was also an Audit Manager and a Senior Audit Manager with Price
Waterhouse in Salt Lake City, Utah, and New York, New York. Mr. Pierce is a
certified public accountant and has also served on the Board of Directors of
Mountain America Credit Union and currently serves as a Director of Pretzel
Time, Inc.
Mr. Knotts has been Senior Vice President of Mrs. Fields since October
1996. Mr. Knotts' responsibilities include all aspects of store operations and
related support functions. Between January 1992 and October 1996, Mr. Knotts
served as Executive Vice President of Operations for Original Cookie and Hot
Sam, where he was responsible for store operations, marketing, purchasing,
construction and store design. Mr. Knotts also held the position of Regional
Vice President of Stores for Silo Inc., a $1 billion consumer electronics and
major appliance chain.
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.
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<PAGE>
Mr. Ward has been Vice President of Administration for Mrs. Fields since
September 1996. Mr. Ward's responsibilities include management of the Human
Resources Department, Benefits and the Legal Department. Between 1991 and 1996,
Mr. Ward's responsibilities were overseeing the Legal Department and the Human
Resources Department for MFI. He is admitted to practice law in the State of
Utah.
Mr. Winokur has been Chairman of the Board of Directors of Mrs. Fields and
MFH 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 MFH, a portfolio company of Capricorn which owns the majority of MFH's
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 Director of Penn Central Corporation. Mr. Winokur is also a
Director of NAC Re Corporation, The WMF Group, Ltd., MFH, 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. Prior to that he served as
Managing Director of Smith Barney from 1991 to 1993. Mr. Gregory is a member and
managing director of Capricorn Holdings, L.L.C., the General Partner of
Capricorn, and a director of Marine Drilling Companies, Inc.
Mr. Lewis has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Lewis is the Chairman of Devon Value Advisers. Mr. Lewis
served as Chairman of Strategic Planning Associates, specializing in shareholder
value strategies. Mr. Lewis was a Senior Advisor at Dillon Read & Co., Inc.
("Dillon Read") and his company, Devon Value Advisors, continues to act as a
consultant to Dillon Read. He was a Managing Director of Kidder, Peabody & Co.,
Inc., President of Avon North America and Executive Vice President of Avon
Products, Inc. Mr. Lewis has served on the Board of Directors of Owens Corning,
American Management Systems, Incorporated, Jostens, Inc., Marakon Associates and
London Fog.
Mr. Mullin has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Mullin founded Mullin Consulting, Inc. in Los Angeles in
1969, and serves as its Chairman and Chief Executive Officer. He also co-founded
Strategic Compensation Associates and serves as Chairman of the firm's Executive
Committee. Mr. Mullin is a member of the Board of Directors of Avery Dennison
Corporation, 1st Business Bank, Process Technology Holdings, Inc., Golden State
Vintners, M Life Insurance Company and the Board of Advisors of CMS Companies.
Mr. Osnos has been a Director of Mrs. Fields since its inception in
September 1996. Mr. Osnos has served since 1992 as Chairman of Osnos & Company,
which provides interim management to companies. He has served as Interim
President/CEO/COO to a large array of companies in manufacturing, distribution,
retailing and service industries. In 1979 he joined the predecessor firm and
became a partner in 1981. He has been Chairman of the Turnaround Management
Association and a member of its Board since prior to 1993. He is also on the
Board of Directors of Furr's/Bishop's, Inc. and Dunham's Athleisure Corp.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with regard to compensation for
services rendered in all capacities to the Company by its Chief Executive
Officer, the four other most highly compensated executive officers of the
Company other than the CEO who were serving as executive officers at the end of
the last completed fiscal year and one additional individual for whom disclosure
would have been provided, but for the fact that the individual was not serving
as an executive officer at the end of the last completed fiscal year.
Information set forth in the table reflects compensation earned by such
individuals for services with the Company or its subsidiaries.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS(8) COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
------------------ ---- ---------- ----------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
LARRY HODGES 1997 $300,000 $185,412 $2,177 $50,000(7) -- $ --
President and CEO 1996 262,834 -- 1,656 -- 229,992 --
1995 247,313 200,000 1,250 -- -- --
L. TIM PIERCE 1997 175,000 103,607 1,287 -- -- --
Senior Vice President 1996 167,723 -- 1,107 -- 32,856 33,000(1)
and CFO 1995 164,180 52,000 1,494 -- -- 33,000(1)
PAT KNOTTS 1997 162,500 27,321 -- -- -- --
Senior Vice President 1996 172,490 267,212(2) -- -- 32,856 23,920(3)
Operations 1995 157,635 -- -- -- -- 2,912(4)
MICHAEL WARD 1997 109,904 56,393 619 -- -- --
Vice President Legal 1996 83,020 -- 526 -- 24,642 --
and Administration 1995 83,095 8,650 442 -- -- --
GARRY REMINGTON 1997 82,859 -- -- -- 24,642 46,707(6)
Senior Vice President 1996 -- -- -- -- -- --
Real Estate 1995 -- -- -- -- -- --
JULIE BYERLEIN(5) 1997 121,375 -- -- -- -- --
Senior Vice President 1996 -- -- -- -- -- --
Marketing and 1995 -- -- -- -- -- --
Licensing
</TABLE>
_______________
(1) Represents forgiveness of a loan made by MFI in 1993.
(2) Represents payments under retention and employment agreements from Original
Cookie/Hot Sam.
(3) Represents payment of relocation expenses of $20,920 and a grant of $3,000
under the Original Cookie 401(k) plan.
(4) Represents a grant under the Original Cookie 401(k) plan.
(5) Started with the Company in May 1997. Resigned from the Company in June
1998.
(6) Represents payment of relocation expenses.
(7) 50% of the restricted shares vest on January 1, 1999 and the other 50% vest
on January 1, 2000.
(8) The stock options for MFH Common Stock 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.
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<PAGE>
OPTION GRANTS AND EXERCISES
The Board of Directors of MFH recently approved the provisions of a
director stock option plan (the "Director Stock Option Plan"), providing for the
issuance of common stock, par value $.001 per share (the "MFH Common Stock"), of
MFH to directors of MFH, and an employee stock option plan (the "Employee Stock
Option Plan" and, together with the Director Stock Option Plan, the "Plans"),
providing for the issuance of options to purchase MFH Common Stock to officers
and other employees of MFH and its subsidiaries, including the Company. The
Plans provide for the issuance of options to purchase an aggregate of 542,840
shares of MFH Common Stock to directors of MFH and officers and employees of
MFH's subsidiaries, including the Company, of which 375,840 shares, representing
approximately 10% of the total MFH Common Stock on a fully diluted basis, after
giving effect to the issuance of stock pursuant to the MFH Warrants and to
issuances of stock pursuant to options currently issued to directors and
employees under the Plans, have been issued. The following table sets forth
information concerning stock option grants made with respect to fiscal year 1997
to the named executive officers to purchase common stock of MFH, the owner of
the Company. See "Certain Relationships and Related Transactions" and
"Beneficial Ownership of Capital Stock."
OPTION GRANTS WITH RESPECT TO LAST FISCAL YEAR--MFH COMMON STOCK
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE
UNDERLYING GRANTED TO EXERCISE OF BASE APPRECIATION
OPTIONS/SARS EMPLOYEES IN PRICE ($ PER EXPIRATION FOR OPTION TERM (2)
----------------------
GRANTED FISCAL YEAR(1) SHARE) DATE 5% 10%
------------ ------------ ------------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Garry Remington.......... 24,642 100% $13.00 7/10/07 $521,918 $830,928
</TABLE>
_____________
(1) Represents percentage of total options to purchase MFH Common Stock granted
to employees of the Company with respect to the fiscal year.
(2) The dollar amounts under these columns are the result of calculations at 5%
and 10% compounded annual rates set by the Commission, and therefore are not
intended to forecast future appreciation, if any, in the price of MFH Common
Stock. The potential realizable values illustrated at 5% and 10% compound
annual appreciation of the options which expire on July 10, 2007 assume that
the price of the MFH Common Stock increases to $21.18 and $33.72 per share,
respectively, over the 10-year term of the options.
BOARD COMPENSATION
The Board of Directors of Mrs. Fields meets regularly on a quarterly basis
and more often as required. Board members, other than officers of the Company
and Mr. Winokur, Mr. Gregory and Ms. Fields, are compensated for services
rendered annually as follows: (i) $12,000 cash; and (ii) grants of options to
purchase MFH Common Stock, pursuant to the Director Stock Option Plan. The Board
of Directors of MFH recently approved the award of options under the Director
Stock Option Plan to purchase 3,350 shares of MFH Common Stock to each of
Messrs. Ferry, Gregory, Lewis, Osnos and Winokur as of January 1, 1997, at an
exercise price of $10.00 per share, and the award of options to purchase 1,792
shares of MFH Common Stock 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 MFH
common stock pursuant to a director stock purchase plan (the "Director Stock
Purchase Plan"). Such compensation in shares that would be payable or issuable
to Messrs. Winokur and Gregory will be paid to Capricorn. A total of 51,667
vested shares of MFH Common Stock and 28,333 restricted shares of MFH Common
Stock have been issued to directors and officers of the Company under the
Director Stock Purchase Plan.
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<PAGE>
BOARD COMMITTEES
Three functioning committees of the Board have been organized including (i)
Executive Committee, (ii) Compensation Committee and (iii) Audit Committee.
Following is a brief description of each of these committees.
Executive Committee. The Executive Committee is composed of Messrs.
Winokur (Chairman), Gregory and Hodges. The purpose of this committee is to act
on the behalf of the entire Board of Directors between Board meetings.
Compensation Committee. The Compensation Committee is composed of Messrs.
Gregory (Chairman), Mullin and Lewis. The purpose of this committee is to ensure
that the Company has a broad plan of executive compensation that is competitive
and motivating to the degree that it will attract, hold and inspire performance
of managerial and other key personnel of a quality and nature that will enhance
the growth and profitability of the Company.
Audit Committee. The Audit Committee is comprised of Messrs. Ferry
(Chairman) and Osnos. The purpose of the Audit Committee is to provide oversight
and review of the Company's accounting and financial reporting process in
consultation with the Company's independent and internal auditors.
INDEMNIFICATION AND COMPENSATION
The Company's By-Laws authorize the Company to indemnify its present and
former directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding upon receipt of
an undertaking by or on behalf of such individuals to repay such amounts if so
required.
EMPLOYMENT AGREEMENTS
All of the executive officers are parties to employment agreements with the
Company. Each employment agreement provides for a period of employment of two
years (or three years, in the case of Larry Hodges) from the date of the
agreement, subject to termination provisions and to automatic extension of the
agreement. Each employment agreement permits the employee to participate in any
incentive compensation plan adopted by the Company to replace the Fiscal 1994
Incentive Compensation Plan of MFI, benefit plans and an equity-based plan or
arrangement. If the Company terminates employment for cause or if the employee
terminates employment without good reason, the Company has no further obligation
to pay the employee. If the Company terminates employment without cause, or the
employee terminates employment with good reason, the employee can receive in
severance pay the amount equal to the product of his or her then current semi-
monthly base salary by the greater of the number of semi-monthly periods from
the notice of termination or 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 (except for
investments of not more than 3% of the equity of a company listed or traded on a
national securities exchange or an over-the-counter securities market), officer,
agent or director of a firm or person that directly competes with the Company in
a line or lines of business of the Company that accounts for 10% or more of the
Company's gross sales, revenues or earnings before taxes. The employment
agreements have customary provisions for vacation, fringe benefits, payment of
expenses and automobile allowances. The employees who have such employment
agreements, and their base salaries, are: Larry Hodges, President and Chief
Executive Officer, $350,000, L. Tim Pierce, Senior Vice President, Chief
Financial Officer and Secretary, $200,000, Pat Knotts, Senior Vice President of
Operations, $215,000, Michael Ward, Vice President of Administration and
Assistant Secretary, $140,000 and Garry Remington, Senior Vice President of Real
Estate, $190,000.
87
<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
As of the date of this Prospectus, all of the capital stock of the Company
is owned by MFH, whose address is 2855 East Cottonwood Parkway, Suite 400, Salt
Lake City, Utah 84121.The following table sets forth certain information, as of
November 1, 1998, believed by the Company to be accurate based on information
provided to it concerning the beneficial ownership of common stock by each
stockholder who is known by the Company to own beneficially in excess of 5% of
the outstanding common stockholders, and by each director, the Company's Chief
Executive Officer, each of the Company's other four most highly compensated
executive officers and all officers and directors as a group, as of November 1,
1998. The stockholders listed below are deemed beneficial owners of common stock
of the Company as a result of their ownership of common stock of MFH, the owner
of 100% of the capital stock of the Company. Except as otherwise indicated, all
persons listed below have (i) 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 (ii) record and beneficial ownership with
respect to their shares. The shares and percentages set forth below include
shares of common stock which were outstanding or issuable within 60 days upon
the exercise of options outstanding as of November 1, 1998. The percentages set
forth below do not give effect to the exercise of the MFH Warrants or to the
issuance of stock pursuant to options currently issued to directors and
employees under the Plans. See "Management--Option Grants and Exercises" and "--
Board Compensation," "Risk Factors--Controlling Stockholder" and "Certain
Relationships and Related Transactions." As of November 1, 1998, there were
eight record holders of MFH Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
NUMBER OF PERCENTAGE
TITLE OF CLASS NAME OF BENEFICIAL OWNER SHARES OF CLASS
- -------------- ------------------------ ------------------- --------------------
<S> <C> <C> <C>
Common stock, par Capricorn Investors II, L.P.(1)(2)................. 3,075,848 93.6%
value $0.01 per Larry Hodges(2).................................... 30,000 0.9%
share, of MFH Peter Mullin(2).................................... 15,000 0.5%
Richard Ferry(2)................................... 10,000 0.3%
Walker Lewis(2).................................... 7,500 0.2%
Gilbert Osnos(2)................................... 7,500 0.2%
All executive officers and directors as a group
(7 persons)(2)(3).................................. 3,145,848 95.7%
</TABLE>
_____________
(1) The address of Capricorn is 30 East Elm Street, Greenwich, CT 06830.
(2) Larry Hodges, Peter Mullin, Richard Ferry, Walker Lewis and Gilbert Osnos
are directors of the Company. Herbert Winokur and Nat Gregory are managing
member and member, respectively, of Capricorn Holdings, L.L.C., the General
Partner of Capricorn, and are directors of the Company. See "Management."
(3) Includes shares beneficially owned by Capricorn.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Debbi Fields and Affiliates. In November 1996, the
Company entered into a consulting agreement (the "Consulting Agreement") with
Debbi Fields, a director of the Company, under which Debbi Fields travels and
performs public relations and advertising activities on behalf of the Company
for at least 50 days a year for a fee of $250,000 per year, with an option to
perform 20 additional days a year for additional pay of $5,000 per day. The
compensation increases by 10% a year beginning on January 1, 1999. The
Consulting Agreement expires on December 31, 1999. The Company may terminate the
Consulting Agreement for cause and Debbi Fields may terminate the Consulting
Agreement at any time. Under the Consulting Agreement, Debbi Fields may not
disclose any confidential information of the Company, such as recipes and trade
secrets, and may not, without the prior written consent of the Company, compete
with the Company.
In addition, the Company has a license agreement with FSG Holdings, Inc., a
Delaware Corporation, under which Debbi Fields has a nonexclusive license to use
certain trademarks, names, service marks and logos of the Company in connection
with book and television series projects. Debbi Fields is required to pay 50
percent of any gross revenues in excess of $200,000 that she receives from the
book and television series projects to the Company as a license fee.
The Company, until recently, leased certain office space to an entity which
is owned in part by Debbi Fields. Billings to the entity for the period from
inception (September 18, 1996) to December 28, 1996, the fiscal year ended
January 3, 1998 and the 39 weeks ended September 27, 1997 and October 3, 1998
totaled approximately $60,000, $274,000, $204,000 and $0, respectively, of which
approximately $29,000, $23,000 and $0 is included in accounts receivable as of
December 28, 1996, January 3, 1998 and October 3, 1998, respectively. The lease
was terminated in the first quarter of fiscal year 1998. The Company 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 the Company,
acts as a consultant and an advisor to Dillon Read. In early 1997, the Company
paid to Dillon Read a fee of approximately $707,000 in connection with the
restructuring of the Company in September 1996. In addition, Mr. Lewis' company,
Devon Value Advisers, received a fee of $250,000, plus expenses, from the
Company in the first quarter of 1998 pursuant to an agreement to provide
advisory acquisition and consulting services to the Company. The Company
believes that the arrangements were on terms that could have been obtained from
an unaffiliated third party.
Korn/Ferry Agreement. The Company has paid fees of approximately $47,000,
$157,000, $147,000 and $47,000 during the period ended December 28, 1996, the
year ended January 3, 1998 and the 39 weeks ended September 27, 1997 and October
3, 1998, respectively, to Korn/Ferry International, an executive search firm of
which Richard Ferry, a director of the Company, is the Chairman, in connection
with the hiring of employees for the Company. The Company believes that the
arrangements are on terms that could have been obtained from an unaffiliated
third party.
Arrangements with MFH. The Company and MFH expect to enter into a Tax
Sharing Agreement as defined in and permitted by the Indenture. See "Description
of Senior Notes--Certain Covenants."
As of December 28, 1996, January 3, 1998 and October 3, 1998 the Company
had receivables of approximately $39,000, $89,000 and $478,000 due from MFH and
payables of $137,000, $194,000 and $0 due to MFH, respectively. The receivables
stem primarily from goods sold and an allocation of payroll and other operating
expenses. The Company believes that the terms of the sale and allocations are
essentially equivalent to the terms that would have been obtained from an
unaffiliated third party in a similar transaction.
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At the time of the offering of the Series A Senior Notes, MFH, which is
majority owned by Capricorn, was the holder of a $4,643,000 principal amount
subordinated note of the Company. The Company accrued interest of $130,000 in
fiscal year 1996 and $441,000 through November 26, 1997. All accrued interest
was paid in fiscal year 1997. The principal amount of this note was converted
into common equity of the Company in connection with the refinancing of certain
debt of the Company and MFB. Messrs. Winokur and Gregory, directors of the
Company, are, respectively, the manager and managing director of Capricorn
Holdings, the General Partner of Capricorn.
Arrangements with MIDIAL. At the time of the Prior Offering, a subsidiary
of MIDIAL was the holder of $27,000,000 in aggregate principal amount of senior
notes of the Company and $8,400,000 in aggregate principal amount of
subordinated notes of the Company as to which the Company had accrued or paid
interest of $683,000 in 1996 and of $3,177,000 through November 26, 1997. In
connection with the refinancing of certain debt of the Company and MFB, the
Company repaid all such notes and related interest. Mr. de Carbonnel, a former
director of the Company, serves as Chairman and Chief Executive Officer of
MIDIAL. See "The Transactions."
Incentive Arrangements. Under a senior management value creation plan
that was adopted by MFI 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
MFH Common Stock at $10.00 per share.
Director Stock Purchase Plan. Each of the directors of the Company was
offered an opportunity to purchase MFH Common Stock under the Director Stock
Purchase Plan. Under the Director Stock Purchase Plan, shares of MFH Common
Stock, either restricted or vested, can be issued to outside directors of MFH
and its subsidiaries, including the Company. Restricted shares vest 50% on
January 1, 1999 and 50% on January 1, 2000, or earlier, upon a change of control
of MFH or the Company. See "Management--Board Compensation." A total of 51,667
vested shares of MFH Common Stock and 28,333 restricted shares of MFH Common
Stock have been issued to directors and officers of the Company under the
Director Stock Purchase Plan.
The Plans. Under the Employee Stock Option Plan, a committee of the Board
is authorized to administer the Employee Stock Option Plan and has the power,
among other things, to grant awards to officers and other employees of MFH and
its subsidiaries, including the Company, of options for MFH Common Stock. 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 the Company, which is equal to the
excess of 5.5 times Adjusted EBITDA for such fiscal year over net debt at the
end of such fiscal year. Time vested options vest 25% per year on the
anniversaries of the dates on which they are granted, and vest in full upon a
change of control of MFH or the Company. Upside options vest upon the earlier to
occur of the expiration of such option and a change of control, in accordance
with certain internal rate of return ("IRR") targets: (i) if the IRR through the
vesting date is less than 20%, the option will not vest; (ii) if the IRR is from
20% to 24.99%, the option will vest one-third; (iii) if the IRR is from 25% to
29.99%, the option will vest two-thirds; and (iv) if the IRR is at least 30%,
the option will vest in full. IRR shall mean, as of any date, the internal rate
of return, determined in accordance with generally accepted practice, on one
share of MFH Common Stock calculated from September 18, 1996, through the date
as of which the determination is being made, using (i) a value of $10.00 per
share at September 18, 1996 (subject to certain adjustments), (ii) if the
relevant date is the date of a change of control, the value paid pursuant to or
implicit in the change of control transaction (as determined in good faith by a
committee of the Board of Directors), and (iii) if the relevant date of
determination is the expiration of such option, the value determined in good
faith based on the implied valuation for the four most recent fiscal quarters
for which financial statements are available. An aggregate of 492,840 shares of
MFH Common Stock 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.
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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 MFH Common Stock to outside
directors of MFH and its subsidiaries, including the Company. 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 MFH or the Company. An aggregate of 50,000
shares of MFH Common Stock are reserved for issuance under the Director Stock
Option Plan. MFH Common Stock 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 MFH Common Stock as of January 1, 1997,
at an exercise price of $10.00 per share, and to purchase 1,792 shares of MFH
Common Stock 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.
The Stockholders' Agreement. MFH has entered into a Stockholders'
Agreement (the "Stockholders' Agreement") with its stockholders. The
Stockholders' Agreement gives rights of first refusal to MFH if any MFH
stockholder receives an offer to purchase MFH Common Stock and, if MFH does not
exercise its rights, gives the rights of first refusal to other MFH
stockholders. In the event of a sale to a third party approved by Capricorn,
Capricorn has the right to require the other MFH stockholders to sell their MFH
Common Stock (the "Drag Along"). If Capricorn sells any MFH Common Stock, the
other MFH stockholders will have the opportunity to sell their MFH Common Stock
in proportion to their holdings (the "Tag Along"). The Stockholders' Agreement
also provides for piggyback registration rights for all MFH stockholders, and
gives one MFH stockholder demand registration rights. The Stockholders'
Agreement gives MFH the option to purchase all of the MFH Common Stock held by
an officer or director that holds MFH Common Stock if such officer or director
is terminated. If an officer or director is terminated other than for cause, the
officer or director has the right to sell shares to MFH. The Stockholders'
Agreement provides for customary restrictions on transfer of MFH Common Stock.
The holders of MFH Warrants will be subject to the Drag Along and benefit from
the Tag Along.
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DESCRIPTION OF SENIOR NOTES
GENERAL
The New Senior Notes offered hereby will be issued pursuant to an
Indenture, dated as of November 26, 1997 and amended as of August 24, 1998 (as
so amended, the "Indenture"), among the Company, MFB, Great American and The
Bank of New York, as Trustee (the "Trustee"). The terms of the Senior Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The New Senior Notes are subject to all such terms, and holders of New
Senior Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Copies of the proposed form of Indenture and Registration Rights
Agreement are available as set forth below under "--Additional Information." The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." Wherever particular provisions of the Indenture
are referred to in this summary, such provisions are incorporated by reference
as a part of the statements made and such statements are qualified in their
entirety by such reference.
The Senior Notes are general unsecured obligations of the Company, rank
senior in right of payment to all subordinated indebtedness of the Company and
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company. As of October 3, 1998, the Company (excluding its
subsidiaries) had less than $0.4 million in indebtedness other than the Senior
Notes. The Senior Notes are unconditionally guaranteed on a senior basis by the
Guarantors. The Guarantees are general unsecured obligations of the Guarantors,
rank senior in right of payment to all subordinated indebtedness of the
Guarantors and rank pari passu in right of payment with all existing and future
senior indebtedness of the Guarantors. As of October 3, 1998, the aggregate
amount of indebtedness of the Company's subsidiaries was approximately $0.4
million and the aggregate liquidation preference of mandatorily redeemable
preferred stock of the Company's subsidiaries was approximately $1.5 million,
all of which was issued by a subsidiary other than the Guarantors and
effectively rank senior in right of payment to the Senior Notes. Although the
Indenture limits the ability of the Company and its subsidiaries to incur
additional indebtedness and issue preferred stock, the Company is permitted to
incur additional indebtedness, including pursuant to the Credit Agreement, and
issue preferred stock, including secured indebtedness, under certain
circumstances, which will effectively rank senior to the Senior Notes with
respect to the assets securing such Indebtedness. See "Risk Factors--Effective
Subordination" and "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock."
PRINCIPAL, MATURITY AND INTEREST
The Indenture provides for the issuance of up to $200 million of senior
notes of the Company, of which $100 million of Series A Senior Notes and Old
Series B Senior Notes were previously issued. An additional $40 million of
Series C Senior Notes were issued in the Offering. Each Senior Note will mature
on December 1, 2004. Interest on the New Senior Notes will accrue at the rate of
10 1/8% per annum and will be payable semi-annually in arrears on June 1 and
December 1, commencing on December 1, 1998, to holders of record of the New
Senior Notes on the immediately preceding May 15 and November 15. Interest on
the New Senior Notes will accrue from the most recent date to which interest has
been paid on the Old Senior Notes or, if no interest has been paid on the Series
C Senior Notes, from August 24, 1998. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest on the New Senior Notes will be payable at the office or agency of
the Company maintained for such purpose within the City and State of New York
or, at the option of the Company, payment of interest may be made by check
mailed to the holders of the Senior Notes at their respective addresses set
forth in the register of holders of New Senior Notes; provided that all payments
of principal, premium, if any, and interest with respect to New Senior Notes the
holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the holders
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thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The New Senior Notes will be issued in denominations of $1,000 and
integral multiples thereof. For each Old Senior Note accepted for exchange, the
holder of such Old Senior Note will receive a New Senior Note having a principal
amount equal to that of the surrendered Old Senior Note.
The Old Senior Notes and New Senior Notes will be treated as a single class
of securities under the Indenture.
GUARANTEES
The Company's payment obligations under the Senior Notes are jointly and
severally, unconditionally guaranteed on a senior unsecured basis (the
"Guarantees") by MFB and Great American and will be severally, fully and
unconditionally guaranteed by any additional Guarantors. The obligations of each
Guarantor under its Guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable law. See, however, "Risk Factors--
Fraudulent Conveyance Considerations." MFB and Great American are currently,
under the Old Guarantees, and will continue to be, under the New Guarantees, the
Guarantors of the Senior Notes, until there are any such additional Guarantors.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee under the Indenture, (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists, (iii) such Guarantor, or any
Person formed by or surviving any such consolidation or merger, would have
Consolidated Net Worth (immediately after giving effect to such transaction),
equal to or greater than the Consolidated Net Worth of such Guarantor
immediately preceding the transaction, and (iv) the Company would be permitted
by virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described above under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Guarantee; provided that the
Net Proceeds of such sale or other disposition are applied in accordance with
the applicable provisions of the Indenture. See "Repurchase at the Option of
Holders--Asset Sales."
OPTIONAL REDEMPTION
The Senior Notes are not redeemable at the Company's option prior to
December 1, 2001. Thereafter, the Senior Notes are subject to redemption at any
time at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days notice, in cash at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on December 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................... 103.375%
2002........................................... 101.688%
2003 and thereafter............................ 100.000%
</TABLE>
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Notwithstanding the foregoing, until November 20, 2001, the Company may on
any one or more occasions redeem up to an aggregate of 35% of the aggregate
principal amount of Senior Notes ever issued under the Indenture at a redemption
price equal to 110.125% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date, with
the net cash proceeds of one or more Public Equity Offerings; provided that at
least 65% of the aggregate principal amount of Senior Notes ever issued under
the Indenture remains outstanding immediately after the occurrence of any such
redemption; and provided further that such redemption shall occur within 60 days
of the date of the closing of any such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that no Senior Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Senior Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Senior Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Note shall state the portion of
the principal amount thereof to be redeemed. A new Senior Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Senior Note. Senior Notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on Senior Notes or portions of
them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under the caption "--Repurchase at the Option of
Holders," the Company is not required to make mandatory redemption or sinking
fund payments with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Senior Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such holders Senior Notes pursuant
to the offer described below (the "Change of Control Offer") at an offer price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon to the date of repurchase (the "Change of Control
Payment"). Within 60 days following any Change of Control, the Company will mail
a notice to each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Senior Notes on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Senior Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Senior
Notes or portions thereof so tendered and (iii) deliver or cause to be delivered
to the Trustee the Senior Notes so accepted together with an Officers
Certificate stating the aggregate principal amount of Senior Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each holder of Senior Notes so tendered the Change of Control Payment for such
Senior Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each holder a new Senior Note equal in
principal amount to any unpurchased portion of
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the Senior Notes surrendered, if any, provided that each such new Senior Note
will be in a principal amount of $1,000 or an integral multiple thereof. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders of the Senior Notes to require that the
Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization or similar transaction.
Certain Indebtedness of the Company contains, and it is expected that
future Indebtedness of the Company will contain, prohibitions of certain events
that would constitute a Change of Control. In addition, the exercise by the
holders of Senior Notes of their right to require the Company to repurchase the
Senior Notes could cause a default under such Indebtedness, even if the Change
of Control itself does not, due to the financial effect of such repurchases on
the Company. Finally, the Company's ability to pay cash to the holders of Senior
Notes upon a repurchase may be limited by the Company's then existing financial
resources. See "Risk Factors--Inability to Purchase Senior Notes Upon Change of
Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Senior Notes validly tendered and not withdrawn under such Change
of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below); (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company; (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals or their Related Parties,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares); or (iv) the first day on which a majority of the members of
the Board of Directors of the Company are not Continuing Directors. For purposes
of this definition, any transfer of an equity interest of an entity that was
formed for the purpose of acquiring Voting Stock of the Company will be deemed
to be a transfer of such portion of such Voting Stock as corresponds to the
portion of such equity of such entity that has been so transferred.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Senior Notes to require the Company
to repurchase such Senior Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
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"Principals" means Herbert S. Winokur, Jr. and Capricorn Investors II, L.P.
"Related Party" with respect to any Principal means (a) any greater than
50% owned Subsidiary, or spouse or immediate family member (in the case of an
individual) of such Principal or (b) trust, corporation, general partnership or
other entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding a greater than 50% controlling interest of which consist,
or a limited partnership, the general partner of which consists, of the
Principals and/or such other Persons referred to in the immediately preceding
clause (a).
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (in the case of an Asset Sale or
Asset Sales aggregating $10,000 or more, evidenced by an officers' certificate
delivered to the Trustee and, in the case of any Asset Sale having a fair market
value or resulting in net proceeds in excess of $5.0 million, evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of cash, provided that
the amount of (x) any liabilities (as shown on the Company's or such
Subsidiary's most recent balance sheet), of the Company or any Subsidiary (other
than contingent liabilities and liabilities that are by their terms subordinated
to the Senior Notes or any guarantee thereof) that are assumed by the transferee
of any such assets pursuant to a customary novation agreement that releases the
Company or such Subsidiary from further liability and (y) any securities, notes
or other obligations received by the Company or any such Subsidiary from such
transferee that are immediately converted by the Company or such Subsidiary into
cash (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay senior
Indebtedness of the Company or any Guarantor or (b) to the making of a Permitted
Investment, the making of a capital expenditure in a Permitted Business or the
acquisition of long-term assets in a Permitted Business. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
Indebtedness under a Credit Facility, including the Credit Agreement (as defined
herein), or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all holders of Senior Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of Senior Notes that may be purchased out of the Excess
Proceeds that remain upon completion of the Excess Proceeds offer required under
the Indenture, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Senior Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Senior Notes surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Senior Notes to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's or any of
its Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's or any of its Subsidiaries' Equity
Interests in their capacity as such (other than dividends or distributions
payable in Equity
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Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company that is a Guarantor); (ii) purchase, redeem or otherwise acquire or
retire for value (including, without limitation, in connection with any merger
or consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company or other Affiliate of the Company
(other than any such Equity Interests owned by the Company or any Wholly Owned
Subsidiary of the Company); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Senior Notes, except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after the
Issue Date (excluding Restricted Payments permitted by clause (ii), (iii) or
(iv) of the next succeeding paragraph), is less than the sum of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one accounting
period) from the beginning of the first fiscal quarter commencing after the
Issue Date to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds (other than any proceeds referred to in the proviso to the first
sentence of the definition of "Investments") received by the Company from the
issue or sale since the Issue Date of Equity Interests of the Company (other
than Disqualified Stock, but including the MFH Equity Infusion) or of
Disqualified Stock or debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or Disqualified Stock
or convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the Issue Date is sold for cash or
otherwise liquidated or repaid for cash, the lesser of (A) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend by a Subsidiary of the Company to the holders of any
Equity Interests on a pro rata basis; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Subsidiary of the Company held by any member of the Company's (or any of its
Subsidiaries) management pursuant to any management equity subscription
agreement or stock option agreement; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed, during any twelve-month period, an aggregate amount equal to the sum of
$250,000, plus the amount of cash proceeds received by the
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Company from any reissuance of Equity Interests by the Company to members of
management of the Company or its Subsidiaries during such period, which
aggregate amount shall in no event exceed $500,000 in any such period, and no
Default or Event of Default shall have occurred and be continuing immediately
after such transaction; (vi) payments to MFH pursuant to the Tax Sharing
Agreement; (vii) payments pursuant to the Pretzel Time Employment Agreement and
the Pretzel Time Management Agreement; and (viii) the redemption or repurchase
of preferred stock of Pretzel Time outstanding on the Issue Date.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $2.0 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or appraisal required by
the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; provided that the Company may incur Indebtedness (including
Acquired Indebtedness) or issue shares of Disqualified Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least (A)
from the date of the Indenture to December 31, 1999, 2.25 to 1 and (B)
thereafter, 2.5 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period; and
(ii) the Weighted Average Life to Maturity of such Indebtedness is equal to
or greater than the remaining Weighted Average Life to Maturity of the Senior
Notes, provided that this clause (ii) shall not apply in the case of Acquired
Indebtedness.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(i) the incurrence by the Company and its Subsidiaries of the Existing
Indebtedness other than the Senior Notes;
(ii) the incurrence by the Company on the Issue Date of Indebtedness
represented by the Senior Notes in an aggregate principal amount not to exceed
$100.0 million and the Guarantees thereof by the Guarantors;
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(iii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Subsidiary, in an aggregate principal amount not to exceed
$5.0 million at any time outstanding;
(iv) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was permitted
by the Indenture to be incurred;
(v) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries, provided that (A) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment
in full in cash of all Obligations with respect to the Senior Notes and (B)(1)
any subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a Wholly
Owned Subsidiary and (2) any sale or other transfer of any such Indebtedness
to a Person that is not either the Company or a Wholly Owned Subsidiary shall
be deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Subsidiary, as the case may be;
(vi) the incurrence by the Company of Hedging Obligations in the ordinary
course of business;
(vii) the incurrence of Indebtedness in connection with one or more
standby letters of credit, guarantees, performance or surety bonds or other
reimbursement obligations, in each case, issued in the ordinary course of
business and not in connection with the borrowing of money or the obtaining of
advances or credit (other than (A) advances or credit on open account,
includible in current liabilities, for goods and services in the ordinary
course of business and on terms and conditions customary in a Permitted
Business and (B) the extension of credit represented by such letter of credit,
guarantee, bond or other obligation itself), provided that any draw under or
call upon any of the foregoing is repaid in full within 45 days, and provided
further that the aggregate amount of all Indebtedness incurred pursuant to
this clause (vii) shall not exceed $5.0 million at any time outstanding;
(viii) the incurrence of Indebtedness arising from agreements of the
Company or a Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in connection
with the disposition of any business, assets or Subsidiary (other than
guarantees of Indebtedness incurred by any Person acquiring all or a portion
of such business, assets or Subsidiary for the purpose of financing such
acquisition), provided that the maximum aggregate liability of all such
Indebtedness shall at no time exceed 50% of the gross proceeds actually
received by the Company or such Subsidiary in connection with such
disposition;
(ix) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Subsidiary of the Company that is a
Guarantor that was permitted to be incurred by another provision of this
covenant;
(x) the incurrence by Pretzel Time of Indebtedness under a working
capital facility, provided that the aggregate principal amount of all
Indebtedness (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of Pretzel Time thereunder)
outstanding thereunder after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (x), does not exceed
an amount equal to $1.0 million;
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(xi) the incurrence by the Company of additional Indebtedness (including
Indebtedness under a Credit Facility) in an aggregate principal amount (or
accreted value, as applicable), including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (xi), not to exceed $15.0 million at any time
outstanding;
(xii) the incurrence by the Company or any of its subsidiaries of Acquired
Indebtedness in an aggregate amount not to exceed $5.0 million at any time
outstanding;
(xiii) the guarantee by the Company or any of its Subsidiaries (other than
MFB) of operating store lease obligations of the Company or any of its
Subsidiaries or any franchisee of the Company or any of its Subsidiaries in
the ordinary course of business and consistent with past practice;
(xiv) the guarantee by any Subsidiary of the Company of Indebtedness of
the Company under any Credit Facility otherwise permitted to be incurred under
the Indenture;
(xv) the incurrence by the Company of Indebtedness in the form of notes
issued in connection with the repurchase, redemption, acquisition or
retirement of Equity Interests of the Company or any Subsidiary of the Company
in an amount not to exceed $500,000 at any time outstanding and subordinated
in right of payment to the Senior Notes; and
(xvi) the incurrence by the Company of Indebtedness or the guarantee by
the Company of Indebtedness incurred by franchisees in connection with the
cost of purchasing a franchise and the cost of equipment in connection with
the set-up of a franchise, provided that such Indebtedness or guarantee does
not exceed $3.0 million at any time outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvi) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (a)(i) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (A) on its Capital Stock
or (B) with respect to any other interest or participation in, or measured by,
its profits, or (ii) pay any indebtedness owed to the Company or any of its
Subsidiaries, (b) make loans or advances to the Company or any of its
Subsidiaries or (c) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (i) Existing Indebtedness as in effect on the Issue Date,
(ii) the Indenture and the Senior Notes, (iii) applicable law, (iv) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any
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Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (v) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (vi) purchase money
obligations or Capital Lease Obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iv) above on the property so acquired, (vii) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
(viii) customary restrictions imposed on the transfer of copyrighted or patented
materials and customary provisions in agreements that restrict the assignees of
such agreements or any rights thereunder or (ix) restrictions with respect to a
Subsidiary of the Company imposed pursuant to a binding agreement relating to
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia, (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Senior Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, (iii) immediately
after such transaction no Default or Event of Default exists and (iv) except in
the case of a merger of the Company with or into a Wholly Owned Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been obtained
in a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (A) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (B) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing, provided that (u) payments to MFH
pursuant to the Tax Sharing Agreement, (v) any employment agreement entered into
by the Company or any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Subsidiary, (w)
transactions between or among the Company and/or its
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Subsidiaries, (x) Restricted Payments that are permitted by the provisions of
the Indenture described above under the caption "--Restricted Payments," (y) the
payment of reasonable fees, expense reimbursements and customary
indemnification, advances and other similar arrangements to directors and
officers of the Company and its Subsidiaries and (z) reasonable loans or
advances to employees of the Company and its Subsidiaries in the ordinary course
of business of the Company or such Subsidiary, in each case, shall not be deemed
Affiliate Transactions.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED SUBSIDIARIES
The Indenture provides that the Company (a) will not, and will not permit
any Wholly Owned Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Subsidiary of
the Company), unless (i) such transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of such Wholly Owned Subsidiary and (ii)
the cash Net Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the covenant described above under
the caption "--Repurchase at the Option of Holders--Asset Sales," and (b) will
not permit any Wholly Owned Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or a
Wholly Owned Subsidiary of the Company.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if (i) the Company or any of its Subsidiaries
shall acquire or create another domestic wholly owned Subsidiary after the date
of the Indenture having assets (A) with a fair market value in excess of
$100,000 or (B) consisting of one or more stores or (ii) the Company acquires
all remaining common stock of Pretzel Time, then such newly acquired or created
Subsidiary or Pretzel Time, as the case may be, shall become a Guarantor and
execute a Supplemental Indenture and deliver an Opinion of Counsel, in
accordance with the terms of the Indenture.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indenture provides that the Company will not permit any Subsidiary,
directly or indirectly, to guarantee, or pledge any assets to secure the payment
of (other than as a result of a Permitted Lien), any other Indebtedness of the
Company or any Subsidiary of the Company, unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
the Guarantee of the payment of the Senior Notes by such Subsidiary, which
Guarantee shall be senior to or pari passu with such Subsidiary's guarantee of
or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any
such Guarantee by a Subsidiary of the Senior Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
any sale, exchange or transfer, to any Person not an Affiliate of the Company,
of all of the Company's stock in, or all or substantially all the assets of,
such Subsidiary, which sale, exchange or transfer is made in compliance with the
applicable provisions of the Indenture. The form of such Guarantee will be
attached as an exhibit to the Indenture.
BUSINESS ACTIVITIES
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, engage in any business other than a Permitted Business, except to
such extent as would not be material to the Company and its Subsidiaries taken
as a whole.
In addition, the Indenture provides that (a) the Company will not engage in
any Asset Sale involving MFB, (b) neither the Company nor MFB will engage in any
Asset Sale involving the "Mrs. Fields" or "Pretzel Time" brand name and (c) for
so long as MFB is a Subsidiary of the Company, MFB shall not incur any
Indebtedness (other than its Guarantee of the Senior Notes and any guarantee of
Indebtedness under a Credit Facility).
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PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any holder of any Senior Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Senior Notes unless such consideration is
offered to be paid or is paid to all holders of the Senior Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Notes are outstanding, the Company will furnish to the
holders of Senior Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Guarantors have agreed that, for so long as any
Senior Notes remain outstanding, they will furnish to the holders of Senior
Notes and to securities analysts and prospective investors, upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes; (ii) default in payment when due of the principal of or premium,
if any, on the Senior Notes; (iii) failure by the Company for 30 days after
notice to comply with any of its other agreements in the Indenture or the Senior
Notes; (iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the Issue
Date, which default (A) is caused by a failure to pay principal of or premium,
if any, or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a "Payment
Default") or (B) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $2.5 million or more; (v) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $2.5
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; and (vii) except as permitted by the
Indenture, any Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Senior Notes
may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Senior Notes will become
due and payable
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without further action or notice. Holders of the Senior Notes may not enforce
the Indenture or the Senior Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Senior Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Senior Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Senior Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Senior Notes. If an Event of Default occurs prior
to December 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Senior Notes prior to December 1, 2001, then
the premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Senior Notes by
accepting a Senior Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Senior Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Senior Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Senior Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Senior Notes
concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Senior Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Senior Notes
are being defeased to maturity or to a particular redemption date, (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Senior Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred, (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Senior
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred, (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit, (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound, (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that, after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of Senior Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Senior Note selected for redemption. Also, the Company is not required to
transfer or exchange any Senior Note for a period of 15 days before a selection
of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Senior Notes may be amended or supplemented with the consent of the Holders
of at least a majority in principal amount of the Senior Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Senior Notes), and any existing
default or compliance with any provision of the Indenture or the Senior Notes
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding Senior Notes (including consents obtained in connection
with a tender offer or exchange offer for Senior Notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any Senior Note or alter the provisions with respect to the redemption of the
Senior Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"); (iii) reduce the
rate of or change the time for payment of interest on any Senior Note; (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Senior Notes (except a rescission of acceleration of
the Senior Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Notes and a waiver of the payment default that resulted
from such acceleration); (v) make any Senior Note payable in money other than
that stated in the Senior Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Senior Notes to receive payments of principal of or premium, if any, or interest
on the Senior Notes; (vii) waive a redemption payment with respect to any Senior
Note (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders"); or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Senior Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Senior Notes in addition to or in place of certificated Senior
Notes, to provide for the assumption of the Company's obligations to Holders of
Senior Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the Holders of Senior Notes
or that does not adversely affect the legal rights under the Indenture of any
such Holder, or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Senior Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Offering Circular may obtain a copy of the
Indenture and Registration Rights Agreement without charge by writing to Mrs.
Fields' Original Cookies, Inc., 2855 East Cottonwood Parkway, Suite 400, Salt
Lake City, Utah 84121, Attention: Michael Ward.
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BOOK-ENTRY, DELIVERY AND FORM
New Senior Notes exchanged for Old Senior Notes through the Book-Entry
Transfer Facility may be represented by a Global Note (the "New Global Note").
One New Global Note shall be issued with respect to each $53.725 million or less
in aggregate 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 Trust Company (the "Depository"),
pursuant to a FAST Balance Certificate Agreement between the Trustee and DTC and
registered in the name of Cede & Co., as nominee of DTC (such nominee being
referred to herein as the "Global Holder").
New Senior Notes exchanged for Old Senior Notes which are in the form of
registered definitive certificates (the "Certified Notes") will be issued in the
form of Certificate Notes. Such Certificated Notes may, unless the Global Notes
has previously been exchanged for Certified Notes, be exchanged for an interest
in the New Global Note representing the principal amount of New Senior Notes
being transferred.
The Depository has advised the Company that a limited-purchase trust
company was created to hold securities for its participating organizations
(collectively, the "Participants" or the "Depository's Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depository's system
is also available to the other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the "Depository's
Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depository only through the Depository's Participants or the Depository's
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the Global Notes; and (ii) ownership of the Senior Notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interests of the Depository's
participants), the Depository's Participants and the Depository's Indirect
Participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer Senior Notes will be limited to such extent.
For so long as the Global Holder is the registered owner of any New Senior
Notes the Global Holder will be considered the sole owner of such New Senior
Notes outstanding under the Indenture. Except as provided below, owners of
beneficial interests in a New Global Note will not be entitled to have New
Senior Notes represented by such New Global Note registered in their names, will
not receive or be entitled to receive physical delivery of Certificated New
Senior Notes, and will not be considered the owners or Holders thereof under the
Indenture for any purpose. As a result, the ability of a person having a
beneficial interest in New Senior Notes represented by a New Global Note to
pledge such interest to persons or entities that do not participate in the
Depository's system or to otherwise take actions in respect of such interest,
may be affected by the lack of physical certificate evidencing such interest.
Accordingly, each person owning a beneficial interest in a New Global Note must
rely on the procedures of the Depository and, if such person is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a Holder
under such New Global Note of the Indenture.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of New Senior Notes by the Depository, or for maintaining, supervising or
reviewing any records of the Depository relating to such New Senior Notes.
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Payments in respect of the principal of, premium, if any, and interest on
any New Senior Notes registered in the name of a Global Holder on the applicable
record date will be payable by the Trustee to or at the direction of such Global
Holder in its capacity as the registered Holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustees may treat the persons in
whose name the Senior Notes, including the New Global Notes, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment of such amounts
to beneficial owners of New Senior Notes (including principal, premium, if any,
and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
interests in the New Global Notes in principal amount of beneficial interests in
the relevant security as shown on the records of the Depository. Payments by the
Depository's Participants and the Depository's Indirect Participants to the
beneficial owners of New Senior Notes will be governed by standing instructions
and customary practice and will be the responsibility of the Depository's
Participant or the Depository's Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the New
Senior Notes in definitive form under the Indenture, then, upon surrender by the
relevant Global Holder of its New Global Note, New Senior Notes in such form
will be issued to each person that such Global Holder and the Depository
identifies as the beneficial owner of the related New Senior Notes. In addition,
subject to certain conditions, any person having a beneficial interest in the
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Certificated Senior Notes. Upon any such issuance, the Trustee is required
to register such New Senior Notes in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). Such New
Senior Notes would be issued in fully registered forms.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the New Senior Notes
represented by the Global Notes (including principal, premium, if any and
interest) be made by wire transfer of immediately-available, same-day funds to
the accounts specified by the Holder of interest in such Global Note. With
respect to Certificated Senior Notes, the Company will make all payments of
principal, premium, if any and interest by wire transfer of immediately-
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holders registered
address. The Company expects that secondary trading in the Certificated New
Senior Notes will also be settled in immediately-available funds.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on August 24, 1998. Pursuant to the Registration
Rights Agreement, the Company and the Guarantors agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to the New Senior Notes, which will have
terms substantially similar in all material respects to the Old Senior Notes,
within 90 days. Upon the effectiveness of the Exchange Offer Registration
Statement, the Company will offer to the Holders of Transfer Restricted
Securities pursuant to the Exchange Offer who are able to make certain
representations the opportunity to exchange their Transfer Restricted Securities
for New Senior Notes. If (i) the Company and the Guarantors had not been
required to file the Exchange Offer Registration Statement or are not permitted
to consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company 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 Senior
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
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Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Series C Senior Notes acquired directly from the Company
or an affiliate of the Company, the Company and the Guarantors will file with
the Commission a Shelf Registration Statement to cover resales of the Series C
Senior Notes by the Holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. The Company and the Guarantors will use their best efforts to cause
the applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Senior Note until (i) the date on which such Senior
Note has been exchanged by a person other than a broker-dealer for a New Senior
Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in
the Exchange Offer of an Old Senior Note for a New Senior Note, the date on
which such New Senior Note is sold to a purchaser who receives from such broker-
dealer on or prior to the date of such sale a copy of the prospectus contained
in the Exchange Offer Registration Statement, (iii) the date on which such
Senior Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the date
on which such Senior Note is distributed to the public pursuant to Rule 144
under the Securities Act.
The Registration Rights Agreement provides that (i) the Company and the
Guarantors will file a Registration Statement with the Commission on or prior to
90 days after the Closing Date, (ii) the Company and the Guarantors will use
their best efforts to have the Registration Statement declared effective by the
Commission on or prior to 150 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, New Senior
Notes in exchange for all Old Senior Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company and the Guarantors will use their best efforts to file the Shelf
Registration Statement with the Commission on or prior to 90 days after such
filing obligation arises and to cause the Shelf Registration to be declared
effective by the Commission on or prior to 150 days after such obligation
arises. If (a) the Company and the Guarantors fail to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Registration Statement, or (d) the
Shelf Registration Statement or the Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company and the Guarantors will pay Liquidated
Damages to each holder of Old Senior Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default in
an amount equal to $.05 per week per $1,000 principal amount of Old Senior
Notes held by such holder. The amount of the Liquidated Damages will increase by
an additional $.05 per week per $1,000 principal amount of Old Senior Notes with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages of $.20 per week per
$1,000 principal amount of Old Senior Notes. All accrued Liquidated Damages will
be paid by the Company on each Damages Payment Date to the Global Note Holder by
wire transfer of immediately available funds or by federal funds check and to
holders of Certificated Old Senior Notes by wire transfer to the accounts
specified by them or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease.
Holders of Old Senior Notes will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) 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 set forth in the Registration Rights Agreement in order to have
their Senior Notes included in the Shelf Registration Statement and benefit from
the provisions regarding Liquidated Damages set forth above.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounting Firm" means any of Arthur Andersen LLP, Deloitte & Touche LLP,
Ernst & Young LLP, KPMG Peat Marwick LLP and PricewaterhouseCoopers LLP or any
of their successor firms.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, excluding,
however, Indebtedness incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Subsidiary of such specified
Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired
by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Repurchase at the Option of
Holders--Change of Control" and/or the provisions described above under the
caption "--Certain Covenants--Merger, Consolidation, or Sale of Assets" and not
by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (A) that have a fair market
value in excess of $1.0 million or (B) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or
to another Wholly Owned Subsidiary, (ii) an issuance of Equity Interests by a
Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary,
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "--Certain Covenants--Restricted Payments," (iv) arrangements
providing for the receipt by the Company of franchise and royalty fees but not
otherwise involving the sale of assets of the Company or any of its Subsidiaries
(other than inventory in the ordinary course of business) and (v) a disposition
of any Non-Core Stores will not be deemed to be Asset Sales.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
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"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) marketable direct obligations issued
by any State of the United States or any local government or other political
subdivision thereof rated (at the time of the acquisition of such security) at
least "AA" by S&P or the equivalent thereof by Moody's and having maturities of
not more than one year from the acquisition of such security, (iv) certificates
of deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not exceeding
six months and overnight bank deposits, in each case, with any domestic
commercial bank having capital and surplus in excess of $500 million and a Keefe
Bank Watch Rating of "B" or better or with any registered broker-dealer whose
commercial paper is rated at least "A-1" by S&P or the equivalent thereof by
Moody's, (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iv) above
entered into with any financial institution meeting the qualifications specified
in clause (iv) above, (vi) commercial paper rated at least "A-1" by S&P or the
equivalent thereof by Moody's and, in each case, maturing within six months
after the date of acquisition, and (vii) investments in money market funds all
of whose assets consist of securities described in clauses (ii) through (vi)
above.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent and in the same proportion that the
net income of such Subsidiary was included in calculating Consolidated Net
Income and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof that is a Guarantor, (ii)
the Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental
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approval (that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Credit Facility" means, with respect to the Company, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders (including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith) providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit up to a
maximum aggregate amount of not more than $15.0 million, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Senior Notes mature, provided that a
class of Capital Stock shall not be Disqualified Stock solely as a result of any
maturity or redemption that is conditioned upon, and subject to, compliance with
the covenant described under the caption "--Certain Covenants--Restricted
Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (including preferred stock of Pretzel Time outstanding on the Issue
Date but excluding any Indebtedness of the Company or any of its Subsidiaries
under any Credit Facility existing on the Issue Date) in existence on the Issue
Date, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), (ii)
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the consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is guaranteed by such Person or one of its Subsidiaries or
secured by a Lien on assets of such Person or one of its Subsidiaries (whether
or not such guarantee or Lien is called upon), and (iv) the product of (A) all
dividend payments, whether or not in cash, on any series of preferred stock of
such Person or any of its Subsidiaries, other than dividend payments on Equity
Interests payable solely in Equity Interests of the Company, times (B) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the provision set forth in the definition of Consolidated Net Income, (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date, and (iv) the financial information of the Company with
respect to any portion of the four fiscal quarters prior to the Issue Date may
be adjusted to eliminate certain historical expenses that are not expected to
recur after the consummation of the Pretzel Contributions so long as such
adjustments are not deemed to be contrary to the requirements of Regulation S-X
under the Securities Act by an Accounting Firm. In calculating the Fixed Charge
Coverage Ratio for any period, to the extent that the proceeds from the
incurrence of any Indebtedness are to be used to fund the acquisition of Equity
Interests or assets in a Permitted Business, the Company may include any pro
forma adjustments permitted by Regulation S-X under the Securities Act in its
calculation of the amount of Consolidated Cash Flow that relate solely to such
acquisition, so long as such pro forma adjustments are not deemed to be contrary
to the requirements of Rule 11-02 of Regulation S-X under the Securities Act in
writing by an Accounting Firm.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means (i) MFB and (ii) any other Subsidiary that executes a
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest or
foreign currency exchange rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP,
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common stock of the Company shall
not be deemed to be an Investment. If the Company or any Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Issue Date" means November 26, 1997.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction),
provided that the definition of "Lien" shall not include any option, call or
similar right relating to treasury shares of the Company to the extent that such
option, call or right is granted (i) under any employee stock option plan,
employee stock ownership plan or similar plan or arrangement of the Company or
its Subsidiaries or (ii) in connection with the issuance of Indebtedness
permitted to be incurred pursuant to the covenant described under the caption "-
- -Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
"MFB" means The Mrs. Fields Brand, Inc., a Delaware corporation and a
wholly owned subsidiary of the Company.
"MFH" means Mrs. Fields Holding Company, Inc., a Delaware corporation and
the corporate parent of the Company.
"Moodys" means Moody's Investors Service, Inc.
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"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (A) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (B) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale but only as and when received), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the permanent repayment of, or permanent reduction in availability or commitment
under, Indebtedness secured by a Lien on the asset or assets that were the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP.
"Non-Core Stores" means the stores listed in Exhibit B to the Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the same or a similar line of business as the
Company and its Subsidiaries were engaged in on the Issue Date, including,
without limitation, the specialty retail snack-food business.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company that is a Guarantor and that is engaged
in a Permitted Business, (b) any Investment in Cash Equivalents, (c) any
Investment by the Company or any Subsidiary of the Company in a Person, if as a
result of such Investment (i) such Person becomes a Wholly Owned Subsidiary of
the Company and a Guarantor that is engaged in a Permitted Business or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Wholly Owned Subsidiary of the Company that is a Guarantor and that is
engaged in a Permitted Business, (d) any Restricted Investment made as a result
of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales," (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company, (f) any Investments in accounts
and notes receivable acquired in the ordinary course of business, (g) any
Investments in notes of employees, officers, directors and their transferees and
Affiliates issued to the Company representing payment of the exercise price of
options to purchase common stock of the Company, (h) any Investments by the
Company in Hedging Obligations otherwise permitted to be incurred under the
Indenture, (i) any Investments existing on the Issue Date (including, without
limitation, a $500,000 loan to Martin E. Lisiewski outstanding as of the Issue
Date) and (j) any purchase of any and all remaining common stock of PTI.
"Permitted Liens" means (i) Liens securing Indebtedness under a Credit
Facility that was permitted by the terms of the Indenture to be incurred, (ii)
Liens in favor of the Company, (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company, provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company, (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition and do not extend to
any assets of the Company other than the property so acquired, (v) Liens to
secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business,
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(vi) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clauses (iii) and (x) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock," provided
that, in the case of Indebtedness permitted by such clause (iii), covering only
the assets acquired with such Indebtedness, (vii) Liens existing on the Issue
Date, (viii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor, and (ix) Liens incurred in the ordinary
course of business of the Company or any Subsidiary of the Company that (A) are
not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of business)
and (B) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of business by
the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries, provided that (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith), (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Senior Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Senior Notes on terms at least
as favorable to the holders of Senior Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded, and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Pretzel Time" means Pretzel Time, Inc., a Pennsylvania corporation.
"Pretzel Time Employment Agreement" means that certain Employment
Agreement, dated as of September 2, 1997, between Pretzel Time and Martin E.
Lisiewski.
"Pretzel Time Management Agreement" means that certain Management
Agreement, dated as of September 2, 1997, between the Company and Pretzel Time.
"Public Equity Offering" means a public offering registered under the
Securities Act (except for any registration pursuant to Form S-8) of common
stock of (i) the Company or (ii) MFH to the extent that the net proceeds thereof
are contributed to the Company as a capital contribution, provided that the
aggregate proceeds from any such public offering shall in no event be less than
$20.0 million.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"S&P" means Standard & Poor's Ratings Service, a division of The McGraw-
Hill Companies, Inc.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the Issue
Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
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"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (B)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Tax Sharing Agreement" means any tax allocation agreement between the
Company or any of its Subsidiaries with the Company or any direct or indirect
shareholder of the Company with respect to consolidated or combined tax returns
including the Company or any of its Subsidiaries, but, in each case, only to the
extent that amounts payable from time to time by the Company or any such
Subsidiary under any such agreement do not exceed the corresponding tax payments
that the Company or such Subsidiary would have been required to make to any
relevant taxing authority had the Company or such Subsidiary not joined in such
consolidated or combined returns, but instead had filed returns including only
the Company and its Subsidiaries.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (A) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (B) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT AGREEMENT
The Company entered into an Amended and Restated Loan Agreement (the
"Credit Agreement"), dated as of February 28, 1998, with LaSalle National Bank
(the "Bank"). Under the Credit Agreement, the Bank will provide the Company 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 the Bank. Principal amounts due on revolving loans made under the
Credit Agreement bear interest at the Company's 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 the Bank may issue Letters of Credit on behalf of
the Company in an aggregate amount not to exceed $500,000. The aggregate amount
of Letters of Credit issued plus the aggregate amount of revolving loans
outstanding cannot exceed $15.0 million. Substantially all of the assets of the
Company have been pledged to the Bank under the Credit Agreement. The Credit
Agreement contains certain restrictions on, among other things, payments, the
incurrence of indebtedness and liens, which are substantially similar to the
restrictions in the Indenture. Currently there are no amounts outstanding under
the Credit Agreement. The Company is limited to borrowing $12.7 million in
accordance with restrictions of the Indenture.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Senior Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Senior Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Senior Notes received in
exchange for Old Senior Notes where such Old Senior Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 120 days after the consummation of the Exchange
Offer, it will make this Prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition, until
,1998, all dealers effecting transactions in the New Senior Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Senior Notes
by broker-dealers. New Senior Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Senior Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or though brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Senior Notes. Any broker-dealer
that resells New Senior Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Senior Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
New Senior Notes and any commission or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 120 days after the consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal or Agent's Message. The Company has
agreed to pay all expenses incident to the Exchange Offer (including the
expenses of one counsel for the Holders of the Notes in an amount up to $50,000)
other than commissions or concessions of any brokers or dealers and will
indemnify the Holders of the Notes (including any broker-dealer) against certain
liabilities, including liabilities under the Securities Act.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. Federal income tax
consequences associated with the exchange of the Old Senior Notes for the New
Senior Notes pursuant to the Exchange Offer. The summary is based upon current
laws, regulations, rulings and judicial decisions all of which are subject to
change, possibly with retroactive effect. The discussion below does not address
all aspects of U.S. Federal income taxation that may be relevant to particular
Holders of Old Senior Notes or New Senior Notes. In addition, the discussion
does not address any aspect of state, local or foreign taxation.
The exchange of the Old Senior Notes for the New Senior Notes pursuant to
the Exchange Offer should not be treated as an "exchange" for U.S. Federal
income tax purposes because the New Senior Notes should not be considered to
differ materially in kind or extent from the New Senior Notes. Rather, the New
Senior Notes received by a Holder should be treated as a continuation of the Old
Senior Notes in the hands of such Holder. As a result there should be no U.S.
Federal income tax consequences to Holders exchanging the Old Senior Notes for
the New Senior Notes pursuant to the Exchange Offer, and any exchanging Holder
of Old Senior Notes should have the same tax basis and holding period in, and
income in respect of, the New Senior Notes as such Holder had in the Old Senior
Notes immediately prior to the Exchange.
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PROSPECTIVE HOLDERS OF THE NEW SENIOR NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH HOLDERS'
OLD SENIOR NOTES FOR THE NEW SENIOR NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS.
LEGAL MATTERS
The validity of the New Senior Notes and the New Guarantees offered hereby
will be passed upon by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York, counsel for the Company. A partner in Skadden, Arps, Slate, Meagher & Flom
LLP is an investor in Capricorn.
EXPERTS
The historical consolidated financial statements of Mrs. Fields' Original
Cookies, Inc. and subsidiaries as of December 28, 1996 and January 3, 1998 and
for the period from inception (September 18, 1996) to December 28, 1996 and for
the year ended January 3, 1998; the historical financial statements of Mrs.
Fields Inc. and subsidiaries as of September 17, 1996 and for the period from
December 31, 1995 to September 17, 1996; the historical 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 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 thereto, and are
included herein 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
herein, 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 herein.
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 herein.
120
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On August 24, 1998, Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields")
sold $40,000,000 in aggregate principal amount of Series C Senior Notes due 2004
(the "Offering"). The net proceeds of the Offering and the equity infusion of
the net proceeds of the MFH Offering (the "MFH Equity Infusion") together with
existing Company cash were used to: (i) finance the acquisition of all of the
outstanding capital stock of Great American; (ii) finance the tender offer to
repurchase all of Great American's $40,000,000 aggregate principal amount of
10 7/8% Senior Secured Notes due 2001, including accrued but unpaid interest and
a premium of $1,600,000; (iii) finance the repayment of all of Great American's
$10,000,000 aggregate principal amount of 12.5% Subordinated Notes, including
accrued but unpaid interest; (iv) finance the retirement of Great American's
Senior Redeemable Preferred Stock and Junior Redeemable Preferred Stock at an
aggregate discounted purchase price of $8,400,000; (v) finance the acquisition
of all of the outstanding capital stock of Deblan Corporation ("Deblan") and
Chocolate Chip Cookies of Texas, Inc. ("Chocolate Chip"), two franchisees of
Great American, including the repayment of assumed debt; and (vi) finance the
asset purchase of eight stores controlled by another Great American franchisee
(the "Combined Karp Entities").
The unaudited pro forma condensed combined financial statements are based
upon the historical financial statements of Mrs. Fields, H&M, Pretzel Time,
Great American, Deblan, Chocolate Chip and the Combined Karp Entities, and
should be read in conjunction with the audited and unaudited financial
statements, including the notes thereto, of these entities included elsewhere in
this Registration Statement. The combined operations of these entities are
collectively referred to herein as the "Company." 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 and the Combined Karp Entities, as well as the previous acquisitions of H&M
and Pretzel Time. Mrs. Fields, H&M and Pretzel Time operate using a 52/53-week
year ending near December 31. Great American operates using a 52/53-week year
ending near June 30. Deblan operates using a year ending December 31, Chocolate
Chip operates using a year ending September 30, and the Combined Karp Entities
operate using a year ending December 31.
The unaudited pro forma condensed combined statements of operations for the 53
weeks ended January 3, 1998 and the 39 weeks ended October 3, 1998 assume that
the Great American Transactions, the MFH Transactions and the acquisitions of
H&M and Pretzel Time occurred as of December 29, 1996 (the first day of the most
recently completed fiscal year) and combine the historical results of operations
of the entities for those periods with pro forma adjustments to give effect to
the Great American Transactions, the Combined Karp Entities acquisition, the MFH
Transactions and the acquisitions of H&M and Pretzel Time.
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-1
<PAGE>
THE COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE 53 WEEKS ENDED JANUARY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MRS. FIELDS PRE-ACQUISITION
-----------------------------------------------------------------------
PRE-
PRETZEL PRO FORMA ACQUISITION
H&M TIME ADJUSTMENTS PRO FORMA
MRS. FIELDS (SEE NOTE 2) (SEE NOTE 3) (SEE NOTE 1) COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
REVENUES:
Net store and batter sales............................... $123,987 $9,328 $ 302 $ -- $133,617
Franchising, net......................................... 3,574 -- 2,142 (653)(a) 5,063
Licensing, net........................................... 2,028 -- -- -- 2,028
Other, net............................................... 918 36 181 -- 1,135
-------- ------ ------ ------- --------
Total revenues.......................................... 130,507 9,364 2,625 (653) 141,843
-------- ------ ------ ------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs........................ 66,832 6,120 284 (653)(a) 72,583
Food cost of sales....................................... 28,127 1,366 63 -- 29,556
General and administrative............................... 16,730 1,326 1,617 (750)(b) 18,923
Depreciation and amortization............................ 10,403 690 118 525 (c) 11,736
-------- ------ ------ ------- --------
Total operating costs and expenses...................... 122,092 9,502 2,082 (878) 132,798
-------- ------ ------ ------- --------
Income (loss) from operations........................... 8,415 (138) 543 225 9,045
INTEREST EXPENSE.......................................... (7,830) (370) (120) (2,857)(d) (11,177)
INTEREST INCOME........................................... 246 -- -- -- 246
OTHER INCOME (EXPENSE), net............................... (368) -- -- -- (368)
-------- ------ ------ ------- --------
Income (loss) before provision for
income taxes........................................... 463 (508) 423 (2,632) (2,254)
PROVISION FOR INCOME TAXES................................ 655 -- -- -- 655
-------- ------ ------ ------- --------
Income (loss) before preferred stock
accretion and dividends of subsidiaries
and minority interest.................................. (192) (508) 423 (2,632) (2,909)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES................................ (644) -- -- -- (644)
MINORITY INTEREST......................................... (138) -- -- (169)(e) (307)
-------- ------ ------ ------- --------
Income (loss) from continuing operations................ $ (974) $ (508) $ 423 $(2,801) $ (3,860)
======== ====== ====== ======= ========
OTHER DATA:
Cash flows from operating activities.................... $ 919 $ (94) $ 805 $ -- $ 1,630
Cash flows from investing activities.................... (15,505) (32) (24) -- (15,561)
Cash flows from financing activities.................... 24,164 (489) 14 -- 23,689
EBITDA (See Note 8)..................................... 18,818 552 661 750 20,781
Ratio of earnings to fixed charges (See Note 10)........ -- -- 4.53x -- --
Deficiency of earnings to fixed charges
(See Note 10).......................................... $ (319) $ (508) $ -- $ -- $ (3,205)
<CAPTION>
MRS. FIELDS POST-ACQUISITION
------------------------------------------------------------------------------------
COMBINED POST-
GREAT CHOCOLATE KARP PRO FORMA ACQUISITION
AMERICAN DEBLAN CHIP ENTITIES ADJUSTMENTS PRO FORMA
(SEE NOTE 4) (SEE NOTE 5) (SEE NOTE 6) (SEE NOTE 7) (SEE NOTE 1) COMBINED
------------ ------------ ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Net store and batter sales.................. $32,307 $9,503 $2,789 $2,500 $(2,222) (f) $178,494
Franchising, net............................ 5,391 -- -- (1,035) (g) 9,419
Licensing, net.............................. -- -- -- -- 2,028
Other, net.................................. 167 21 -- -- 1,323
------- ------ ------ ------- --------
Total revenues............................. 37,865 9,524 2,789 2,500 (3,257) 191,264
------- ------ ------ ------ ------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs........... 13,548 5,891 1,396 1,635 (1,035) (g) 94,018
Food cost of sales.......................... 10,578 1,675 654 683 (2,222) (f) 40,924
General and administrative.................. 6,664 1,169 510 238 (2,172) (h) 25,332
Depreciation and amortization............... 2,725 255 51 121 3,380 (i) 18,268
------- ------ ------ ------ ------- --------
Total operating costs and expenses......... 33,515 8,990 2,611 2,677 (2,049) 178,542
------- ------ ------ ------ ------- --------
Income (loss) from operations.............. 4,350 534 178 (177) (1,208) 12,722
INTEREST EXPENSE............................. (6,219) (73) (5) (18) 1,929 (j) (15,563)
INTEREST INCOME.............................. 307 26 5 -- 584
OTHER INCOME (EXPENSE), net.................. 1,264 -- -- -- -- 896
------- ------ ------ ------- ------- --------
Income (loss) before provision for
income taxes.............................. (298) 487 178 (195) 721 (1,361)
PROVISION FOR INCOME TAXES................... 223 195 43 15 (323) (k) 808
------- ------ ------ ------ ------- --------
Income (loss) before preferred stock
accretion and dividends of subsidiaries
and minority interest..................... (521) 292 135 (210) 1,044 (2,169)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES................... -- -- -- -- -- (644)
MINORITY INTEREST............................ -- -- -- -- -- (307)
------- ------ ------ ------- ------- --------
Income (loss) from continuing
operations............................. $ (521) $ 292 $ 135 $ (210) $ 1,044 $ (3,120)
======= ====== ====== ====== ======= ========
OTHER DATA:
Cash flows from operating activities....... $ 1,674 $ 787 $ 240 $ (20) $ -- $ 4,311
Cash flows from investing activities....... 299 (690) (184) 17 -- (16,119)
Cash flows from financing activities....... (105) 193 (32) -- -- 23,745
EBITDA (See Note 8)........................ 7,075 789 229 (56) 2,172 30,990
Ratio of earnings to fixed charges......... -- 7.67x 36.60x -- -- --
(See Note 10)
Deficiency of earnings to fixed charges
(See Note 10)............................. $(1,090) $ -- $ -- $ (195) $ -- $ (3,104)
</TABLE>
See accompanying notes to pro forma condensed
combined financial statements.
P-2
<PAGE>
THE COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
GREAT CHOCOLATE KARP
AMERICAN DEBLAN CHIP ENTITIES
MRS. FIELDS (SEE NOTE 4) (SEE NOTE 5) (SEE NOTE 6) (SEE NOTE 7)
----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net store and batter sales......................... $ 89,938 $ 18,932 $ 6,370 $ 1,873 $ 1,489
Franchising, net................................... 3,884 3,449 -- -- --
Licensing, net..................................... 1,081 -- -- -- --
Other, net......................................... 1,056 82 -- -- --
---------- ---------- ---------- ---------- ----------
Total revenues.................................... 95,959 22,463 6,370 1,873 1,489
---------- ---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs.................. 52,357 7,645 3,523 1,000 370
Food cost of sales................................. 21,588 6,428 1,108 454 297
General and administrative......................... 12,621 5,288 1,067 421 754
Depreciation and amortization...................... 9,707 1,510 182 22 89
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses................ 96,273 20,871 5,880 1,897 1,510
---------- ---------- ---------- ---------- ----------
Income (loss) from operations..................... (314) 1,592 490 (24) (21)
INTEREST EXPENSE, net............................... (8,981) (4,077) (43) (2) (8)
INTEREST INCOME..................................... 530 258 24 4 -
OTHER INCOME (EXPENSE), net......................... (256) (149) 40 11 -
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income taxes... (9,021) (2,376) 511 (11) (29)
PROVISION (BENEFIT) FOR INCOME TAXES................ 68 (38) 115 27 6
---------- ---------- ---------- ---------- ----------
Income (loss) before preferred stock accretion
and dividends of subsidiaries and minority
interest......................................... (9,089) (2,338) 396 (38) (35)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES.......................... (333) -- -- -- --
MINORITY INTEREST................................... (268) -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations.......... $ (9,690) $ (2,338) $ 396 $ (38) $ (35)
========== ========== ========== ========== ==========
OTHER DATA:
Cash flows from operating activities............... $ 676 $ (1,517) $ 372 $ (40) $ (54)
Cash flows from investing activities............... (34,315) (310) (72) (7) (2)
Cash flows from financing activities............... 22,498 (18) (205) (72) 12
EBITDA (See Note 9)................................ 9,393 3,102 672 (2) 68
Ratio of earnings to fixed charges (See Note 10)... -- -- 12.88x -- --
Deficiency of earnings to fixed charges
(See Note 10)..................................... $ (9,397) $ (2,888) $ -- $ (11) $ (29)
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
(SEE NOTE 1) COMBINED
------------ ---------
<S> <C> <C>
REVENUES:
Net store and batter sales............................ $ (832) (f) $117,770
Franchising, net...................................... (385) (g) 6,948
Licensing, net........................................ -- 1,081
Other, net............................................ -- 1,138
------- --------
Total revenues....................................... (1,217) 126,937
------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs..................... (385) (g) 64,510
Food cost of sales.................................... (832) (f) 29,043
General and administrative............................ (1,404) (h) 18,747
Depreciation and amortization......................... 2,664 (i) 14,174
------- --------
Total operating costs and expenses................... 43 126,474
------- --------
Income (loss) from operations........................ (1,260) 463
INTEREST EXPENSE, net.................................. 729 (j) (12,382)
INTEREST INCOME........................................ -- 816
OTHER INCOME (EXPENSE), net............................ -- (354)
------- --------
Income (loss) before provision for income taxes...... (531) (11,457)
PROVISION (BENEFIT) FOR INCOME TAXES................... -- 178
------- --------
Income (loss) before preferred stock accretion
and dividends of subsidiaries and minority
interest............................................ (531) (11,635)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES............................. -- (333)
MINORITY INTEREST...................................... -- (268)
--------
Income (loss) from continuing operations............. $ (531) $(12,236)
======= ========
OTHER DATA:
Cash flows from operating activities.................. $ -- $ (563)
Cash flows from investing activities.................. -- (34,706)
Cash flows from financing activities.................. -- 22,215
EBITDA (See Note 9)................................... 1,404 14,637
Ratio of earnings to fixed charges (See Note 10)...... -- --
Deficiency of earnings to fixed charges
(See Note 10)........................................ $ -- $(12,345)
</TABLE>
See accompanying notes to pro forma condensed
combined financial statements.
P-3
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
Pre-Acquisition
(a) Adjustment to reflect the elimination of franchise fees and related
costs as a result of consolidating H&M and Pretzel Time.
(b) Adjustment to reflect the impact of the reduction in salaries and
payroll expenses related to employees of H&M and Pretzel Time terminated at the
date of the acquisitions assuming that the acquisitions were consummated as of
December 29, 1996. The terminations 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 the Company has sufficient
resources with existing staff to fulfill the applicable responsibilities. Other
costs will not be incurred that will offset these reductions. The impact is
factually supportable as the employees were terminated at the time of the
acquisitions.
(c) Adjustment to reflect amortization of goodwill, which goodwill
totaling $15,500,000, was recorded in connection with the purchase of the net
assets of H&M and the majority ownership of Pretzel Time. Goodwill is being
amortized over a 15-year period. Also includes adjustment to reflect a reduction
in depreciation expense as a result of reducing H&M's property and equipment to
estimated fair market value in connection with the acquisition. The average
estimated depreciable lives for these assets is seven years.
(d) Adjustment to reflect additional interest expense that would have been
incurred on the $100,000,000 Series A/B Senior Notes. Adjustment also reflects a
reduction in interest expense related to: (i) the retirement of $64,098,000 of
Mrs. Fields debt with interest rates ranging from 8.78% to 10.0%; (ii) the
retirement of $8,250,000 of H&M debt with interest rates ranging from 8.0% to
16.0%; (iii) the assumed conversion of $4,643,000 of a Mrs. Fields note payable
with an interest rate of 9.78%; (iv) the additional amortization related to
approximately $5,976,000 of deferred loan costs assumed to be amortized over a
seven-year period; and (v) net of interest income on a $500,000 loan to a
minority stockholder of Pretzel Time with an interest rate of 10.0%.
(e) Adjustment to reflect the recording of the minority interest in
Pretzel Time's income from continuing operations.
POST-ACQUISITION
(f) Adjustment to reflect the elimination of batter sales and batter cost
of sales as a result of combining Great American, Deblan, Chocolate Chip and the
Combined Karp Entities.
(g) Adjustment to reflect the elimination of franchise fees and related
costs as a result of combining Great American, Deblan, Chocolate Chip and the
Combined Karp Entities.
P-4
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(h) Adjustment to reflect the impact of the reduction in salaries and
payroll expenses related to employees of Great American, Deblan, Chocolate Chip
and the Combined Karp Entities terminated at the date of the acquisitions
assuming that the acquisitions were consummated at December 29, 1996. 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 the Company has sufficient resources with existing staff to fulfill
the applicable responsibilities. Other costs will not be incurred that will
offset these reductions. The impact is factually supportable as the employees
were terminated at the time of the acquisitions.
(i) Adjustment to reflect amortization of goodwill, which goodwill
totaling $69,390,000 (including acquisition costs of $1,003,000), was recorded
in connection with the purchase of the net assets of Great American, Deblan,
Chocolate Chip and the Combined Karp Entities. 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 to estimated fair
market value in connection with each respective acquisition. The average
estimated depreciable lives for these assets is seven years.
(j) Adjustment to reflect the reduction in 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) net of the
additional interest expense related to approximately $5,007,000 of new deferred
loan costs amortized over a seven-year period; and (vi) net of the additional
interest expense on the $40,000,000 of Series C Senior Notes and amortization of
$600,000 of assumed discount.
(k) Adjustment to reflect the change in provision for income taxes due to
the consolidated results of operations of the entities before provision for
income taxes.
2. H&M
MFH, through its wholly owned subsidiary, MFPC, acquired the net assets and
certain debt of H&M on July 25, 1997, and concurrent with the completion of the
Prior Offering contributed the net assets of H&M and related debt to Mrs.
Fields. Accordingly, in the accompanying unaudited pro forma condensed combined
statement of operations for the 53 weeks ended January 3, 1998, H&M's results of
operations from December 29, 1996 to July 24, 1997 are included under the "H&M"
column heading. Also, in the accompanying unaudited pro forma condensed combined
statement of operations for the 39 weeks ended October 3, 1998, H&M's results of
operations are included under the "Mrs. Fields" column heading. The purchase
price of $13,750,000 paid by MFH was allocated based on the estimated fair
values of the net assets acquired, as presented below:
<TABLE>
<S> <C>
Fair value of net assets acquired............................. $ 4,132,000
Goodwill acquired............................................. 9,618,000
-----------
Total purchase price...................................... $13,750,000
===========
</TABLE>
P-5
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. Pretzel Time
MFH acquired 56.0% of the common stock of Pretzel Time, a $500,000 note
receivable from Pretzel Time's founder and contract rights on September 2, 1997.
Concurrent with the completion of the Prior Offering, MFH contributed its 56.0%
interest to Mrs. Fields. Accordingly, in the accompanying unaudited pro forma
condensed combined statements of operations for the 53 weeks ended January 3,
1998, Pretzel Time's results of operations from December 29, 1996 to September
1, 1997 are included under the "Pretzel Time" column heading. Also, in the
accompanying unaudited pro forma condensed combined statement of operations for
the 39 weeks ended October 3, 1998, Pretzel Time's results of operations are
included under the "Mrs. Fields" column heading.
MFH paid $4,200,000 in cash to acquire 56.0% of the common stock of
Pretzel Time and made a $500,000, five-year maturity loan, with an interest rate
of 10.0%, to a minority stockholder and founder of Pretzel Time. Of the
$4,200,000 paid by MFH, $750,000 was paid to Pretzel Time to be used for working
capital purposes. Pretzel Time's stockholders' deficit of $425,000 at the date
of acquisition was eliminated and goodwill of $5,882,000 was recorded.
4. GREAT AMERICAN ACQUISITION
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital
stock and subordinated indebtedness of Great American for an aggregate 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>
Fair value of net liabilities assumed....................... $(37,233,000)
Goodwill acquired........................................... 55,633,000
------------
Total purchase price.................................... $ 18,400,000
============
</TABLE>
Because Great American operates using a 52/53-week year ending near June
30, its results of operations for the 53 weeks ended January 3, 1998, in the
accompanying pro forma condensed combined statements of operations, do not agree
with Great American's historical results of operations for either the 52 weeks
ended June 29, 1997 or June 28, 1998. Additionally, in the accompanying pro
forma condensed combined statement of operations for the 39 weeks ended October
3, 1998, 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 October 3, 1998 are
included under the "Mrs. Fields" column heading.
P-6
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATMENTS (CONTINUED)
(UNAUDITED)
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 39 weeks ended October 3, 1998 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>
LESS ADD
52 WEEKS ENDED 26 WEEKS ENDED JUNE 29, 1998 TO DECEMBER 29, 1997
JUNE 28, 1998 DECEMBER 28, 1997 AUGUST 23, 1998 TO 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............................. 6,140 3,558 867 3,449
Other, net................................... 139 72 15 82
Operating costs and expenses................. 31,133 16,044 5,782 20,871
Income (loss) from operations................ 6,214 4,108 (514) 1,592
Net income (loss)............................ (202) 644 (1,492) (2,338)
</TABLE>
5. DEBLAN ACQUISITION
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital
stock of Deblan for an aggregate purchase price of $10,465,000. Accordingly, in
the accompanying pro forma condensed combined statement of operations for the 39
weeks ended October 3, 1998, 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 October 3, 1998 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>
Fair value of net assets acquired.................... $ 2,239,000
Goodwill acquired.................................... 8,226,000
-----------
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
39 weeks ended October 3, 1998 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>
SIX MONTHS ENDED JULY 1, 1998 TO JANUARY 1, 1998 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 expenses.................... 4,418 1,462 5,880
Income from operations.......................... 350 140 490
Net income...................................... 232 164 396
</TABLE>
P-7
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. CHOCOLATE CHIP ACQUISITION
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital
stock of Chocolate Chip for an aggregate 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>
Fair value of net assets acquired................ $ 217,000
Goodwill acquired................................ 3,748,000
----------
Total purchase price......................... $3,965,000
==========
</TABLE>
Because Chocolate Chip operates using a year ending September 30, its
results of operations for the 53 weeks ended January 3, 1998, in the
accompanying pro forma condensed combined statement of operations, do not agree
with Chocolate Chip's historical results of operations for the year ended
September 30, 1997. Additionally, in the accompanying pro forma condensed
combined statement of operations for the 39 weeks ended October 3, 1998,
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 October 3, 1998 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 39 weeks ended October 3, 1998 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
NINE MONTHS THREE MONTHS ADD
ENDED ENDED JULY 1, 1998 TO JANUARY 1, 1998
JUNE 30, 1998 DECEMBER 31, 1997 AUGUST 23, 1998 TO AUGUST 23, 1998
--------------- ----------------- ---------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net store sales............................ $2,266 $803 $410 $1,873
Operating costs and expenses............... 2,100 646 443 1,897
Income (loss) from operations.............. 166 157 (33) (24)
Net income (loss).......................... 116 155 1 (38)
</TABLE>
7. COMBINED KARP ENTITIES ACQUISITION
On September 9, 1998, Mrs. Fields acquired eight Great American stores and
related net assets from a Great American franchisee (collectively, the "Combined
Karp Entities") for an aggregate purchase price of $1,750,000. Accordingly, in
the accompanying pro forma condensed combined statement of operations for the 39
weeks ended October 3, 1998, 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 October 3, 1998 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>
Fair value of net assets acquired.................... $1,118,000
Goodwill acquired.................................... 780,000
----------
Total purchase price............................. $1,898,000
==========
</TABLE>
P-8
<PAGE>
THE COMPANY
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<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 expenses.................... 1,259 251 1,510
Income (loss) from operations................... (78) 57 (21)
Net income (loss)............................... (91) 56 (35)
</TABLE>
8. Pro Forma Combined EBITDA for the 53 Weeks Ended January 3, 1998
<TABLE>
<CAPTION>
MRS FIELDS THE COMPANY
PRE ACQUISITION POST-
PRO FORMA GREAT CHOCOLATE KARP PRO FORMA PRO FORMA
COMBINED AMERICAN DEBLAN CHIP ENTITIES ADJUSTMENTS COMBINED
--------------- -------- ------ --------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations......... $ 9,045 $4,350 $534 $178 $(177) $(1,208) $12,722
Add:
Depreciation and amortization......... 11,736 2,725 255 51 121 3,380 18,268
------- ------ ---- ---- ----- ------- -------
EBITDA............................... $20,781 $7,075 $789 $229 $ (56) $ 2,172 $30,990
======= ====== ==== ==== ===== ======= =======
</TABLE>
9. PRO FORMA COMBINED EBITDA FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>
THE COMPANY
GREAT CHOCOLATE KARP PRO FORMA PRO FORMA
MRS. FIELDS AMERICAN DEBLAN CHIP ENTITIES ADJUSTMENTS COMBINED
--------------- -------- ------ ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations......... $ (314) $1,592 $490 $(24) $(21) $(1,260) $ 463
Add:
Depreciation and amortization......... 9,707 1,510 182 22 89 2,664 14,174
------ ------ ---- ---- ---- ------- -------
EBITDA............................... $9,393 $3,102 $672 $ (2) $ 68 $ 1,404 $14,637
====== ====== ==== ==== ==== ======= =======
</TABLE>
10. RATIO OF EARNINGS TO FIXED CHARGES
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges consist
of interest expense on all indebtedness (whether paid or accrued and net of debt
premium amortization), including the amortization of debt issuance costs and
original issue discount, noncash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with capital lease obligations, letter of credit commissions, fees or
discounts and the product of all dividends and accretion on mandatorily
redeemable cumulative preferred stock multiplied by a fraction, the numerator of
which is one and the denominator of which is one minus the current combined
federal, state and local statutory tax rate.
P-9
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................................................. F-3
Consolidated Balance Sheets as of December 28, 1996, January 3, 1998 and October 3, 1998 (unaudited)................. F-4
Consolidated Statements of Operations for the period from inception (September 18, 1996) to December 28, 1996, for
the year ended January 3, 1998 and for the 39 weeks ended September 27, 1997 (unaudited) and October 3, 1998
(unaudited)......................................................................................................... F-6
Consolidated Statements of Stockholder's Equity for the period from inception (September 18, 1996) to December 28,
1996, for the year ended January 3, 1998 and for the 39 weeks ended October 3, 1998 (unaudited).................... F-7
Consolidated Statements of Cash Flows for the period from inception (September 18, 1996) to December 28, 1996, for
the year ended January 3, 1998 and for the 39 weeks ended September 27, 1997 (unaudited) and October 3, 1998
(unaudited)......................................................................................................... F-8
Notes to Consolidated Financial Statements........................................................................... F-12
MRS. FIELDS INC. AND SUBSIDIARIES
Report of Independent Public Accountants (Arthur Andersen LLP)....................................................... F-44
Independent Auditors' Report (Deloitte & Touche LLP)................................................................. F-45
Consolidated Balance Sheet as of September 17, 1996.................................................................. F-46
Consolidated Statements of Operations for the year ended December 30, 1995 and for the period ended September 17,
1996................................................................................................................ F-48
Consolidated Statements of Stockholders' Deficit for the year ended December 30, 1995 and for the period ended
September 17, 1996.................................................................................................. F-49
Consolidated Statements of Cash Flows for the year ended December 30, 1995 and for the period ended September 17,
1996................................................................................................................ F-50
Notes to Consolidated Financial Statements........................................................................... F-52
THE ORIGINAL COOKIE COMPANY, INCORPORATED AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC. (COMBINED)
Report of Independent Public Accountants............................................................................. F-61
Combined Balance Sheet as of September 17, 1996...................................................................... F-62
Combined Statements of Operations for the year ended December 30, 1995 and for the period ended September 17, 1996... F-64
Combined Statements of Stockholders' Equity for the year ended December 30, 1995 and for the period ended
September 17, 1996.................................................................................................. F-65
Combined Statements of Cash Flows for the year ended December 30, 1995 and for the period ended September 17, 1996... F-66
Notes to Combined Financial Statements............................................................................... F-67
COOKIES USA, INC. AND SUBSIDIARY
Report of Independent Accountants.................................................................................... F-72
Consolidated Balance Sheets as of June 29, 1997 and June 28, 1998.................................................... F-73
Consolidated Statements of Operations for the fifty-two week periods ended June 30, 1996, June 29, 1997 and June 28,
1998................................................................................................................ F-75
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-76
Consolidated Statements of Cash Flows for the fifty-two week periods ended June 30, 1996, June 29, 1997 and June 28,
1998................................................................................................................ F-77
Notes to Consolidated Financial Statements........................................................................... F-79
DEBLAN CORPORATION
Independent Auditors' Report......................................................................................... F-93
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unaudited)........................................ F-94
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-96
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-97
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-98
Notes to Financial Statements........................................................................................ F-100
</TABLE>
F-1
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
Report of Independent Public Accountants............................................................................. F-108
Balance Sheets as of September 30, 1996 and 1997 and June 30, 1998 (unaudited)....................................... F-109
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-111
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-112
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-113
Notes to Financial Statements........................................................................................ F-115
THE COMBINED KARP ENTITIES
Report of Independent Public Accountants............................................................................. F-120
Combined Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unaudited)............................... F-121
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-123
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-124
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-125
Notes to Combined Financial Statements............................................................................... F-127
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields' Original Cookies, Inc.:
We have audited the accompanying consolidated balance sheets of Mrs.
Fields' Original Cookies, Inc. (a Delaware corporation) and subsidiaries as of
December 28, 1996 and January 3, 1998, and the related consolidated statements
of operations, stockholder's equity and cash flows for the period from inception
(September 18, 1996) to December 28, 1996 and for the year ended January 3,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Mrs. Fields' Original Cookies, Inc. and subsidiaries as of December 28, 1996 and
January 3, 1998, 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 the year ended January 3, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
June 10, 1998
F-3
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
------
<TABLE>
<CAPTION>
DECEMBER 28, January 3, October 3,
1996 1998 1998
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 6,709 $ 16,287 $ 5,146
Accounts receivable, net of allowance for doubtful accounts
of $55, $32 and $40, respectively.................................... 1,200 1,535 1,896
Amounts due from franchisees and licensees, net of
allowance for doubtful accounts of $320, $582 and $979,
respectively......................................................... 1,524 2,176 5,616
Inventories............................................................ 3,043 3,100 4,790
Prepaid rent and other................................................. 1,324 2,960 4,312
Deferred income tax assets............................................. 2,092 2,765 2,765
-------- -------- --------
Total current assets................................................ 15,892 28,823 24,525
-------- -------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements................................................. 16,704 21,099 32,856
Equipment and fixtures................................................. 10,427 14,100 18,143
Land................................................................... 128 128 368
-------- -------- --------
27,259 35,327 51,367
Less accumulated depreciation and amortization......................... (1,054) (6,125) (16,364)
-------- -------- --------
Net property and equipment.......................................... 26,205 29,202 35,003
-------- -------- --------
DEFERRED INCOME TAX ASSETS............................................... 917 734 734
-------- -------- --------
GOODWILL, net of accumulated amortization of $966, $4,980
and $9,233, respectively............................................... 50,005 68,501 134,531
-------- -------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of
accumulated amortization of $324, $1,409 and $2,027,
respectively........................................................... 16,327 15,193 14,625
-------- -------- --------
DEFERRED LOAN COSTS, net of accumulated amortization of
$0, $70 and $720, respectively......................................... -- 5,906 10,263
-------- -------- --------
OTHER ASSETS............................................................. 709 1,325 2,976
-------- -------- --------
$110,055 $149,684 $222,657
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<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>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 2,450 $ 472 $ 384
Current portion of capital lease obligations........................ -- 142 174
Accounts payable.................................................... 6,201 3,805 8,669
Current portion of accrued liabilities.............................. 3,202 2,826 6,365
Current portion of store closure reserve............................ 2,450 3,664 2,475
Accrued salaries, wages and benefits................................ 1,811 1,891 3,045
Accrued interest payable............................................ 1,668 1,082 4,859
Sales taxes payable................................................. 676 937 512
Current portion of deferred credits................................. 323 871 318
-------- -------- --------
Total current liabilities........................................ 18,781 15,690 26,801
LONG-TERM DEBT, net of current portion and discount................... 65,113 100,284 139,465
STORE CLOSURE RESERVE, net of current portion......................... 2,305 1,802 4,648
CAPITAL LEASE OBLIGATIONS, net of current portion..................... -- 183 133
ACCRUED LIABILITIES, net of current portion........................... 2,207 -- --
DEFERRED CREDITS, net of current portion.............................. 1,091 -- --
-------- -------- --------
Total liabilities................................................ 89,497 117,959 171,047
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 7, 8 and 10)
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK of PTI (a majority owned subsidiary),
aggregate liquidation preference of $0, $1,437 and $1,481,
respectively........................................................ -- 902 1,171
-------- -------- --------
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK of MFB (a wholly owned subsidiary),
aggregate liquidation preference of $3,597 in 1996.................. 3,597 -- --
-------- -------- --------
MINORITY INTEREST..................................................... -- 58 308
-------- -------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized and
400 shares outstanding............................................ -- -- --
Additional paid-in capital.......................................... 15,000 30,843 59,899
Retained earnings (accumulated deficit)............................. 1,961 (78) (9,768)
-------- -------- --------
Total stockholder's equity....................................... 16,961 30,765 50,131
-------- -------- --------
$110,055 $149,684 $222,657
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-5
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION 39 39
(SEPTEMBER 18, WEEKS WEEKS
1996) TO YEAR ENDED ENDED ENDED
DECEMBER 28, JANUARY 3, SEPTEMBER 27, OCTOBER 3,
1996 1998 1997 1998
-------------- ----------- ------------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Net store and batter sales............................... $39,890 $123,987 $83,759 $89,938
Franchising, net......................................... 621 3,574 2,201 3,884
Licensing, net........................................... 764 2,028 1,215 1,081
Other, net ............................................. 107 918 351 1,056
------- -------- ------- -------
Total revenues........................................ 41,382 130,507 87,526 95,959
------- -------- ------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs........................ 19,492 66,832 48,200 52,357
Food cost of sales....................................... 9,862 28,127 19,549 21,588
General and administrative............................... 4,035 16,730 10,803 12,621
Depreciation and amortization............................ 2,344 10,403 6,596 9,707
------- -------- ------- -------
Total operating costs and expenses.................... 35,733 122,092 85,148 96,273
------- -------- ------- -------
Income (loss) from operations...................... 5,649 8,415 2,378 (314)
------- -------- ------- -------
OTHER INCOME (EXPENSE), net:
Interest expense......................................... (1,867) (7,830) (5,070) (8,981)
Interest income.......................................... 74 246 153 530
Other expense............................................ -- (368) (228) (256)
------- -------- ------- -------
Total other expense, net.............................. (1,793) (7,952) (5,145) (8,707)
------- -------- ------- -------
Income (loss) before provision for income
taxes, preferred stock accretion and
dividends of subsidiaries and minority
interest......................................... 3,856 463 (2,767) (9,021)
PROVISION FOR INCOME TAXES................................. (1,798) (655) (179) (68)
------- -------- ------- -------
Income (loss) before preferred stock
accretion and dividends of subsidiaries
and minority interest............................ 2,058 (192) (2,946) (9,089)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES................................. (97) (644) (276) (333)
MINORITY INTEREST.......................................... -- (138) (2) (268)
------- -------- ------- -------
Net income (loss).................................. $ 1,961 $ (974) $(3,224) $(9,690)
======= ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED
--------------------
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
-------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, September 18, 1996 ............................. -- $ -- $ -- $ -- $ --
Issuance of common stock for cash ..................... 400 -- 15,000 -- 15,000
Net income ............................................ -- -- -- 1,961 1,961
-------- ---------- ------- ------- -------
BALANCE, December 28, 1996 .............................. 400 -- 15,000 1,961 16,961
Parent contribution of investment in PTI .............. -- -- 4,200 -- 4,200
Parent contribution of note receivable due from PTI's
minority stockholder and founder .................... -- -- 500 -- 500
Parent contribution of investment in MFB .............. -- -- 6,500 -- 6,500
Conversion to equity of note payable to parent.......... -- -- 4,643 -- 4,643
Dividend paid to parent ............................... -- -- -- (1,065) (1,065)
Net loss .............................................. -- -- -- (974) (974)
-------- ---------- ------- ------- -------
BALANCE, January 3, 1998 ................................ 400 -- 30,843 (78) 30,765
Parent equity infusion (unaudited)...................... -- -- 29,056 -- 29,056
Net loss (unaudited) .................................. -- -- -- (9,690) (9,690)
-------- ---------- ------- ------- -------
BALANCE, October 3, 1998 (unaudited) .................... 400 $ -- $59,899 $(9,768) $50,131
======== ========== ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
F-7
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION 39 39
(SEPTEMBER 18, WEEKS WEEKS
1996) TO YEAR ENDED ENDED ENDED
DECEMBER 28, JANUARY 3, SEPTEMBER 27, OCTOBER 3,
1996 1998 1997 1998
------------- ---------- ------------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 1,961 $ (974) $(3,224) $ (9,690)
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 6,596 9,707
Amortization of discount on notes........................................... -- -- -- 8
Amortization of deferred loan costs......................................... -- -- -- 650
Loss on sale of assets...................................................... -- 368 228 256
Deferred income taxes....................................................... 1,511 210 -- --
In-kind interest expense on note payable to stockholder..................... 97 338 276 --
Preferred stock accretion and dividends of subsidiaries..................... 97 644 276 333
Minority interest........................................................... -- 234 2 268
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable....................................................... (294) (353) -- (361)
Amounts due from franchisees and licensees................................ (339) (514) 371 (1,624)
Inventories............................................................... (159) 136 (23) (127)
Prepaid rent and other.................................................... (31) (895) 512 1,306
Other assets.............................................................. 39 427 -- (207)
Accounts payable and accrued liabilities.................................. 239 (6,651) (773) 356
Store closure reserve..................................................... (305) (1,666) (1,927) (1,892)
Accrued salaries, wages and benefits...................................... 212 80 (841) (110)
Accrued interest payable.................................................. 1,668 (586) (67) 2,886
Sales taxes payable....................................................... 542 261 (297) (530)
Deferred credits.......................................................... 27 (543) (318) (553)
-------- -------- ------- --------
Net cash provided by operating activities.............................. 7,609 919 791 676
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions and related expenses........................... (19,508) (10,949) -- (28,699)
Purchase of property and equipment, net of effects from acquisitions.......... (1,638) (4,678) (3,216) (5,616)
Proceeds from the sale of assets.............................................. 15 122 -- --
-------- -------- ------- --------
Net cash used in investing activities.................................. (21,131) (15,505) (3,216) (34,315)
-------- -------- ------- --------
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) (98) (40,838)
Payment of debt financing costs............................................... -- (5,976) -- (5,007)
Cash advance from MFH......................................................... -- 1,500 -- --
Repayment of cash advance to MFH.............................................. -- (1,500) -- --
Payment of cash dividend to MFH............................................... -- (1,065) -- --
Equity infusion from MFH...................................................... -- -- -- 29,056
Principal payments on capital lease obligations............................... -- (36) -- (49)
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 PTI........................................... -- -- -- (64)
Proceeds from the issuance of note payable to related party................... 3,500 -- -- --
-------- -------- ------- --------
Net cash provided by (used in) financing activities.................... 20,231 24,164 (98) 22,498
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 6,709 9,578 (2,523) (11,141)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............................ -- 6,709 6,709 16,287
-------- -------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.................................. $ 6,709 $ 16,287 $ 4,186 $ 5,146
======== ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<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, $3,890 (unaudited)
and $6,291 (unaudited) for the period ended December 28, 1996, the year ended
January 3, 1998 and the 39 weeks ended September 27, 1997 and October 3, 1998,
respectively.
Cash paid for income taxes was approximately $0, $217, $80 (unaudited) and
$42 (unaudited) for the period ended December 28, 1996, the year ended January
3, 1998 and the 39 weeks ended September 27, 1997 and October 3, 1998,
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, net liabilities were assumed
as follows:
Fair value of assets acquired ............................... $ 93,494
Net cash paid ............................................... (19,508)
Notes payable issued issued.................................. (65,735)
--------
Liabilities assumed ...................................... $ 8,251
========
In connection with the purchase accounting, the Company recorded certain
other accruals totaling $11,300 and provided reserves totaling $10,900 for
impaired property and equipment at Company-owned stores the Company intends to
exit through closing or franchising. The accruals consisted of $5,060 for
obligations incident to store closures, $2,450 for contingent legal and lease
obligations that were firmed up before year end, $3,135 for transaction and
finders' fees and $655 for severance and related costs. In connection with these
accruals and impairment reserves, the Company recorded an additional $17,680 of
goodwill and established deferred income tax assets (net of valuation
allowances) totaling $4,520.
In October 1996, the Company received property in payment of $128 in
accounts receivable due from a customer.
On March 18, 1997, a certain convertible subordinated note issued in
connection with the previously described business combination was not repaid as
scheduled. The noteholder exercised its option to receive an additional note of
$1,000 due to the delayed payment. The Company recorded the note and additional
goodwill as a subsequent component of the business combination accounting.
During the period ended December 28, 1996 and the year ended January 3,
1998, The Mrs. Fields' Brand, Inc. ("MFB") increased its mandatorily
redeemable cumulative preferred stock liquidation preference by approximately
$97 and $338, respectively, in lieu of paying cash dividends. On November 26,
1997, Mrs. Fields' Holding Company, Inc. ("MFH") converted to common equity of
the Company $4,643 aggregate principal amount of convertible subordinated notes
and contributed to the Company all of the common equity of MFB after converting
its preferred stock interests totaling $3,935 to common equity (see Note 6).
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
("MFPC") as follows (see Note 1):
Fair value of assets acquired ................................ $15,780
Net cash paid ................................................ (5,750)
Notes payable issued ......................................... (8,000)
-------
Liabilities assumed ....................................... $ 2,030
=======
In connection with the purchase accounting for this acquisition, MFPC
accrued $1,000 for estimated obligations incident to certain store closures. The
Company also recorded a reserve totaling approximately $2,500 for impaired
property and equipment at stores the Company intends to close. In connection
with these accruals and reserves, the Company recorded $2,800 of goodwill and
established deferred income tax assets (net of valuation allowances) totaling
$700.
On September 2, 1997, 56 percent of the shares of common stock of Pretzel
Time, Inc. ("PTI") were acquired by MFH as follows (see Note 1):
Fair value of assets acquired .......................... $ 8,311
Net cash paid .......................................... (4,200)
-------
Liabilities assumed ................................. $ 4,111
=======
In connection with the purchase accounting for this acquisition, MFH
accrued $500 for estimated obligations incident to certain store closures. In
connection with these accruals, MFH recorded $400 of goodwill and established
deferred income tax assets (net of valuation allowances) totaling $100.
On November 26, 1997, MFH contributed all of the assets and liabilities of
MFPC, MFH's 56 percent of the shares of common stock of PTI and the $500 note
receivable from PTI's founder and minority stockholder to the Company.
Additionally, on November 26, 1997, MFH contributed all of the common stock of
MFB to the Company.
During the period from the acquisition of the majority ownership of PTI
(September 2, 1997) to January 3, 1998 and for the 39 weeks ended October 3,
1998, PTI increased its mandatorily redeemable cumulative preferred stock
liquidation preference by approximately $68 and $108 (unaudited), respectively,
in lieu of paying cash dividends. In addition, for the same periods, PTI's
mandatorily redeemable cumulative preferred stock was increased by approximately
$238 and $225 (unaudited), respectively, for the accretion required over time to
amortize the original issue discount.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-10
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
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 an
aggregate purchase price of approximately $18,400 (unaudited). During August
and September 1998, the Company also entered into agreements with three
franchisees of Cookies USA (the "Great American Franchisees") pursuant to which
the Company purchased a total of 37 Great American Cookies franchises for an
aggregate purchase price of $16,328 (unaudited). The aggregate purchase price
for all of these acquisitions of $34,728 (unaudited) was allocated, on a
preliminary basis, as follows (see Note 1):
Fair value of assets acquired (unaudited) .................... $ 79,865
Net cash paid (unaudited) .................................... (27,771)
--------
Liabilities assumed (unaudited) ........................... $ 52,094
========
The Company has formulated a plan to exit certain acquired stores that do
not meet management's established financial and geographical criteria. In
connection with the purchase accounting for these acquisitions, the Company
accrued $3,548 (unaudited) for estimated obligations incident to certain store
closures. The Company also recorded a reserve totaling approximately $2,150
(unaudited) for impaired property and equipment at stores the Company intends to
close. In connection with these accruals and reserves, the Company recorded
$5,698 (unaudited) of goodwill. Valuation allowances were recorded for all
deferred tax assets established during purchase accounting.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-11
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Mrs. Fields' Original Cookies, Inc. (the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc.
("MFH" or the "Parent"). MFH is a majority owned subsidiary of Capricorn
Investors II, L.P. ("Capricorn'). The Company has five wholly owned operating
subsidiaries; namely, Great American Cookie Company, Inc. ("GACC"), The Mrs.
Fields' Brand, Inc. ("MFB"), Mrs. Fields' Cookies Australia, Mrs. Fields'
Cookies (Canada) Ltd. and H & M Canada; and four partially owned subsidiaries,
the largest of which is Pretzel Time, Inc. ("PTI") of which the Company owned
60 percent of the common stock as of January 3, 1998. In June 1998, the Company
purchased an additional ten percent of the common stock of PTI, increasing the
Company's ownership interest to 70 percent. GACC was acquired by the Company in
August 1998.
The Company primarily operates retail stores which sell freshly baked
cookies, brownies, pretzels and other food products through four specialty
retail chains. As of October 3, 1998, the Company owned and operated 150 "Mrs.
Fields Cookies" stores, 128 "Original Cookie Company" stores, 86 "Hot Sam
Pretzels' stores, 93 "Pretzel Time" stores, 109 "Great American Cookies"
stores in the United States and two "Pretzel Time" stores in Canada.
Additionally, the Company has franchised or licensed 683 stores in the United
States and 82 stores in several other countries. As of October 3, 1998, the
Company owned and operated 433 core stores and 135 stores which are in the
process of being sold or franchised. All of the stores in the process of being
closed or franchised are expected to be closed or franchised by the end of
fiscal year 2000.
The Company also 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
MFI AND Affiliates AND OCC AND Affiliates
The Company began operations on September 18, 1996, following the
completion of two simultaneous but separate asset purchase transactions wherein
the Company (i) acquired certain assets and assumed certain liabilities of Mrs.
Fields Inc., Mrs. Fields Development Corporation and Mrs. Fields Cookies in
accordance with two Asset Purchase Agreements dated August 7, 1996, among these
parties and Capricorn, and (ii) acquired certain assets and assumed certain
liabilities of The Original Cookie Company, Incorporated and Hot Sam Company,
Inc. in accordance with an Asset Purchase Agreement dated August 7, 1996, as
amended by the First Amendment dated as of September 17, 1996, among these
parties and Capricorn.
F-12
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
The combined purchase price for the acquired net assets was approximately
$85,243,000. The Company paid net cash of $19,508,000 and issued approximately
$65,735,000 in senior and subordinated notes to the selling shareholders. The
acquisitions were accounted for as purchases. The total purchase price was
allocated to the net assets acquired, based on their estimated fair values. The
organization of the Company and the acquisitions resulted in the recording of
intangible assets of approximately $49,942,000 principally made up of goodwill,
trademarks and organization costs. An additional $17,680,000 of goodwill and
$4,520,000 of deferred income tax assets (net of 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 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.
In connection with these acquisitions, the Company formulated a plan to
exit certain stores that did not meet certain financial and geographical
criteria. The plan entailed closing all stores that were not profitable and
franchising stores that were profitable but contributed less than $50,000 in
store cash contribution for cookie stores and less than $35,000 in store cash
contribution for pretzel stores. Management identified 138 (13 of these stores
were closed prior to the acquisitions but had continuing lease obligations)
stores to be closed and 64 stores to be franchised. Of the stores identified to
be closed, all but five of the stores are to be closed by the end of 1998 with
the remaining five stores scheduled for closure during 1999. The timing to
implement the plan was developed based on discussions and relationships with
major shopping mall developers. During the period from inception to December 28,
1996, the year ended January 3, 1998 and the 39 weeks ended October 3, 1998, the
Company closed 17, 70 and 21 stores, respectively, of the 138 stores originally
identified to be closed as part of the Company's exit plan. During the same
periods, the Company franchised three, nine and 13 stores, respectively, of the
64 stores originally identified to be franchised.
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 period from inception to December 28, 1996, the year ended January 3,
1998 and the 39 weeks ended October 3, 1998, the initial impairment reserve was
depleted by approximately $854,000, $3,507,000 and $1,114,000, respectively,
related to the 117 stores to be closed and by approximately $215,000, $492,000
and $676,000, respectively, related to the 54 stores to be franchised.
The $11,300,000 of accruals established at the date of the acquisitions
consisted of $5,060,000 for obligations incident to store closures, $2,450,000
for contingent legal and lease obligations that were firmed up before December
28, 1996, $3,135,000 for transaction and finders' fees and $655,000 for
severance and related costs.
At the date of the acquisitions, in accordance with Emerging Issues Task
Force Issue 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.
F-13
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
Management finalized the plan in early September 1997, within one year of
the date of the acquisitions. At that time, the Company recorded an additional
$1,357,000 to the store closure reserve to reflect the finalized plan estimates
of lease termination costs and adjusted goodwill by a comparable amount under
the provisions of purchase accounting. The increase in the reserve related
solely to the 138 stores originally identified to be closed. See Note 5 for
information regarding the activity within the store closure reserve since the
date of the acquisitions.
During the period from inception to December 28, 1996, the year ended
January 3, 1998 and the 39 weeks ended September 27, 1997 and October 3, 1998,
the net store sales and store contribution for stores in the process of being
closed totaled $5,777,000 and $121,000, $10,599,000 and $2,038,000, $6,380,000
and $(2,082,000) and $3,038,000 and $(1,311,000), respectively.
As of January 3, 1998 and October 3, 1998, approximately $1,643,000 and
$2,053,000, respectively, of the $2,450,000 accrual for legal and lease
obligations has been utilized. The remaining amount as of October 3, 1998 of
approximately $397,000 is expected to be utilized by the end of 1999. As of
January 3, 1998, all of the $3,135,000 accrual established for transaction and
finders' fees and the $655,000 accrual for severance and related costs
associated with the acquisitions were fully utilized for the purposes intended.
H & M CONCEPTS LTD. CO.
On July 25, 1997, Mrs. Fields' Pretzel Concepts, Inc. ("MFPC"), a wholly
owned subsidiary of MFH, acquired substantially all of the assets and assumed
certain liabilities of H & M Concepts Ltd. Co. and subsidiaries ("H & M"). H &
M owned and operated stores which engage in retail sales of pretzels, toppings
and beverages under a franchise agreement with Pretzel Time, Inc. ("PTI"). The
aggregate consideration of $13,750,000 consisted of (i) $5,750,000 of cash,
financed through an advance from MFH of $1,500,000 and a $4,250,000 bank loan to
MFPC, (ii) a $4,000,000 principal amount bridge note of MFPC and (iii) a
$4,000,000 principal amount subordinated note of MFH retained by the sellers
(all such debt collectively referred to as the "H & M Debt"). The acquisition
was accounted for using the purchase method of accounting (based on the
estimated 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, MFH contributed all of the assets and
liabilities of MFPC to the Company and, in consideration thereof, the Company
assumed the H & M Debt, including all accrued but unpaid interest. MFPC and the
Company merged on the same date with the Company being the surviving entity. The
contribution was accounted for in a manner similar to that of pooling-of-
interests accounting. There was no step-up in the historical basis of MFPC's
assets or liabilities. Beginning with July 25, 1997, the Company is including
MFPC's results of operations in the Company's consolidated results of
operations.
F-14
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
PRETZEL TIME, INC.
On September 2, 1997, MFH acquired 56 percent of the shares of common stock
of PTI for an aggregate cash purchase price of $4,200,000, $750,000 of which was
paid to PTI for working capital purposes, and the balance of which was paid to
the selling shareholders. In connection with the acquisition, MFH extended a
$500,000 loan to the founder of PTI who continued to own 44 percent of the
shares of common stock of PTI. The note bears interest at an annual rate of ten
percent (see Note 8). PTI is a franchisor of hand rolled soft pretzel outlets
located in North America. The outlets are primarily located in shopping malls.
The acquisition was accounted for using the purchase method of accounting (based
on the estimated fair values of the net assets acquired) and resulted in
recording approximately $5,882,000 of goodwill that is being amortized using the
straight-line method over 15 years.
Effective November 26, 1997, MFH contributed its 56 percent of the shares
of common stock of PTI to the Company. MFH also contributed to the Company the
$500,000 note due from PTI's founder and minority stockholder. The contribution
was accounted for in a manner similar to that of pooling-of-interests
accounting. There was no step-up in the book basis of PTI's assets or
liabilities. The Company has included 56 percent of PTI's results of operations
with the Company's consolidated results of operations from September 2, 1997 to
January 2, 1998.
On January 2, 1998, the Company purchased an additional four percent of the
shares of common stock of PTI from the founder for $300,000 in cash. The
purchase was accounted for using the purchase method of accounting (based on the
estimated fair values of the net assets acquired) and resulted in recording
approximately $311,000 of goodwill. Beginning with January 2, 1998, the Company
included 60 percent of PTI's results of operations in the Company's consolidated
results of operations. In June 1998, the Company acquired an additional ten
percent of the shares of common stock of PTI from the founder for $875,000 in
cash.
THE MRS. FIELDS' BRAND, INC.
Prior to November 26, 1997, MFH owned 50.1 percent of the shares of the
common stock of MFB. MFB holds legal title to certain trademarks for the "Mrs.
Fields" name and logo and licenses the use of these trademarks to third parties
for the establishment and operation of Mrs. Fields' cookie and bakery operations
and other merchandising activities. In connection with these licensing
activities, MFB authorizes third-party licensees to use certain business
formats, systems, methods, procedures, designs, layouts, specifications, trade
names and trademarks in the United States and other countries.
On November 26, 1997, MFH acquired the remaining 49.9 percent of the shares
of the common stock of MFB from Harvard Private Capital Holdings, Inc. for
approximately $2,565,000. The consideration consisted of $1,065,000 in cash and
$1,500,000 in rights to common equity of MFH. In aggregate, the rights to common
equity were valued at $1,500,000 after being appropriately discounted for lack
of controlling interest and marketability. The acquisition was accounted for
using the purchase method of accounting (based on the estimated fair values of
the net assets acquired) and resulted in recording approximately $2,565,000 of
intangible assets (primarily goodwill) that are being amortized using the
straight-line method over 15 years.
F-15
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
Effective November 26, 1997, MFH contributed all of the common stock of MFB
to the Company. As a result of such capital contribution, MFB became a wholly
owned subsidiary of the Company. The contribution was accounted for in a manner
similar to that of pooling-of-interests accounting. There was no step-up in the
book basis of MFB's assets or liabilities. Although the Company owned 50.1
percent of MFB until November 25, 1997, the Company has included 100 percent of
MFB's results of operations with the Company's consolidated results of
operations for all periods presented as a result of MFB incurring net losses for
these periods.
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.
SUBSEQUENT ACQUISITIONS (UNAUDITED)
On August 24, 1998, the Company acquired all of the outstanding capital
stock and subordinated indebtedness of Cookies USA, Inc. ("Cookies USA"), the
sole stockholder of Great American Cookie Company, Inc. ("GACC"), for an
aggregate purchase price of $18,400,000. GACC is an operator and franchisor of
mall-based specialty retail cookie outlets and manufacturer of cookie batter
which is distributed to GACC-operated retail stores and sold to franchised
retail stores. Concurrently with the acquisition of Cookies USA, the Company
entered into agreements with two GACC franchisees pursuant to which the Company
purchased a total of 29 GACC franchises for an aggregate 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
franchisees operated. On September 9, 1998, the Company acquired eight
additional GACC franchised retail stores from a GACC franchisee, pursuant to an
asset purchase agreement, for an aggregate 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 GACC. GACC 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 $29,000,000 of an MFH offering to the Company (the
"MFH Equity Infusion"); and (iii) existing cash of the Company.
F-16
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
PRO FORMA ACQUISITION INFORMATION (UNAUDITED)
The following unaudited pro forma information for the period from inception
(September 18, 1996) to December 28, 1996, the year ended January 3, 1998 and
the 39 weeks ended September 27, 1997 and October 3, 1998, presents the results
of operations of the Company assuming the H & M, PTI and MFB 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 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, 39 WEEKS 39 WEEKS
1996) TO YEAR ENDED ENDED ENDED
DECEMBER 28, JANUARY 3, SEPTEMBER 27, OCTOBER 3,
UNAUDITED 1996 1998 1997 1998
- --------- ----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Total revenues ......................... $48,090,000 $191,264,000 $134,018,000 $126,937,000
Income from operations ................. 6,718,000 12,722,000 3,285,000 463,000
Net income (loss) ...................... 1,029,000 (3,120,000) (8,448,000) (12,236,000)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PERIODS
The Company operates using a 52/53-week year ending near December 31.
UNAUDITED INFORMATION
The accompanying consolidated financial statements as of October 3, 1998
and for the 39 weeks ended September 27, 1997 and October 3, 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 October 3, 1998 for the
interim periods presented herein.
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.
F-17
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
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 October
3, 1998, the Company had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation.
INVENTORIES
Inventories consist of food, beverages and supplies and are stated at the
lower of cost (first-in, first-out method) or market value.
PRE-OPENING AND ORGANIZATION 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.
The Company expensed all previously capitalized organization costs (which
were not material to the fair presentation of the accompanying consolidated
financial statements taken as a whole) during the 39 weeks ended October 3,
1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Equipment and fixtures are depreciated over three to seven years
using the straight-line method. Leasehold improvements are amortized over the
life of the lease term, or the estimated life of the improvements, whichever is
shorter, using the straight-line method.
Expenditures that materially increase values or capacities or extend useful
lives of property and equipment are capitalized. Routine maintenance, repairs
and renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are recorded in current operations.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and trademarks and are
amortized using the straight-line method over 15 years. Other intangible assets
such as covenants not to compete are not significant and are being amortized
using the straight-line method over three to five years.
F-18
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
DEFERRED LOAN COSTS
Deferred loan costs totaling $10,983,000 resulted from the sale of
$100,000,000 aggregate 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
aggregate principal amount of 10 1/8 percent Series C Senior Notes (the "Series
C Senior Notes") on August 24, 1998, and 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 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 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 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. The Company has reserved for those long-lived assets that are
considered to be impaired.
STORE CLOSURE RESERVE
The Company accrues an estimate for the costs associated with closing a
nonperforming store in the period the determination is made to close the store.
The majority of the costs accrued relate to estimated lease termination costs.
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.
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.
F-19
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
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 aggregate fair market value of its Series
A/B Senior Notes and Series C Senior Notes (see Note 3) was approximately
$101,250,000 and $122,500,000 as of January 3, 1998 and October 3, 1998,
respectively. These estimates are based on quoted market prices. The book values
of the Company's other financial instruments, including cash, accounts
receivable, accounts payable, accrued liabilities and other long-term debt
obligations, approximate fair values at the respective balance sheet dates.
RECENT ACCOUNTING PRONOUNCEMENT
During the 39 weeks ended October 3, 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.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires that public business enterprises report certain
information about operating segments in complete sets of financial statements.
The statement specifies disclosure requirements about the products and services
of a company, the geographic areas in which it operates, and their major
customers. Although the Company has not yet completed its assessment of the
impacts of adopting SFAS No. 131, it will adopt the statement for the year
ending January 2, 1999.
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 in the prior period consolidated
financial statements to conform with the current period presentation.
F-20
<PAGE>
MRS. FIELDS ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
----------------- --------------- ----------------
(UNAUDITED)
<S> <C> <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,
$0 and $9,000, respectively...................................... -- -- (591,000)
Notes payable to individuals or corporations with interest terms
ranging from non-interest bearing to 15 percent, due at various
dates from 1998 through 2001, requiring monthly payments......... -- 756,000 440,000
Senior notes, interest at six-month LIBOR rate (5 3/4 percent at
December 28, 1996) plus an interest margin (three percent at
December 28, 1996) payable semi-annually, secured by
essentially all assets of the Company, repaid in November
1997............................................................. 41,966,000 -- --
Senior notes, interest at ten percent payable semi-annually,
secured by essentially all assets of MFB, principal due
quarterly in varying installments, repaid in November 1997....... 10,000,000 -- --
Convertible subordinated notes, interest at an escalating rate
(9 3/4 percent at December 28, 1996) payable semi-annually,
secured by essentially all assets of the Company, repaid in
November 1997.................................................... 7,357,000 -- --
Convertible subordinated note to stockholder, interest at an
escalating rate (9 3/4 percent at December 28, 1996) payable
semi-annually, secured by essentially all assets of the
Company, converted to equity in November 1997.................... 4,643,000 -- --
Senior subordinated note to MFB minority stockholder, interest
at ten percent compounded quarterly beginning December 15,
1996, secured by essentially all assets of MFB, repaid in
November 1997.................................................... 3,597,000 -- --
----------- ------------ ------------
67,563,000 100,756,000 139,849,000
Less current portion.............................................. (2,450,000) (472,000) (384,000)
----------- ------------ ------------
$65,113,000 $100,284,000 $139,465,000
=========== ============ ============
</TABLE>
F-21
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
On November 26, 1997, the Company refinanced its existing debt (the
"Refinancing") by issuing $100,000,000 aggregate principal amount of Series A
Senior Notes due December 1, 2004 pursuant to an Indenture, dated as of November
26, 1997 (the "Indenture'), between the Company and the Bank of New York. The
Series A Senior Notes were issued pursuant to a private transaction that was not
subject to the registration requirements of the Securities Act of 1933 (the
"Securities Act"). On June 12, 1998, a majority of the Series A Senior Notes
were exchanged for 10 1/8% Series B Senior Notes (the "Series B Senior Notes")
due December 1, 2004, which were registered under the Securities Act (the
"Exchange Offer"). The terms of the Series A Senior Notes and the Series B
Senior Notes (collectively, the "Series A/B Senior Notes") are identical in all
material respects except (i) that the Series B Senior Notes have been registered
under the Securities Act, (ii) for certain transfer restrictions and
registration rights relating to the Series A Senior Notes and (iii) that the
Series B Senior Notes do not contain certain provisions relating to additional
payments to the prior holders of the Series A Senior Notes under certain
circumstances relating to the timing of the Exchange Offer.
On August 24, 1998, the Company issued $40,000,000 aggregate 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 pursuant to
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 an aggregate of 35
percent of the principal amount at a redemption price equal to 110.125 percent
of the principal amount thereof, plus accrued and unpaid interest.
The Senior Notes contain certain covenants that 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.
F-22
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
Pursuant to the Refinancing, the Company repaid approximately $79,096,000
aggregate principal amount of indebtedness and accrued but unpaid interest. Such
indebtedness consisted of (i) approximately $66,402,000 principal amount of
indebtedness and accrued but unpaid interest of the Company incurred in
connection with the MFI and affiliates and OCC and affiliates business
combinations, (ii) approximately $12,374,000 principal amount of indebtedness
and accrued but unpaid interest of the H & M Debt, and (iii) $320,000 of
prepayment penalties associated with retiring the existing debt.
As part of the Refinancing, MFH converted to common equity of the Company
$4,643,000 aggregate principal amount of convertible subordinated notes and
contributed to the Company all of the common equity of MFB after converting its
preferred stock interests totaling $3,935,000 to common equity (see Notes 1 and
6). Also as part of the Refinancing, the Company paid a dividend to MFH in the
amount of approximately $1,065,000 and returned a $1,500,000 advance to MFH,
which was a portion of the cash provided by MFH in connection with the
acquisitions of H & M and PTI.
The aggregate amount of principal maturities of debt at January 3, 1998 are
as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1998.................................. $ 472,000
1999.................................. 168,000
2000.................................. 105,000
2001.................................. 11,000
2002.................................. --
Thereafter............................... 100,000,000
------------
$100,756,000
============
</TABLE>
On December 29, 1997, the Company amended its revolving credit agreement
(the "Agreement") with a commercial bank which provided for a maximum
commitment of up to $3,000,000 secured by essentially all of the assets of the
Company. The Agreement, which was extended through February 28, 1998 was
terminated. On February 28, 1998, the Company entered into a new revolving
credit agreement (the "1998 Agreement") with a commercial bank (the "Bank")
which provides for a maximum commitment of up to $15,000,000 secured by
essentially all of the assets of the Company. Borrowings under the 1998
Agreement bear interest, at the Company's option, at either the Bank's prime
rate plus one fourth of one percent or the one-month LIBOR rate plus three
percent, with interest payable monthly in arrears. As of October 3, 1998, the
Company had no outstanding borrowings under the 1998 Agreement.
F-23
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
CAPITAL LEASE OBLIGATIONS
Future minimum lease payments for equipment held under capital lease
arrangements as of January 3, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1998......................................... $ 163,000
1999......................................... 123,000
2000......................................... 46,000
2001......................................... 41,000
---------
Total future minimum lease payments.............. 373,000
Less amount representing interest................ (48,000)
---------
325,000
Less current portion............................. (142,000)
---------
$ 183,000
=========
</TABLE>
As of December 28, 1996, January 3, 1998 and October 3, 1998, total assets
held under capital lease arrangements were approximately $0, $376,000 and
$376,000 (unaudited) with accumulated amortization of approximately $0, $59,000
and $99,000 (unaudited), respectively.
4. INCOME TAXES
The components of the provision for income taxes for the period ended
December 28, 1996 and the year ended January 3, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
Current:
Federal............................................... $ 207,000 $ 70,000
State................................................. 75,000 228,000
Foreign............................................... 5,000 57,000
Deferred:
Federal............................................... 1,112,000 367,000
State................................................. 277,000 55,000
Change in valuation allowance......................... 122,000 (122,000)
---------- ---------
Total provision for income taxes................... $1,798,000 $ 655,000
========== =========
</TABLE>
F-24
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
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 the year ended January 3,
1998:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
---------------- --------------
<S> <C> <C>
Federal statutory income tax rate............................................. 34.0% 34.0%
Dividends paid by subsidiary............................................... -- 34.5
Amortization of non-deductible goodwill.................................... -- 12.3
Net operating losses utilized.............................................. -- (3.9)
State income taxes, net of federal benefit................................. 5.3 5.3
State franchise minimum taxes.............................................. -- 44.0
Foreign taxes.............................................................. -- 12.3
Change in valuation allowance.............................................. 3.2 (26.3)
Other...................................................................... 4.1 29.3
---- -----
Effective income tax rate..................................................... 46.6% 141.5%
==== =====
</TABLE>
The significant components of the Company's deferred income tax assets and
liabilities at December 28, 1996 and January 3, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
---------------- ----------------
<S> <C> <C>
Deferred income tax assets:
Property and equipment reserve........................................... $ 3,501,000 $ 2,014,000
Store closure reserve.................................................... 1,868,000 2,202,000
Transaction cost accrual................................................. 789,000 565,000
Net operating loss carryforward.......................................... 782,000 4,875,000
Legal reserve............................................................ 470,000 302,000
Lease accrual............................................................ 403,000 92,000
Other reserves........................................................... -- 81,000
Accrued expenses......................................................... 334,000 230,000
Alternative minimum tax credit carryforward.............................. 207,000 207,000
----------- -----------
Total deferred income tax assets...................................... 8,354,000 10,568,000
Valuation allowance...................................................... (4,482,000) (5,160,000)
----------- -----------
Deferred income tax assets net of valuation allowance................. 3,872,000 5,408,000
----------- -----------
Deferred income tax liabilities:
Accumulated depreciation and amortization................................ (850,000) (1,548,000)
Other.................................................................... (13,000) (361,000)
----------- -----------
Total deferred income tax liabilities................................. (863,000) (1,909,000)
----------- -----------
Net deferred income tax assets........................................ $ 3,009,000 $ 3,499,000
=========== ===========
</TABLE>
F-25
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
Management has provided valuation allowances on portions of the deferred
income tax assets arising from the Company's business combinations. The
valuation allowances established in accordance with purchase accounting are not
recorded through the provision for income taxes, but rather, as an increase to
goodwill. During the period ended December 28, 1996 and the year ended January
3, 1998, valuation allowances of $4,360,000 and $800,000, respectively, were
recorded in connection with accounting for the business combinations. As of
January 3, 1998, the Company had net operating loss carryforwards for tax
reporting purposes totaling $12,414,000. Of these net operating loss
carryforwards, $1,814,000 expire in 2011 and $10,600,000 expire in 2012.
5. STORE CLOSURE RESERVE
As of the consummation date of the MFI and affiliates and OCC and
affiliates business combinations discussed in Note 1, the Company's management
began to assess and formulate a plan to close various Company-owned stores
(referred to herein as ''stores in the process of being closed'') that did not
meet certain financial and geographical criteria. The Company initially recorded
an estimated reserve totaling approximately $5,060,000 in accordance with
purchase accounting. During the period from inception to December 28, 1996, the
Company closed 17 stores and as of December 28, 1996, the remaining reserve for
stores to be closed totaled approximately $4,755,000.
During the year ended January 3, 1998, management finalized its plan and
increased its estimate of the cost to close the previously identified stores by
approximately $1,357,000 and adjusted goodwill by a comparable amount. The
reserve was also increased by approximately $538,000 for ten core operating
stores that have been closed or targeted for closure due primarily to leases not
being renewed by the lessor. This portion of the store closure reserve was
expensed in the Company's consolidated statement of operations for the year
ended January 3, 1998. The Company has also recorded reserves of approximately
$1,500,000 for stores acquired in the H & M and PTI acquisitions that management
intends to close. These reserves were recorded as part of the purchase
accounting associated with the acquisitions of H & M and PTI (see Note 1).
During the year ended January 3, 1998, the Company closed 80 stores (ten of
which were core operating stores), and as of January 3, 1998, the remaining
reserve totaled approximately $5,466,000.
During the 39 weeks ended October 3, 1998, the Company closed 30 stores
(nine of which were core operating stores). The Company also recorded reserves
of approximately $3,548,000 for stores acquired in the Great American
Acquisitions that management intends to close. These reserves were recorded as
part of the purchase accounting associated with the Great American Acquisitions.
As of October 3, 1998, the remaining reserve totaled $7,123,000 for the expected
costs to close the remaining stores in fiscal years 1998, 1999 and 2000.
As of October 3, 1998, management has identified approximately 51 existing
stores for sale to franchisees. Management believes that the net proceeds from
the sale of stores to franchisees will exceed the total carrying value of the
store assets as of January 3, 1998 and October 3, 1998.
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 property investment or targeted closing. The Company's policy
is to expense any net property investment for underperforming stores identified
to have permanent impairment of investment. Additionally, when a store is
identified for targeted closing, the Company's policy is to provide for the
costs of closing the store, which are predominantly estimated lease termination
costs.
F-26
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
6. MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCKS OF
SUBSIDIARIES
In connection with the MFI and affiliates and OCC and affiliates business
combinations discussed in Note 1, MFB issued 100 shares of mandatorily
redeemable cumulative preferred stock (the ''MFB Preferred Stock'') which had an
initial liquidation preference of $35,000 per share and a cumulative annual
dividend rate of 10 percent compounded quarterly. During the period ended
December 28, 1996 and the year ended January 3, 1998, MFB elected to add the
dividends to the liquidation preference. As part of the Refinancing, MFH
converted the $3,500,000 face amount of the MFB Preferred Stock together with
accrued but unpaid dividends of approximately $435,000 to common equity and the
related preferred stock was cancelled.
The mandatorily redeemable cumulative preferred stock of PTI (the ''PTI
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 PTI Preferred Stock must be redeemed at $10,000 per
share, plus unpaid and accumulated dividends, on September 1, 1999. The excess
of the redemption price over the carrying value is being accreted over the
period from issuance to September 1, 1999, using the effective interest method
and is being charged to the accumulated deficit of PTI. In the event of a
liquidation or sale of PTI, 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 PTI
(September 2, 1997) to January 3, 1998 and for the 39 weeks ended October 3,
1998, PTI increased the liquidation preference of the PTI Preferred Stock by
$68,000 and $108,000, respectively, in lieu of paying cash dividends. In
addition, the PTI Preferred Stock was increased by $238,000 and $225,000,
respectively, for the accretion required over time to amortize the original
issue discount incurred at the time of issuance. As of January 3, 1998 and
October 3, 1998, accrued dividends of $195,000 and $303,000, respectively, were
unpaid.
During the period from September 2, 1997 to January 3, 1998, PTI
repurchased 17.5 shares of the PTI Preferred Stock for an aggregate of $175,000
in cash, or $10,000 per share, plus accrued dividends totaling approximately
$20,200. As of January 3, 1998 and October 3, 1998, there are 127 shares of PTI
Preferred Stock issued and outstanding with an aggregate liquidation preference
of approximately $1,437,000 and $1,481,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
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-27
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
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.
For the period ended December 28, 1996, the year ended January 3, 1998 and
the 39 weeks ended September 27, 1997 and October 3, 1998, rent expense is as
follows:
<TABLE>
<CAPTION>
Inception
(SEPTEMBER 18,
1996) TO Year Ended 39 Weeks 39 Weeks
DECEMBER 28, JANUARY 3, ENDED SEPTEMBER 27, ENDED OCTOBER 3,
1996 1998 1997 1998
--------------- ----------------- ------------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Minimum rentals ................................ $ 8,216,000 $30,654,000 $18,938,000 $23,076,000
Contingent rentals ............................. 105,000 432,000 324,000 522,000
Sub-lease rentals .............................. (2,220,000) (8,756,000) (3,189,000) (5,837,000)
----------- ----------- ----------- -----------
$ 6,101,000 $22,330,000 $16,073,000 $17,761,000
=========== =========== =========== ===========
</TABLE>
As of January 3, 1998, 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>
1998 ......................................................................... $ 30,605,000
1999 ......................................................................... 26,968,000
2000 ......................................................................... 21,948,000
2001 ......................................................................... 18,283,000
2002 ......................................................................... 15,673,000
Thereafter ................................................................... 24,374,000
------------
$137,851,000
============
</TABLE>
As of January 3, 1998, the future minimum sublease payments due to the
Company under these leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1998 .......................................................................... $ 9,959,000
1999 .......................................................................... 9,067,000
2000 .......................................................................... 7,506,000
2001 .......................................................................... 6,497,000
2002 .......................................................................... 6,190,000
Thereafter .................................................................... 10,481,000
-----------
$49,700,000
===========
</TABLE>
F-28
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
In January 1998, the Company entered into an operating lease agreement for
corporate office facilities totaling 31,000 square feet. The lease commenced on
May 1, 1998 and will expire April 30, 2008. The lease includes escalating
monthly rental payments totaling $6,900,000 over the life of the lease, or
approximately $57,500 per month on a straight-line basis. These commitments are
not included in the preceding commitment presentation.
CONTRACTUAL ARRANGEMENTS
The Company has entered into a supply agreement to buy frozen dough
products through 1998. The agreement stipulates minimum annual purchase
commitments of not less than 22,000,000 pounds of the products during fiscal
year 1998. The terms of the agreement include certain volume incentives and
penalties. The Company and the supplier may terminate the supply agreement if
the other party defaults on any of the performance covenants.
The Company has assumed an agreement with a third-party lender to provide
financing to franchisees for the purchase of existing Company stores. Under the
terms of the agreement, a maximum of $5,000,000 may be borrowed from the lender
by franchisees of which the Company has agreed to guarantee a maximum of
$2,000,000. Outstanding franchisee borrowings guaranteed by the Company under
this agreement at January 3, 1998 and October 3, 1998 were approximately
$550,000 and $328,000, 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 3, 1998 and October 3, 1998, the Company has assumed
obligations totaling approximately $203,000 and $113,000 (unaudited),
respectively, which are included in capital lease obligations.
The Company recorded deferred credits of approximately $1,204,000 as of
September 18, 1996 associated with the assumption of a long-term marketing and
supply agreement with a supplier in connection with the MFI and affiliates and
OCC and affiliates business combinations discussed in Note 1. Under terms of the
agreement, the Company is obligated to purchase a minimum amount of product from
the supplier. This agreement was amended in January 1997 and an additional
$600,000 in deferred credits were recorded. The amended agreement expires on the
later of December 31, 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, PTI entered into a long-term marketing and
supply agreement with a supplier. Under terms of the agreement, the Company is
obligated to purchase a minimum amount of product from the supplier. An
additional $437,000 in deferred credits were recorded pursuant to this
agreement. The termination date of this agreement will be the later of December
31, 2003 or when PTI has met its purchase commitment. Under these agreements,
the Company recognized approximately $64,000, $1,393,000, $721,000 (unaudited)
and $672,000 (unaudited) as a reduction primarily to food cost of sales during
the period ended December 28, 1996, the year ended January 3, 1998 and the 39
weeks ended September 27, 1997 and October 3, 1998, respectively.
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. The Company may terminate the Consulting Agreement for
cause and Debbi Fields may terminate the Consulting Agreement at any time. Under
the Consulting Agreement, Debbi Fields may not disclose any confidential
information of the Company, such as recipes and trade secrets, and may not,
without the prior written consent of the Company, compete with the Company.
F-29
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
The Company has a license agreement with FSG Holdings, Inc., a Delaware
corporation, under which Debbi Fields has a nonexclusive license to use certain
trademarks, names, service marks and logos of the Company in connection with
book and television series projects. Debbi Fields is required to pay 50 percent
of any gross revenues in excess of $200,000 that she receives from the book and
television series projects to the Company as a license fee.
In connection with the acquisition of H&M, certain franchise agreements and
an area development agreement with PTI were assigned to the Company. The
franchise agreements provide for the franchise by the Company of the PTI stores
previously franchised by H&M and the payment by the Company to PTI of an annual
franchise royalty equal to seven percent of the annual sales by such stores,
plus an advertising fee of one percent of sales. The franchise agreements also
provide for the conversion, within three years, of the Company's Hot Sam and
Pretzel Oven stores to Pretzel Time franchises on a royalty-free basis for the
first five years following the date of conversion. The area development
agreement provides for the grant by PTI to the Company of area development
rights to open additional Pretzel Time stores in a territory covering 16 states,
predominantly in the western United States, four western Canadian provinces and
in Mexico. The additional stores may be opened by the Company as the franchisee
or by third parties as franchisees. Under the area development agreement, the
Company is obligated to pay to PTI a $5,000 franchise fee per new location
within the territory. PTI is obligated under the area development agreement to
pay to the Company an annual royalty of up to two percent with respect to
Pretzel Time franchises opened by parties other than the Company within the
territory.
The Company has entered into employment agreements with five key officers
with terms of two to three years. The agreements are for an aggregate 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.
8. RELATED-PARTY TRANSACTIONS
As of December 28, 1996, January 3, 1998 and October 3, 1998, 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
$1,524,000, $2,176,000 and $5,616,000 (unaudited), respectively. Such amounts
are included in amounts due from franchisees and affiliates and are net of
allowance for doubtful accounts totaling $320,000, $582,000 and $979,000
(unaudited), respectively.
As of December 28, 1996 and January 3, 1998, the Company had net payables
of approximately $98,000, and $105,000, respectively, due to MFH. As of October
3, 1998, the Company had receivables of approximately $478,000 (unaudited) due
from MFH. The amounts due to or from MFH are recorded in prepaid rent and other
in the accompanying consolidated balance sheets.
During the period ended December 28, 1996, the year ended January 3, 1998
and the 39 weeks ended October 3, 1998, the Company accrued approximately
$130,000, $441,000 and $0, respectively, of interest expense due MFH related to
the convertible subordinated notes MFH purchased. As part of the Refinancing,
MFH converted all of the $4,643,000 convertible subordinated notes to equity and
the notes were cancelled (see Note 3).
F-30
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED)
The Company previously leased certain office space to an entity which is
owned in part by a director of the Company. Billings to the entity during the
period ended December 28, 1996, the year ended January 3, 1998 and the 39 weeks
ended September 27, 1997 and October 3, 1998, totaled approximately $60,000,
$274,000, $204,000 (unaudited) and $0 (unaudited), respectively, of which
approximately $29,000, $23,000 and $0 (unaudited) is included in amounts due
from franchisees and affiliates as of December 28, 1996, January 3, 1998 and
October 3, 1998, respectively. The lease was terminated during the 39 weeks
ended October 3, 1998.
The Company paid fees to Korn/Ferry International ("KFI") totaling
approximately $47,000, $157,000, $147,000 (unaudited) and $47,000 (unaudited)
during the period ended December 28, 1996, the year ended January 3, 1998 and
the 39 weeks ended September 27, 1997 and October 3, 1998, respectively. KFI is
an executive search firm of which one of the Company's directors is the
Chairman.
A director of the Company is a consultant to the Company in connection with
certain of the Company's benefit plans for employees and directors. To date, the
director has not received any compensation in connection with the consulting
work and the terms of such compensation have not been determined as of October
3, 1998.
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. In addition, the director's company received a fee of $250,000
(unaudited), plus expenses, from the Company during the 39 weeks ended October
3, 1998 pursuant to an agreement to provide advisory acquisition and consulting
services to the Company. The Company believes that the arrangements were on
terms that could have been obtained from an unaffiliated third party.
As of January 3, 1998 and October 3, 1998, the Company has a loan due from
the founder and minority stockholder of PTI totaling $552,000. 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
PTI stock; provided that in any calendar year no more than $100,000 may be so
offset. In addition, as of October 3, 1998, the Company is due approximately
$462,000 (unaudited) from the founder in connection with certain lease payments
related to the purchase of PTI for which the Company is indemnified. These
amounts are recorded in other assets in the accompanying consolidated balance
sheets.
At the time of the Refinancing, a subsidiary of MIDIAL (the parent company
of OCC and affiliates) was the holder of $27,000,000 in aggregate principal
amount of senior notes of the Company and $8.4 million in aggregate principal
amount of subordinated notes of the Company as to which the Company had accrued
or paid interest of $3,177,000 from the date of inception (September 18, 1996)
through November 26, 1997. In connection with the Refinancing, the Company
repaid all such notes and related interest. The Chairman and Chief Executive
Officer of MIDIAL was a former director of the Company.
The Company and MFH expect to enter into a tax-sharing arrangement but as
of the date of these financial statements no such agreement has been finalized.
F-31
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED)
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 period ended December 28, 1996, the year ended
January 3, 1998 and the 39 weeks ended September 27, 1997 and October 3, 1998
were approximately $6,800, $97,900, $73,111 (unaudited) and $87,000 (unaudited),
respectively.
10. SUBSEQUENT EVENT (UNAUDITED)
On September 12, 1997, nine Great American Cookies franchisees filed a
lawsuit against the Company and certain other parties alleging certain
anticipatory breaches of contract and violations of certain state, franchise and
unfair trade practice laws. These allegations were made as a result of the
discussions held between the Company and Cookies USA regarding the possibility
of the Company acquiring all of the outstanding shares of common stock of
Cookies USA. The nine Great American Cookies franchisees have withdrawn their
lawsuit pursuant to Settlement Agreements and Waivers among the parties. The
Settlement Agreements and Waivers provide for a mutual release, tag-along rights
to the franchisees of Great American Cookies if the Company's ownership is sold
in the future and certain other guarantees by the Company to the franchisees of
Great American Cookies. The Settlement Agreements and Waivers were offered to
all of the franchisees of Great American Cookies.
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's obligation related to its $140,000,000 aggregate
principal amount of Senior Notes due 2004 (see Note 3) is fully and
unconditionally guaranteed on a senior basis by two 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. and The Mrs. Fields' Brand, Inc.
(the "Guarantor Subsidiaries") and Mrs. Fields' Cookies Australia, Mrs. Fields'
Cookies (Canada) Ltd. and H & M Canada, and four partially owned subsidiaries,
the largest of which is Pretzel Time, Inc., of which the Company owns a majority
interest (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.
In the supplemental condensed consolidating financial statements, the
principal elimination entries eliminate the Parent Company's investments in
subsidiaries and intercompany balances and transactions.
F-32
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 6,091 $ 588 $ 30 $ -- $ 6,709
Accounts receivable, net................................... 1,187 -- 13 -- 1,200
Amounts due from (to) franchisees and licensees, net....... 1,309 290 (75) -- 1,524
Inventories................................................ 3,043 -- -- -- 3,043
Other current assets....................................... 3,416 -- -- -- 3,416
------- ------- ---- ------------ --------
Total current assets...................................... 15,046 878 (32) -- 15,892
PROPERTY AND EQUIPMENT, net................................. 26,181 1 23 -- 26,205
INTANGIBLES, net............................................ 50,047 16,285 -- -- 66,332
INVESTMENTS IN SUBSIDIARIES................................. 3,100 -- -- (3,100) --
OTHER ASSETS................................................ 1,626 -- -- -- 1,626
------- ------- ---- ------------ --------
$96,000 $17,164 $ (9) $ (3,100) $110,055
======= ======= ==== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations............................................... $ 1,950 $ 500 $ -- $ -- $ 2,450
Accounts payable........................................... 6,188 6 7 -- 6,201
Accrued liabilities........................................ 9,782 348 -- -- 10,130
------- ------- ---- ------------ --------
Total current liabilities................................. 17,920 854 7 -- 18,781
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion........................ 52,016 13,097 -- -- 65,113
OTHER ACCRUED LIABILITIES................................... 5,603 -- -- -- 5,603
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK............................................ -- 3,597 -- -- 3,597
STOCKHOLDERS' EQUITY (DEFICIT).............................. 20,461 (384) (16) (3,100) 16,961
------- ------- ---- ------------ --------
$96,000 $17,164 $ (9) $ (3,100) $110,055
======= ======= ==== ============ ========
</TABLE>
F-33
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUITED)
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................................................. $ 40,823 $ 559 $ -- $ -- $ 41,382
--------- ---------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs........................... 19,492 -- -- -- 19,492
Food cost of sales.......................................... 9,862 -- -- -- 9,862
General and administrative.................................. 3,871 146 18 -- 4,035
Depreciation and amortization............................... 2,027 317 -- -- 2,344
--------- ---------- ------------ ------------ ------------
Total operating costs and expenses......................... 35,252 463 18 -- 35,733
--------- ---------- ------------ ------------ ------------
Income (loss) from operations.............................. 5,571 96 (18) -- 5,649
INTEREST EXPENSE AND OTHER, net.............................. (1,410) (383) -- -- (1,793)
--------- ---------- ------------ ------------ ------------
Income (loss) before provision for income taxes,
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-34
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUITED)
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-35
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUITED)
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
--------- ---------- ------------ ------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C> <C> <C>
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-36
<PAGE>
MRS. FIELDS ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED)
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................................................. $ 122,090 $ 2,004 $ 7,077 $ (664) $ 130,507
--------- --------- ------------ ----------- ------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs........................... 63,765 -- 3,731 (664) 66,832
Food cost of sales.......................................... 27,272 -- 855 -- 28,127
General and administrative.................................. 14,753 1,066 911 -- 16,730
Depreciation and amortization............................... 8,745 1,125 533 -- 10,403
--------- --------- ------------ ----------- ------------
Total operating costs and expenses......................... 114,535 2,191 6,030 (664) 122,092
--------- --------- ------------ ----------- ------------
Income (loss) from operations.............................. 7,555 (187) 1,047 -- 8,415
INTEREST EXPENSE AND OTHER, net.............................. (6,329) (1,230) (393) -- (7,952)
--------- --------- ------------ ----------- ------------
Income (loss) before provision for income taxes,
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-37
<PAGE>
MRS. FIELDS ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED)
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 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 MFH............................. (1,065) -- -- -- (1,065)
-------- ---------- ------------ ----------- -----------
Net cash provided by (used in) financing activities........ 24,450 (250) (36) -- 24,164
-------- ---------- ------------ ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS................................................. 8,179 137 1,262 -- 9,578
CASH AND CASH EQUIVALENTS, beginning of year................. 6,091 588 30 -- 6,709
-------- ---------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of year....................... $ 14,270 $ 725 $ 1,292 $ -- $ 16,287
======== ========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid.............................................. $ 7,607 $ 789 $ 20 $ -- $ 8,416
Taxes paid................................................. 181 25 11 -- 217
</TABLE>
F-38
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES............................................. $ 86,225 $ 1,215 $ 86 $ -- $ 87,526
-------- ----------- ---------- ------------ ------------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs..................... 48,200 -- -- -- 48,200
Food cost of sales.................................... 19,549 -- -- -- 19,549
General and administrative............................ 10,060 607 136 -- 10,803
Depreciation and amortization......................... 5,766 830 -- -- 6,596
-------- ----------- ---------- ------------ ------------
Total operating costs and expenses................... 83,575 1,437 136 -- 85,148
-------- ----------- ---------- ------------ ------------
(Loss) income from operations......................... 2,650 (222) (50) -- 2,378
INTEREST EXPENSE AND OTHER, net.......................... (4,134) (1,011) -- -- (5,145)
-------- ----------- ---------- ------------ ------------
(Loss) income before provision for income taxes,
preferred stock accretion and dividends of
subsidiaries and equity in net loss of consolidated
subsidiaries.......................................... (1,484) (1,233) (50) -- (2,767)
PROVISION FOR INCOME TAXES............................... (179) -- -- -- (179)
-------- ----------- ---------- ------------ ------------
(Loss) income before preferred stock accretion and
dividends of subsidiaries and equity in net loss of
consolidated subsidiaries............................. (1,663) (1,233) (50) -- (2,946)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES............................... -- (276) -- -- (276)
EQUITY IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES............................................ -- -- -- (2) (2)
-------- ----------- ---------- ------------ ------------
NET LOSS................................................. $ (1,663) $ (1,509) $ (50) $ (2) $ (3,224)
======== =========== ========== ============ ============
</TABLE>
F-39
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
(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................................................. $ 309 $(39) $521 $ -- $ 791
------- ---- ---- ------------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net.................... (3,216 -- -- -- (3,216)
------- ---- ---- ------------ -------
Net cash used in investing activities..................... (3,216) -- -- -- (3,216)
------- ---- ---- ------------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease
obligations............................................... (98) -- -- -- (98)
------- ---- ---- ------------ -------
Net cash used in financing activities..................... (98) -- -- -- (98)
------- ---- ---- ------------ -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................................ (3,005) (39) 521 -- (2,523)
CASH AND CASH EQUIVALENTS, beginning of
period..................................................... 6,121 588 -- -- 6,709
------- ---- ---- ------------ -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,116 $549 $521 $ -- $ 4,186
======= ==== ==== ============ =======
</TABLE>
F-40
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 OCTOBER 3, 1998 IS UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ (1,378) $ 5,114 $1,410 $ -- $ 5,146
Accounts receivable, net................................ 1,745 -- 151 -- 1,896
Amounts due from franchisees and licensees, net......... 1,537 3,951 128 -- 5,616
Inventories............................................. 3,862 922 6 -- 4,790
Other current assets and amounts due from (to)
affiliates, net........................................ 47,017 (39,355) (585) -- 7,077
-------- -------- ------ -------- --------
Total current assets................................... 52,783 (29,368) 1,110 -- 24,525
PROPERTY AND EQUIPMENT, net.............................. 33,313 1,434 256 -- 35,003
INTANGIBLES, net......................................... 65,491 77,085 6,580 -- 149,156
INVESTMENT IN SUBSIDIARIES............................... 53,650 -- -- (53,650) --
OTHER ASSETS............................................. 11,921 1,441 611 -- 13,973
-------- -------- ------ -------- --------
$217,158 $ 50,592 $8,557 $(53,650) $222,657
======== ======== ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations............................................ $ 143 $ 31 $ 384 $ -- $ 558
Accounts payable........................................ 7,755 865 49 -- 8,669
Accrued liabilities..................................... 13,622 3,276 676 -- 17,574
-------- -------- ------ -------- --------
Total current liabilities.............................. 21,520 4,172 1,109 -- 26,801
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion..................... 139,542 -- 56 -- 139,598
OTHER ACCRUED LIABILITIES................................ 4,648 -- -- -- 4,648
MANDATORILY REDEEMABLE CUMULATIVE
PREFERRED STOCK......................................... -- -- 1,171 -- 1,171
MINORITY INTEREST........................................ -- -- 268 40 308
STOCKHOLDERS' EQUITY..................................... 51,448 46,420 5,953 (53,690) 50,131
-------- -------- ------ -------- --------
$217,158 $ 50,592 $8,557 $(53,650) $222,657
======== ======== ====== ======== ========
</TABLE>
F-41
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
AND OCTOBER 3, 1998 IS UNAUDITED.)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET REVENUES.............................................. $ 91,342 $3,194 $2,842 $(1,419) $95,959
-------- ------ ------ ------- -------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs........................ 53,096 -- 251 (990) 52,357
Food cost of sales....................................... 21,196 748 73 (429) 21,588
General and administrative............................... 10,692 812 1,117 -- 12,621
Depreciation and amortization............................ 8,073 1,285 349 -- 9,707
-------- ------ ------ ------- -------
Total operating costs and expenses...................... 93,057 2,845 1,790 (1,419) 96,273
-------- ------ ------ ------- -------
(Loss) income from operations........................... (1,715) 349 1,052 -- (314)
INTEREST EXPENSE AND OTHER, net........................... (8,733) 18 8 -- (8,707)
-------- ------ ------ ------- -------
(Loss) income before provision for income taxes,
preferred stock accretion and dividends of
subsidiaries and equity in net loss of consolidated
subsidiaries............................................ (10,448) 367 1,060 -- (9,021)
PROVISION FOR INCOME TAXES................................ (68) -- -- -- (68)
-------- ------ ------ ------- -------
(Loss) income before preferred stock accretion and
dividends of subsidiaries and equity in net loss of
consolidated subsidiaries............................... (10,516) 367 1,060 -- (9,089)
PREFERRED STOCK ACCRETION AND
DIVIDENDS OF SUBSIDIARIES................................ -- -- (333) -- (333)
EQUITY IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES............................................. -- -- -- (268) (268)
-------- ------ ------ ------- -------
NET (LOSS) INCOME......................................... $(10,516) $ 367 $ 727 $ (268) $(9,690)
======== ====== ====== ======= =======
</TABLE>
F-42
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT OCTOBER 3, 1998 AND FOR THE 39 WEEKS ENDED
SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 IS UNAUDITED.)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE 39 WEEKS ENDED OCTOBER 3, 1998
(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 .............................................. $(37,783) $ 37,954 $ 505 $ -- $ 676
-------- -------- ------ ------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions and related expenses ..... (35,656) 6,957 -- -- (28,699)
Purchase of property and equipment, net ................. (5,609) -- (7) -- (5,616)
-------- -------- ------ ------------ --------
Net cash (used in) provided by investing activities .... (41,265) 6,957 (7) -- (34,315)
-------- -------- ------ ------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 39,400 -- -- -- 39,400
Payment of debt financing costs........................... (5,007) -- -- -- (5,007)
Equity infusion from MFH.................................. 29,056 -- -- -- 29,056
Principal payments on long-term debt and capital lease
obligations ............................................ (49) (40,522) (316) -- (40,887)
Reduction in preferred stock of PTI ..................... -- -- (64) -- (64)
-------- -------- ------ ------------ --------
Net cash provided by (used in) financing activities .... 63,400 (40,522) (380) -- 22,498
-------- -------- ------ ------------ --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................. (15,648) 4,389 118 -- (11,141)
CASH AND CASH EQUIVALENTS, beginning of
period .................................................. 14,270 725 1,292 -- 16,287
-------- -------- ------ ------------ --------
CASH AND CASH EQUIVALENTS, end of period ................. $ (1,378) $ 5,114 $1,410 $ -- $ 5,146
======== ======== ====== ============ ========
</TABLE>
F-43
<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-44
<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-45
<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-46
<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 unearned revenues.......................................................... 425
---------
Total current liabilities............................................................... 27,956
STORE CLOSURE RESERVE, net of current portion................................................... 294
UNEARNED REVENUES, 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-47
<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-48
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE ADDITIONAL CUMULATIVE
PREFERRED STOCK COMMON STOCK 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-49
<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-50
<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-51
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Mrs. Fields Inc. ("MFI"), a Delaware corporation, was incorporated on May 2,
1986 and is a holding company for its wholly owned subsidiaries Mrs. Fields
Cookies Australia, Mrs. Fields Cookies, Ltd. (Canada) plus other inactive
subsidiaries (collectively termed "Mrs. Fields International") and its majority
owned subsidiary, Mrs. Fields Development Corporation ("MFD") and MFD's wholly
owned subsidiary, Mrs. Fields Cookies ("MFC"). Collectively, these entities are
referred to herein as the "Company".
Nature of Operations
The most significant part of the Company's operations are its retail stores
which sell freshly baked cookies, brownies and other food products. As of
September 17, 1996, the Company operates 147 "Mrs. Fields Cookies" stores all of
which are located in the United States. Additionally, the Company has franchised
approximately 163 stores in the United States and approximately 55 stores in
nine other countries.
Additionally, the Company holds legal title to certain trademarks for the
"Mrs. Fields" name and logo, and licenses the use of these trademarks to third
parties for the establishment and operation of Mrs. Fields cookie and bakery
operations and other merchandising activities. In connection with these
licensing activities, the Company authorizes third-party licensees to use
certain business formats, systems, methods, procedures, designs, layouts,
specifications, trade names and trademarks in the United States and other
countries.
The Company's business follows seasonal trends and is also affected by climate
and weather conditions. The Company usually experiences its highest revenues in
the fourth calendar quarter. Because the Company's stores are heavily
concentrated in shopping malls, the Company's sales performance is somewhat
dependent on the performance of those malls. The results for the period ended
September 17, 1996 presented in the accompanying consolidated financial
statements may not be indicative of results that would have been achieved for an
entire calendar year.
Effective September 18, 1996, the Company sold substantially all of its net
assets to Mrs. Fields' Original Cookies, Inc. and The Mrs. Fields' Brand, Inc.
(see Note 11). Subsequently, the Company has been solely involved in liquidating
remaining assets and collecting certain outstanding notes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company operates using a 52/53-week year ending near December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of MFI, Mrs. Fields
International, MFD and MFC. All significant intercompany balances and
transactions have been eliminated in consolidation.
F-52
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sources of Supply
The Company currently buys a significant amount of its food products from
three suppliers. Management believes that other suppliers could provide similar
products with comparable terms.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 and fixtures are depreciated over three to seven years
using the straight-line method. Leasehold improvements are amortized over the
life of the lease term, or the estimated life of the improvements, whichever is
shorter, using the straight-line method.
Expenditures that materially increase values or capacities or extend useful
lives of property and equipment are capitalized. Routine maintenance, repairs
and renewal costs are expensed as incurred. Gains or losses from the sale or
retirement of property and equipment are included in the determination of net
income or loss.
F-53
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-54
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-55
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-56
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-57
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
F-58
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain of the leases provide for contingent rentals based on gross revenues.
Total rental expense including contingent rentals and net of sublease rentals
received, under the above operating leases for the year ended 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 unearned revenues of
approximately $1,486,000 under a long-term marketing and supply agreement with a
supplier. Under the terms of the agreement, the Company was obligated to
purchase a minimum amount of product from the supplier. In April 1996, the
Company and the supplier renegotiated the agreement whereby the supplier would
reduce the unearned portion to $504,000 and advance the Company $800,000 in
exchange for an extension of the termination date and a modification of the
purchase commitment. The termination date of the renegotiated agreement will be
the later of March 31, 2001 or when the Company has met its purchase commitment.
The Company reduced food costs by approximately $1,082,000 during the period
ended September 17, 1996 related to this arrangement and its renegotiation. The
remaining balance of approximately $1,204,000 is included in unearned revenues
as of September 17, 1996.
F-59
<PAGE>
MRS. FIELDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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-60
<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-61
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
September 17,
1996
---------------
<S> <C>
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-62
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
COMBINED BALANCE SHEET (CONTINUED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 17,
1996
-----------------
<S> <C>
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-63
<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 1995
-------------- --------------
<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-64
<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-65
<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-66
<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-67
<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>
<CAPTION>
<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.
F-68
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-69
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-70
<PAGE>
THE ORIGINAL COOKIE COMPANY, INCORPORATED
AND THE CARVED-OUT PORTION OF HOT SAM COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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-71
<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-72
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
------
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
---------- ----------
<S> <C> <C>
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-73
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1997 1998
--------- --------
<S> <C> <C>
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-74
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIFTY- FOR THE FIFTY- FOR THE FIFTY-
TWO TWO 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 sales--existing and new stores....................... 1,157 1,602 873
Other, net..................................................... 115 66 139
------- ------- -------
Total revenue................................................. 40,384 40,042 37,347
------- ------- -------
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....................................... 4,607 5,484 6,214
------- ------- -------
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
------- ------- -------
Total other expenses, net..................................... 6,162 5,969 5,865
------- ------- -------
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 statements
are an integral part of these statements.
F-75
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS OF
PURCHASE
PRICE
ADDITIONAL OVER TOTAL
COMMON STOCK 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 statement
are an integral part to these statements.
F-76
<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 accompaning notes to consolidated financial statements
are an integral part of these statements.
F-77
<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 accompaning notes to consolidated financial statements
are an integral part of these statements.
F-78
<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-79
<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 pursuant to 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 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. 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-80
<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. The carrying amount was further substantiated by the
acquisition of the Company by an unrelated party as further discussed in Note
15. No impairment is indicated as of June 28, 1998.
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.
F-81
<PAGE>
COOKIES USA, INC, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-82
<PAGE>
COOKIES USA, INC, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 aggregate 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>
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
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<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
========== ==========
</TABLE>
F-83
<PAGE>
COOKIES USA, INC, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Notes payable at June 29, 1997 and June 28, 1998 are described as follows:
<TABLE>
<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>
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
aggregate 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.
F-84
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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 aggregate 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.
F-85
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
NUMBER OF AMOUNT OF
LEASE RENEWALS GUARANTEE
--------------- -------------
Fiscal Year of Lease Expiration
1999................................ 1 $ 75,000
2000................................ 1 24,000
2001................................ -- --
2002................................ 1 60,000
--------
$159,000
========
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 aggregate 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.
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 aggregate
annual base salary of $355,000. The agreements have customary provisions for
benefits and noncompetition.
F-86
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 aggregate 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-87
<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.
F-88
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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 pursuant to 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 thereto 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 aggregate 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 aggregate 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
pursuant to 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 aggregate amount not
to exceed $1.5 million.
F-89
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-90
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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).
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 aggregate purchase price of approximately $18.4 million, pursuant to 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.
F-91
<PAGE>
COOKIES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 set forth 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 set forth 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 aggregate 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-92
<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-93
<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-94
<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-95
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
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-96
<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>
ADDITIONAL
COMMON STOCK 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-97
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
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-98
<PAGE>
DEBLAN CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 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-99
<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:
Machinery and equipment 5-7 years
Furniture and fixtures 5-7 years
Leasehold improvements 10-20 years
Transportation equipment 5 years
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.
F-100
<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)
LICENSES
Fees paid in connection with obtaining operating licenses are amortized
over the life of the license, ranging from 60 months to 360 months.
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 herein, 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.
F-101
<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)
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)
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.
F-102
<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)
2. INTANGIBLES
Intangibles consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
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
===== ===== =====
</TABLE>
3. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Cash value of officer's life insurance....................... $ 82 $ 101 $ 110
Deposits..................................................... 103 80 71
----- ----- -----
$ 185 $ 181 $ 181
===== ===== =====
</TABLE>
F-103
<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 FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
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
---------- ----------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Accumulated depreciation..................................................... $ 3 $ 2 $ 14
===== ===== =====
</TABLE>
F-104
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
5. NOTES PAYABLE
Notes payable are as follows (in thousands):
<TABLE>
<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 aggregate 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 aggregate 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 aggregate 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>
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.
F-105
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
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 FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31 JUNE 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>
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.
F-106
<PAGE>
DEBLAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1998 IS UNAUDITED)
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-107
<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-108
<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-109
<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-110
<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-111
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY 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 (unaudited)..... 250 $ -- 750 $(216) $460 $244
==== ===== ===== ===== ==== ====
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-112
<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-113
<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-114
<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.
F-115
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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 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.
F-116
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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.
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.
F-117
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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>
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>
F-118
<PAGE>
CHOCOLATE CHIP COOKIES OF TEXAS, INC.
NOTES TO 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
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.
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-119
<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-120
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 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-121
<PAGE>
THE COMBINED KARP ENTITIES
COMBINED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 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-122
<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-123
<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-124
<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-125
<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 $364,00, $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-126
<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>
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.
F-127
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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-128
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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.
F-129
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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.
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.
F-130
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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>
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>
F-131
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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>
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.
F-132
<PAGE>
THE COMBINED KARP ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES TO UNAUDITED PERIODS)
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.
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 consummated.
F-133
<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 THE COMPANY 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 THE COMPANY SINCE
THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
________________
================================================================================
- --------------------------------------------------------------------------------
$ 53,725,000
MRS. FIELDS'
ORIGINAL COOKIES, INC.
10/1/8/% SERIES B
SENIOR NOTES DUE 2004
_________________________
PROSPECTUS
_________________________
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE CORPORATION.
As authorized by Section 145 of the General Corporation Law of the State of
Delaware, each director and officer of the Company may be indemnified by the
Company against expenses (including attorney's fees, judgments, fines and
amounts paid in settlement) actually and reasonably incurred in connection with
the defense or settlement of any threatened, pending or completed legal
proceedings in which he is involved by reason of the fact that he is or was a
director or officer of the Company if he acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of the Company, the director or
officer may not be indemnified in respect of any claim, issue or matter as to
which he shall have been adjudged to be liable for negligence or misconduct in
the performance of his duty to the Company unless a court determines otherwise.
The Company's by-laws authorize the Company to indemnify its present and
former directors and officers and to pay or reimburse expenses for individuals
in advance of the final disposition of a proceeding upon receipt of an
undertaking by or on behalf of such individuals to repay such amounts if so
required.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
1.1 Purchase Agreement, dated as of August 13, 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
2.1 Securities Purchase Agreement by and among Cookies USA, Inc., the
Individuals and Entities Identified Therein as The Sellers and Mrs.
Fields' Original Cookies, Inc., dated as of August 13, 1998
2.2 Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Jake Tortorice of Chocolate Chip Cookies of Texas, Inc. as
Seller. Filed as Exhibit 2.3 to the 8-K dated September 3, 1998.
2.3 Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome E. Mouton, Steven
J. Bryan and Jason A. Piltzmaker, holders of all outstanding capital
stock of Deblan Corporation, as Sellers Filed as Exhibit 2.2 to the 8-K
dated September 3, 1998.
1
<PAGE>
EXHIBIT (CONTINUED)
2.4 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and ASK & MSK Family Limited Partnership-II(B), Ltd. Filed as exhibit
2.4 to the 8-K dated September 3, 1998.
2.5 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Crossroads Cookies, Inc. Filed as exhibit 2.5 to the 8-K dated
September 3, 1998.
2.6 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Hot Barton and Northpark Cookies, Inc. Filed as exhibit 2.6 to the
8-K dated September 3, 1998.
2.7 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Northpark Cookies, Inc. Filed as exhibit 2.7 to the 8-K dated
September 3, 1998.
2.8 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Quail Springs Cookies, Inc. Filed as exhibit 2.8 to the 8-K dated
September 3, 1998.
2.9 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc.
and Westgate Cookies, Inc. Filed as exhibit 2.9 to the 8-K dated
September 3, 1998.
3.1 Restated Certificate of Incorporation of Mrs. Fields' Original
Cookies, Inc., filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (No. 333-45179) and incorporated by reference
herein
3.2 Restated Certificate of Incorporation of The Mrs. Fields' Brand, Inc.,
filed as Exhibit 3.2 to the Company's Registration Statement on Form
S-4 (No. 333-45179) and incorporated by reference herein
3.3 Certificate of Designations of the Mrs. Fields' Brand, Inc., dated as
of September 18, 1996, filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-4 (No. 333-45179) and incorporated by
reference herein
3.4 Amended and Restated Certificate of Incorporation of Great American
Cookie Company, Inc.
3.5 By-Laws of Mrs. Fields' Original Cookies, Inc., filed as Exhibit 3.4
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
3.6 By-Laws of The Mrs. Fields' Brand, Inc., filed as Exhibit 3.5 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
3.7 By-Laws of Great American Cookie Company, Inc.
4.1 Indenture, dated as of November 26, 1997, among Mrs. Fields' Original
Cookies, Inc., The Mrs. Fields' Brand, Inc., and The Bank of New York,
as Trustee, filed as Exhibit 4.1 to the Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein.
4.2 Form of Notation of Guarantee (included as Exhibit E to Exhibit 4.1)
4.3 Form of Certificate of Senior Note (included as Exhibit A to Exhibit
4.1)
4.4 First Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields Brand, Inc., and The
Bank of New York, as Trustee
4.5 Second Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., Great
American Cookie Company, Inc., and The Bank of New York, as trustee
4.6 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 to as
to legality of the New Senior Notes to be issued by Mrs. Fields'
Original Cookies, Inc. and the New Guarantees to be issued by The Mrs.
Fields' Brand, Inc. and Great American Cookie 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 Company's
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 Company's
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
2
<PAGE>
EXHIBIT (CONTINUED)
10.3 Amended and Restated Marketing Agreement, dated as of January 9, 1997,
between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain, filed as Exhibit 10.27 to the Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.4 Amendment dated December 1, 1997, to Amended and Restated
Marketing Agreement between Mrs. Fields' Original Cookies, Inc. and
Coca-Cola USA Fountain
10.5 Corollary agreement, dated September 21, 1998, to existing marketing
agreement, dated as of January 9, 1997 and amended on November 13,
1997 and December 1, 1997, between Mrs. Fields' Original Cookies, Inc.
and Coca-Cola USA
10.6 Employment Agreement, dated as of October 1, 1997, between Michael R.
Ward and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.28
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.7 Employment Agreement, dated as of October 1, 1997, between Pat Knotts
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.29 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.8 Employment Agreement, dated as of October 1, 1997, between L. Tim
Pierce and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.30
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.9 Employment Agreement, dated as of July 1, 1996, between Lawrence
Hodges and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.31
the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
3
<PAGE>
EXHIBIT (CONTINUED)
10.10 Employment Agreement, dated as of July 10, 1997, between Garry
Remington and Mrs. Fields' Original Cookies, Inc.
10.11 Lease Agreement, dated as of February 23, 1993, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies,
filed as Exhibit 10.32 the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.12 Lease Agreement, dated as of October 10, 1995, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies,
filed as Exhibit 10.33 the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.13 Letter of Agreement, dated as of October 1, 1992, between United
Airlines, Inc. and Mrs. Fields Development Corporation, filed as
Exhibit 10.34 to the Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.14 Lease Agreement, dated as of January 18, 1998, between 2855 E.
Cottonwood Parkway, L.C. and Mrs. Fields' Original Cookies, Inc.,
filed as Exhibit 10.35 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.15 Amendment to Supply Agreement, dated as of June 19, 1995 between Van
Den Bergh Foods Company and Mrs. Fields, Inc., filed as Exhibit 10.37
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.16 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 Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.17 License Agreement, dated as of March 1, 1992, between Mrs. Fields
Development Corporation and Marriott Corporation, filed as Exhibit
10.40 to the Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.18 License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp., filed
as Exhibit 10.41 to the Company's Registration Statement on S-4 (No.
333-45170) and incorporated by reference herein.
10.19 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 Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.20 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
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.21 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 Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.22 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 Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.23 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 Company's Registration Statement
on S-4 (No. 333-45179) and incorporated by reference herein
10.24 Employment Agreement, dated as of September 2, 1997, between Pretzel
Time, Inc. and Martin E. Lisiewski, filed as Exhibit 10.48 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.25 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 Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.26 $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 Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
4
<PAGE>
EXHIBIT (CONTINUED)
10.27 Exchange Agreement, dated September 2, 1997, between Mrs. Fields'
Holding Company, Inc. and Martin E. Lisiewski, filed as Exhibit 10.51
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.28 Registration Rights Agreement, dated September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski, filed as
Exhibit 10.52 to the Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.29 Franchise Development Agreement, dated September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc., filed as
Exhibit 10.53 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein.
10.30 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 Company's
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.31 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 Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.32 Uniform Franchise Offering Circular of Pretzel Time, Inc., as amended
on August 24, 1998*
10.33 Uniform Franchise Offering Circular of Great American Cookie Company,
Inc., as amended on August 25, 1998*
10.34 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 Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein.
10.35 Assignment of Assets and Assumption of Liabilities Agreement, dated
July 25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields'
Pretzel Concepts, Inc., filed as Exhibit 10.62 to the Company's
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.36 First Amendment to Operating Agreement for UVEST, LLC, dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST Limited,
filed as Exhibit 10.64 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.37 First Amendment to Operating Agreement for LV-H&M, L.L.C., Dated July
25, 1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean Jensen,
filed as Exhibit 10.65 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.38 Lease Agreement, dated March 2, 1995, between Price Development
Company, Limited Partnership and Mrs. Fields Cookies, filed as Exhibit
10.69 to the Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.39 Consulting Agreement, dated November 26, 1996, between Debra J. Fields
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.70 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.40 Mrs. Fields' Holding Company, Inc. Director Stock Option Plan
10.41 Mrs. Fields' Holding Company, Inc. Employee Stock Option Plan
10.42 Mrs. Fields' Holding Company, Inc. Director Stock Purchase Plan
10.43 Amended and Restated Loan Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank,
filed as Exhibit 10.73 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.44 Intellectual Property Security Agreement, dated as of February 28,
1998, between Mrs. Fields' Original Cookies, Inc. and LaSalle National
Bank
10.45 Pledge and Security Agreement, dated as of February 28, 1998, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank
10.46 Stockholders' Agreement, dated as of July 17, 1998, between Mrs.
Fields' Holding Company, Inc. and its Stockholders
5
<PAGE>
EXHIBIT (CONTINUED)
10.47 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
12.1 Computation of ratio of earnings to fixed charges of Mrs. Fields'
Original Cookies, Inc.
21.1 Subsidiaries of Mrs. Fields' Original Cookies, Inc.
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) *
24.1 Power of Attorney of certain officers and directors of the Company,
included in Part II of this Registration Statement
24.2 Power of Attorney of certain officers and directors of The Mrs.
Fields' Brand, Inc., included in Part II of this Registration
Statement
24.3 Power of attorney of certain officers and directors of Great American
Cookie Company, Inc., included in Part II of this 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), filed as Exhibit 27 to the
Company's Form 10-Q for the quarter ended October 3, 1998
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*
99.5 Letter to Brokers*
99.6 Letter to Clients*
________
* To be filed by amendment.
6
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake:
(1) To file, during 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.
7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, Mrs. Fields'
Original Cookies, Inc. certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-4 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Salt Lake City, State of Utah, on the 16th day of November,
1998.
MRS. FIELDS' ORIGINAL COOKIES, INC.
By /s/Larry A. Hodges
----------------------
Larry A. Hodges
President/CEO
8
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Mrs. Fields' Original
Cookies, Inc. and each of us, do hereby constitute and appoint Michael R. Ward
or L. Tim Pierce, our true and lawful attorney and agent, with power of
substitution, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated above, which said attorney and
agent may deem necessary or advisable to enable said corporation to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with this Registration Statement on Form S-4, and any and all
amendments to said Registration Statement and all instruments necessary or
incidental in connection therewith, including specifically, but without
limitation, power and authority to sign for us or any of us in our names, in the
capacities indicated below, any and all amendments hereto, and to file the same
with the Commission. Said attorney shall have full power and authority to do
and perform in the name and on behalf of each of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises as fully and to all intents and purposes as each of the undersigned
might or could do in person, hereby ratifying and approving the acts of said
attorneys and each of them.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Larry A. Hodges President, Chief Executive Officer November 16, 1998
------------------------------------
(Larry A. Hodges) and Director
/s/L. Tim Pierce Senior Vice President, Chief November 16, 1998
------------------------------------
(L. Tim Pierce) Financial Officer and Secretary
/s/Herbert S. Winokur Chairman of the Board of Directors November 16 1998
------------------------------------
(Herbert S. Winokur)
/s/Richard M. Ferry Director November 16, 1998
------------------------------------
(Richard M. Ferry)
/s/Debbi Fields Director November 16, 1998
------------------------------------
(Debbi Fields)
/s/Nathaniel A. Gregory Director November 16, 1998
------------------------------------
(Nathaniel A. Gregory)
/s/Walker Lewis Director November 16, 1998
------------------------------------
(Walker Lewis)
/s/Peter W. Mullin Director November 16, 1998
------------------------------------
(Peter W. Mullin)
/s/Gilbert C. Osnos Director November 16, 1998
------------------------------------
(Gilbert C. Osnos)
</TABLE>
9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, The Mrs.
Fields' Brand, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-4 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Salt Lake City, State of Utah, on the 16th day of November,
1998.
THE MRS. FIELDS' BRAND, INC.
By /s/Larry A. Hodges
---------------------
Larry A. Hodges
President/CEO
10
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Mrs. Fields' Brand, Inc.
and each of us, do hereby constitute and appoint Michael R. Ward or L. Tim
Pierce, our true and lawful attorney and agent, with power of substitution, to
do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated above, which said attorney and agent may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission (the "Commission"), in connection with this
Registration Statement on Form S-4, and any and all amendments to said
Registration Statement and all instruments necessary or incidental in connection
therewith, including specifically, but without limitation, power and authority
to sign for us or any of us in our names, in the capacities indicated below, any
and all amendments hereto, and to file the same with the Commission. Said
attorney shall have full power and authority to do and perform in the name and
on behalf of each of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises as fully and to all
intents and purposes as each of the undersigned might or could do in person,
hereby ratifying and approving the acts of said attorneys and each of them.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Larry A. Hodges President, Chief Executive Officer November 16, 1998
-----------------------------------
(Larry A. Hodges) and Director, Secretary & Treasurer
/s/L. Tim Pierce Chief Financial Officer November 16, 1998
-----------------------------------
(L. Tim Pierce)
/s/Herbert S. Winokur Chairman of the Board of Directors November 16, 1998
-----------------------------------
(Herbert S. Winokur)
/s/Walker Lewis Director November 16, 1998
-----------------------------------
(Walker Lewis)
</TABLE>
11
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, Great American
Cookie 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 16th day of
November, 1998.
GREAT AMERICAN COOKIE COMPANY, INC.
By /s/Larry A. Hodges
---------------------
Larry A. Hodges
President/CEO
12
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Great American Cookie
Company, Inc. and each of us, do hereby constitute and appoint Michael R. Ward
or L. Tim Pierce, our true and lawful attorney and agent, with power of
substitution, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated above, which said attorney and
agent may deem necessary or advisable to enable said corporation to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with this Registration Statement on Form S-4, and any and all
amendments to said Registration Statement and all instruments necessary or
incidental in connection therewith, including specifically, but without
limitation, power and authority to sign for us or any of us in our names, in the
capacities indicated below, any and all amendments hereto, and to file the same
with the Commission. Said attorney shall have full power and authority to do
and perform in the name and on behalf of each of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises as fully and to all intents and purposes as each of the undersigned
might or could do in person, hereby ratifying and approving the acts of said
attorneys and each of them.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Larry A. Hodges Chairman of the Board of Directors November 16, 1998
-------------------------------------
(Larry A. Hodges) and President
/s/L. Tim Pierce Chief Financial Officer November 16, 1998
-------------------------------------
(L. Tim Pierce) Secretary and Director
/s/Michael R. Ward Vice President and Director November 16, 1998
-------------------------------------
(Michael R. Ward)
</TABLE>
13
<PAGE>
EXHIBIT INDEX
EXHIBIT
1.1 Purchase Agreement, dated as of August 13, 1998, among Mrs. Fields'
Original Cookies, Inc., The Mrs. Fields Brand Inc., Jefferies & Company,
Inc. and BT Alex. Brown Incorporated
2.1 Securities Purchase Agreement by and among Cookies USA, Inc., the
Individuals and Entities Identified Therein as The Sellers and Mrs.
Fields' Original Cookies, Inc., dated as of August 13, 1998
2.2 Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Jake Tortorice of Chocolate Chip Cookies of Texas, Inc. as
Seller. Filed as Exhibit 2.3 to the 8-K dated September 3, 1998.
2.3 Stock Purchase Agreement among Mrs. Fields' Original Cookies, Inc., as
Buyer, and Lawrence J. Cohen, Mildred S. Cohen, Jerome E. Mouton, Steven
J. Bryan and Jason A. Piltzmaker, holders of all outstanding capital
stock of Deblan Corporation, as Sellers Filed as Exhibit 2.2 to the 8-K
dated September 3, 1998.
2.4 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
ASK & MSK Family Limited Partnership-II(B), Ltd. Filed as Exhibit 2.4 to
the 8-K dated September 3, 1998.
2.5 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Crossroads Cookies, Inc. Filed as Exhibit 2.5 to the 8-K dated September
3, 1998.
2.6 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Hot Barton and Northpark Cookies, Inc. Filed as Exhibit 2.6 to the 8-K
dated September 3, 1998.
2.7 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Northpark Cookies, Inc. Filed as Exhibit 2.7 to the 8-K dated September
3, 1998.
2.8 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Quail Springs Cookies, Inc. Filed as Exhibit 2.8 to the 8-K dated
September 3, 1998.
2.9 Asset Purchase Agreement between Mrs. Fields' Original Cookies, Inc. and
Westgate Cookies, Inc. Filed as Exhibit 2.9 to the 8-K dated September 3,
1998.
3.1 Restated Certificate of Incorporation of Mrs. Fields' Original Cookies,
Inc., filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-4 (No. 333-45179) and incorporated by reference herein
3.2 Restated Certificate of Incorporation of The Mrs. Fields' Brand, Inc.,
filed as Exhibit 3.2 to the Company's Registration Statement on Form S-4
(No. 333-45179) and incorporated by reference herein
3.3 Certificate of Designations of the Mrs. Fields' Brand, Inc., dated as of
September 18, 1996, filed as Exhibit 3.3 to the Company's Registration
Statement on Form S-4 (No. 333-45179) and incorporated by reference
herein
3.4 Amended and Restated Certificate of Incorporation of Great American
Cookie Company, Inc.
3.5 By-Laws of Mrs. Fields' Original Cookies, Inc., filed as Exhibit 3.4 to
the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
<PAGE>
EXHIBIT (CONTINUED)
3.6 By-Laws of The Mrs. Fields' Brand, Inc., filed as Exhibit 3.5 to the
Company's Registration Statement on S-4 (No. 333-45179) and incorporated
by reference herein
3.7 By-Laws of Great American Cookie Company, Inc.
4.1 Indenture, dated as of November 26, 1997, among Mrs. Fields' Original
Cookies, Inc., The Mrs. Fields' Brand, Inc., and The Bank of New York, as
Trustee, filed as Exhibit 4.1 to the Company's Registration Statement on
S-4 (No. 333-45179) and incorporated by reference herein.
4.2 Form of Notation of Guarantee (included as Exhibit E to Exhibit 4.1)
4.3 Form of Certificate of Senior Note (included as Exhibit A to Exhibit 4.1)
4.4 First Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields Brand, Inc., and The Bank
of New York, as Trustee
4.5 Second Supplemental Indenture, dated as of August 24, 1998, among Mrs.
Fields' Original Cookies, Inc., The Mrs. Fields' Brand, Inc., Great
American Cookie Company, Inc., and The Bank of New York, as trustee
4.6 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 to as to
legality of the New Senior Notes to be issued by Mrs. Fields' Original
Cookies, Inc. and the New Guarantees to be issued by The Mrs. Fields'
Brand, Inc. and Great American Cookie 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 Company's 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 Company's Registration Statement on
S-4 (No. 333-45179) and incorporated by reference herein
<PAGE>
EXHIBIT (CONTINUED)
10.3 Amended and Restated Marketing Agreement, dated as of January 9, 1997,
between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA Fountain,
filed as Exhibit 10.27 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.4 Amendment, dated December 1, 1997, to Amended and Restated Marketing
Agreement between Mrs. Fields' Original Cookies, Inc. and Coca-Cola USA
Fountain
10.5 Corollary agreement, dated September 21, 1998, to existing marketing
agreement, dated as of January 9, 1997 and amended on November 13, 1997
and December 1, 1997 between Mrs. Fields' Original Cookies, Inc. and
Coco-Cola USA Fountain.
10.6 Employment Agreement, dated as of October 1, 1997, between Michael R.
Ward and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.28 to
the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.7 Employment Agreement, dated as of October 1, 1997, between Pat Knotts
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.29 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.8 Employment Agreement, dated as of October 1, 1997, between L. Tim
Pierce and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.30
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.9 Employment Agreement, dated as of July 1, 1996, between Lawrence Hodges
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.31 the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.10 Employment Agreement, dated as of July 10, 1997, between Garry
Remington and Mrs. Fields' Original Cookies, Inc.
10.11 Lease Agreement, dated as of February 23, 1993, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies,
filed as Exhibit 10.32 the Company's Registration Statement on S-4 (No.
333-45179) and incorporated by reference herein
10.12 Lease Agreement, dated as of October 10, 1995, between The Equitable
Life Assurance Society of the United States and Mrs. Fields Cookies,
filed as Exhibit 10.33 the Company's Registration Statement on S-4 (No.
333-45179) and incorporated by reference herein
10.13 Letter of Agreement, dated as of October 1, 1992, between United
Airlines, Inc. and Mrs. Fields Development Corporation, filed as
Exhibit 10.34 to the Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.14 Lease Agreement, dated as of January 18, 1998, between 2855 E.
Cottonwood Parkway, L.C. and Mrs. Fields' Original Cookies, Inc., filed
as Exhibit 10.35 to the Company's Registration Statement on S-4 (No.
333-45179) and incorporated by reference herein
10.15 Amendment to Supply Agreement, dated as of June 19, 1995 between Van
Den Bergh Foods Company and Mrs. Fields, Inc., filed as Exhibit 10.37
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.16 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 Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.17 License Agreement, dated as of March 1, 1992, between Mrs. Fields
Development Corporation and Marriott Corporation, filed as Exhibit
10.40 to the Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
<PAGE>
EXHIBIT (CONTINUED)
10.18 License Agreement, dated as of October 28, 1993 between Mrs. Fields
Development Corporation and Marriott Management Services, Corp., filed
as Exhibit 10.41 to the Company's Registration Statement on S-4 (No.
333-45170) and incorporated by reference herein.
10.19 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 Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.20 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 Company's
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.21 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 Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.22 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 Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.23 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 Company's Registration Statement on
S-4 (No. 333-45179) and incorporated by reference herein
10.24 Employment Agreement, dated as of September 2, 1997, between Pretzel
Time, Inc. and Martin E. Lisiewski, filed as Exhibit 10.48 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.25 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 Company's Registration Statement on S-4 (No. 333-
45179) and incorporated by reference herein
10.26 $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 Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.27 Exchange Agreement, dated September 2, 1997, between Mrs. Fields'
Holding Company, Inc. and Martin E. Lisiewski, filed as Exhibit 10.51
to the Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.28 Registration Rights Agreement, dated September 2, 1997, between Mrs.
Fields' Holding Company, Inc. and Martin E. Lisiewski, filed as Exhibit
10.52 to the Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.29 Franchise Development Agreement, dated September 2, 1997, between Mrs.
Fields' Original Cookies, Inc. and Pretzel Time, Inc., filed as Exhibit
10.53 to the Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein.
10.30 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 Company's
Registration Statement on S-4 (No. 333-45179) and incorporated by
reference herein
10.31 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 Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.32 Uniform Franchise Offering Circular of Pretzel Time, Inc., as amended
on August 24, 1998*
10.33 Uniform Franchise Offering Circular of Great American Cookie
Company, Inc., as amended on August 25, 1998*
10.34 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 Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein.
10.35 Assignment of Assets and Assumption of Liabilities Agreement, dated
July 25, 1997, between H&M Concepts Ltd., Co., and Mrs. Fields' Pretzel
Concepts, Inc., filed as Exhibit 10.62 to the Company's Registration
Statement on S-4 (No. 333-45179) and incorporated by reference herein
10.36 First Amendment to Operating Agreement for UVEST, LLC, dated July 25,
1997, between Mrs. Fields' Pretzel Concepts, Inc. and NVEST Limited,
filed as Exhibit 10.64 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
<PAGE>
EXHIBIT (CONTINUED)
10.37 First Amendment to Operating Agreement for LV-H&M, L.L.C., Dated July
25, 1997, between Mrs. Fields' Pretzel Concepts, Inc. and Jean Jensen,
filed as Exhibit 10.65 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.38 Lease Agreement, dated March 2, 1995, between Price Development
Company, Limited Partnership and Mrs. Fields Cookies, filed as Exhibit
10.69 to the Company's Registration Statement on S-4 (No. 333-45179)
and incorporated by reference herein
10.39 Consulting Agreement, dated November 26, 1996, between Debra J. Fields
and Mrs. Fields' Original Cookies, Inc., filed as Exhibit 10.70 to the
Company's Registration Statement on S-4 (No. 333-45179) and
incorporated by reference herein
10.40 Mrs. Fields' Holding Company, Inc. Director Stock Option Plan
10.41 Mrs. Fields' Holding Company, Inc. Employee Stock Option Plan
10.42 Mrs. Fields' Holding Company, Inc. Director Stock Purchase Plan
10.43 Amended and Restated Loan Agreement, dated as of February 28, 1998,
between Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank,
filed as Exhibit 10.73 to the Company's Registration Statement on S-4
(No. 333-45179) and incorporated by reference herein
10.44 Intellectual Property Security Agreement, dated as of February 28,
1998, between Mrs. Fields' Original Cookies, Inc. and LaSalle National
Bank
10.45 Pledge and Security Agreement, dated as of February 28, 1998, between
Mrs. Fields' Original Cookies, Inc. and LaSalle National Bank
10.46 Stockholders' Agreement, dated as of July 17, 1998, between Mrs.
Fields' Holding Company, Inc. and its Stockholders
10.47 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
12.1 Computation of ratio of earnings to fixed charges of Mrs. Fields'
Original Cookies, Inc.
21.1 Subsidiaries of Mrs. Fields' Original Cookies, Inc.
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)*
24.1 Power of Attorney of certain officers and directors of the Company,
included in Part II of this Registration Statement
24.2 Power of Attorney of certain officers and directors of The Mrs. Fields'
Brand, Inc., included in Part II of this Registration Statement
24.3 Power of attorney of certain officers and directors of Great American
Cookie Company, Inc., included in Part II of this 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), filed as Exhibit 27 to the
Company's Form 10-Q for the quarter ended October 3, 1998
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*
99.5 Letter to Brokers*
99.6 Letter to clients*
________
* To be filed by amendment.
<PAGE>
_______________________________________________________________________________
MRS. FIELDS' ORIGINAL COOKIES, INC.
$40,000,000
Aggregate Principal Amount of
10% Series C Senior Notes due 2004
____________________________________
PURCHASE AGREEMENT
Dated as of August 13, 1998
____________________________________
Jefferies & Company, Inc. BT Alex. Brown Incorporated
_______________________________________________________________________________
<PAGE>
$40,000,000
Aggregate Principal Amount of
10.% Series C Senior Notes due 2004
of
MRS. FIELDS' ORIGINAL COOKIES, INC.
PURCHASE AGREEMENT
August 13, 1998
JEFFERIES & COMPANY, INC.
BT ALEX. BROWN INCORPORATED
c/o Jefferies & Company, Inc.
11100 Santa Monica Boulevard
Los Angeles, California 90025
Ladies and Gentlemen:
Mrs. Fields' Original Cookies, Inc., a Delaware corporation (the .Company.),
proposes to issue and sell to Jefferies & Company, Inc. (.Jefferies.) and BT
Alex. Brown Incorporated (.BT.) (each, an .Initial Purchaser,. and,
collectively, the .Initial Purchasers.) an aggregate of $40,000,000 in principal
amount of its 10.% Series C Senior Notes due 2004 (the .Senior Notes.), subject
to the terms and conditions set forth herein. The Senior Notes are to be issued
pursuant to the provisions of an indenture (the .Indenture.), dated as of
November 26, 1997, and amended as of the Closing Date (as defined), among the
Company, the Guarantors (as defined) and The Bank of New York, as trustee (the
.Trustee.). The Senior Notes and the Exchange Notes (as defined) issuable in
exchange therefor are collectively referred to herein as the .Notes.. The Notes
will be guaranteed (together with any future guarantees of the Notes, the
.Guarantees.) by The Mrs. Fields' Brand, Inc., a Delaware corporation (.MFB.).
Upon consummation of the Great American Transactions (as defined), Great
American Cookie Company, Inc., a Delaware corporation (.Great American.) will
guarantee the Notes. As of the date of this agreement, the term .Guarantors.
refers to MFB, and upon consummation of the Great American Transactions, the
term .Guarantors. will also refer to Great American in the sections referred to
on the signature page to this agreement executed by Great American. Capitalized
terms used but not defined herein shall have the meanings given to such terms in
the Indenture.
Concurrently with the offering of the Senior Notes (the .Offering.), the
Company will (i) acquire all of the outstanding capital stock and subordinated
indebtedness of Cookies USA, Inc. a Delaware corporation (.Cookies USA.), and
pay certain liabilities of Great American (the .Great American Acquisition.),
(ii) finance the acquisition of a total of 29 Great American franchise stores
from two Great American franchisees (the .Franchise Acquisition.) and (iii)
finance a tender offer and consent solicitation (the .Great American Tender
Offer.) for all the outstanding $40 million aggregate amount of Great American's
10.% Senior Secured Notes due 2001 (the .Great American Senior Notes.). The
Great American Acquisition, the Franchise Acquisition and the Great American
Tender Offer are referred to herein as the .Great American Transactions..
1
<PAGE>
1. OFFERING CIRCULAR. The Senior Notes will be offered and sold to
-----------------
the Initial Purchasers pursuant to one or more exemptions from the registration
requirements under the Securities Act of 1933, as amended (the .Securities
Act.). The Company and MFB have prepared an offering memorandum, dated August
13, 1998 (the .Offering Circular.), relating to the Senior Notes and the
Guarantees.
Upon original issuance thereof, and until such time as the same is no longer
required pursuant to the Indenture, the Senior Notes (and all securities issued
in exchange therefor, in substitution thereof or upon conversion thereof) shall
bear the following legend:
.THIS SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
.SECURITIES ACT.), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION
HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT
(A) IT IS A .QUALIFIED INSTITUTIONAL BUYER. (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT)(A .QIB.), (B) IT IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES
ACT OR (C) IT IS AN INSTITUTIONAL .ACCREDITED INVESTOR. (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN
.ACCREDITED INVESTOR.), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY OF ITS
SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB
PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A UNDER THE SECURITIES ACT, (C) IN AN
OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 OF THE SECURITIES
ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (E) TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS
AND AGREEMENTS RELATING TO THE TRANSFER OF THIS SECURITY (THE FORM OF WHICH
CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN
AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH
THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM
THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY
TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS .OFFSHORE
TRANSACTION. AND .UNITED STATES. HAVE THE MEANINGS GIVEN TO
2
<PAGE>
THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE
CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY
TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING..
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
-------------------------------
representations, warranties and covenants contained in this Agreement, and
subject to the terms and conditions contained herein, the Company agrees to
issue and sell to the Initial Purchasers, and the Initial Purchasers agree,
severally and not jointly, to purchase from the Company, the principal amounts
of Senior Notes set forth opposite the name of such Initial Purchaser on
SCHEDULE A hereto at a purchase price equal to 96.75% of the principal amount
thereof (the .Purchase Price.).
3. TERMS OF OFFERING. The Initial Purchasers have advised the
-----------------
Company that the Initial Purchasers will make offers (the .Exempt Resales.) of
the Senior Notes purchased hereunder on the terms set forth in the Offering
Circular, as amended or supplemented, solely to (i) persons whom the Initial
Purchasers reasonably believe to be .qualified institutional buyers. as defined
in Rule 144A under the Securities Act (.QIBs.) and (ii) not more than ten other
institutional .accredited investors,. as defined in Rule 501(a)(1),(2),(3) or
(7) of Regulation D under the Securities Act, that make certain representations
and agreements to the Company (each, an .Accredited Institution.)(such persons
specified in clauses (i) and (ii) being referred to herein as the .Eligible
Purchasers.). The Initial Purchasers will offer the Senior Notes to Eligible
Purchasers initially at a price equal to 100% of the principal amount thereof.
Such price may be changed at any time without notice.
Holders (including subsequent transferees) of the Senior Notes will have the
registration rights set forth in the registration rights agreement (the
.Registration Rights Agreement.), to be dated the Closing Date (as defined), in
substantially the form of EXHIBIT A hereto, for so long as such Senior Notes
constitute .Transfer Restricted Securities. (as defined in the Registration
Rights Agreement). Pursuant to the Registration Rights Agreement, the Company
and the Guarantors will agree to file with the Securities and Exchange
Commission (the .Commission.) under the circumstances set forth therein, (i) a
registration statement under the Securities Act (the .Exchange Offer
Registration Statement.) relating to the Company's 10.% Series C Senior Notes
due 2004, having terms identical to those of the Senior Notes (the .Exchange
Notes.), and guarantees of the Exchange Notes to be offered in exchange for the
Senior Notes (such offer to exchange being referred to as the .Exchange Offer.)
and the Guarantees thereof and (ii) if applicable, a shelf registration
statement pursuant to Rule 415 under the Securities Act (the .Shelf Registration
Statement. and, together with the Exchange Offer Registration Statement, the
.Registration Statements.) relating to the resale by certain holders of the
Senior Notes, and to use their best efforts to cause such Registration
Statements to be declared and remain effective and usable for the periods
specified in the Registration Rights Agreement and to consummate the Exchange
Offer. This Agreement, the Indenture, the Senior Notes, the Guarantees and the
Registration Rights Agreement are hereinafter sometimes referred to collectively
as the .Operative Documents..
4. DELIVERY AND PAYMENT.
--------------------
(a) Delivery of, and payment of the Purchase Price for, the Senior Notes and
payment by the Company of the Advisory Fee shall be made at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP at 919 Third Avenue, New York, New
York 10022, or such other location as may be mutually acceptable. Such
delivery and payments shall be made at 9:00 a.m. New York City time, on
August 24, 1998 or at such other time as shall be agreed upon by the
Initial Purchasers and the Company. The time and date of such
3
<PAGE>
delivery and the payments are herein called the .Closing Date..
(b) Senior Notes sold by the Initial Purchasers to QIBs will be represented by
one or more Senior Notes in definitive global form, registered in the name
of Cede & Co., as nominee of The Depository Trust Company (.DTC.), having
an aggregate principal amount corresponding to the aggregate principal
amount of the Senior Notes sold to such QIBs (collectively, the .Global
Note.). Senior Notes sold by the Initial Purchasers to Accredited
Institutions will be represented by one or more Senior Notes in definitive
form, registered in the name of such Accredited Institutions, having an
aggregate principal amount corresponding to the aggregate principal amount
of the Senior Notes sold to such Accredited Institutions (collectively, the
.Accredited Institution Note.). The Global Note and the Accredited
Institution Note shall be delivered by the Company to the Initial
Purchasers (or as the Initial Purchasers direct), in each case with any
transfer taxes thereon duly paid by the Company, against payment by the
Initial Purchasers of the Purchase Price thereof by wire transfer in same-
day funds to the order of the Company. The Global Note and the Accredited
Institution Note shall be made available to the Initial Purchasers for
inspection not later than 9:30 a.m., New York City time, on the business
day immediately preceding the Closing Date.
5. AGREEMENTS OF THE COMPANY AND THE GUARANTORS. Each of the
---------------------------------------------
Company and the Guarantors hereby agrees with the Initial Purchasers as follows:
(a) To advise the Initial Purchasers promptly and, if requested by the Initial
Purchasers, confirm such advice in writing, (i) of the issuance by any
state securities commission of any stop order suspending the qualification
or exemption from qualification of any Senior Notes for offering or sale in
any jurisdiction designated by the Initial Purchasers pursuant to Section
5(e) hereof, or the initiation of any proceeding by any state securities
commission or any other federal or state regulatory authority for such
purpose and (ii) of the happening of any event during the period referred
to in Section 5(c) hereof that makes any statement of a material fact made
in the Offering Circular untrue or that requires any additions to or
changes in the Offering Circular in order to make the statements therein
not misleading. The Company shall use its best efforts to prevent the
issuance of any stop order or order suspending the qualification or
exemption of any Senior Notes under any state securities or Blue Sky laws
and, if at any time any state securities commission or other federal or
state regulatory authority shall issue an order suspending the
qualification or exemption of any Senior Notes under any state securities
or Blue Sky laws, the Company shall use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) At any time prior to the completion of Exempt Resales by the Initial
Purchasers, to furnish the Initial Purchasers as many copies of the
Offering Circular, and any amendments or supplements thereto, as the
Initial Purchasers may reasonably request. Subject to the Initial
Purchasers' compliance with their representations and warranties and
agreements set forth in Section 7 hereof, the Company consents to the use
of the Offering Circular, and any amendments and supplements thereto
required pursuant hereto, by the Initial Purchasers in connection with
Exempt Resales.
(c) At any time prior to the completion of Exempt Resales by the Initial
Purchasers and in connection with market-making activities of the Initial
Purchasers for so long as any Senior Notes are outstanding, (i) not to make
any amendment or supplement to the Offering Circular of which the Initial
Purchasers shall not previously have been advised or to which the Initial
Purchasers shall reasonably object (within five business days after
receiving a copy thereof) after being so advised and (ii) to prepare
promptly upon the Initial Purchasers' reasonable request, any amendment or
supplement to the Offering Circular which may be necessary or advisable in
connection with such Exempt Resales or such market-making activities.
4
<PAGE>
(d) If, during the period referred to in Section 5(c) hereof, any event shall
occur or condition shall exist as a result of which, in the opinion of
counsel to the Initial Purchasers, it becomes necessary to amend or
supplement the Offering Circular in order to make the statements therein,
in the light of the circumstances when such Offering Circular is delivered
to an Eligible Purchaser, not misleading, or if, in the opinion of counsel
to the Initial Purchasers, it is necessary to amend or supplement the
Offering Circular to comply with any applicable law, forthwith to prepare
an appropriate amendment or supplement to such Offering Circular so that
the statements therein, as so amended or supplemented, will not, in the
light of the circumstances when it is so delivered, be misleading, or so
that such Offering Circular will comply with applicable law, and to furnish
to the Initial Purchasers and such other persons as the Initial Purchasers
may designate such number of copies thereof as the Initial Purchasers may
reasonably request.
(e) Prior to the sale of all Senior Notes pursuant to Exempt Resales as
contemplated hereby, to cooperate with the Initial Purchasers and counsel
to the Initial Purchasers in connection with the registration or
qualification of the Senior Notes for offer and sale to the Initial
Purchasers and pursuant to Exempt Resales under the securities or Blue Sky
laws of such jurisdictions as the Initial Purchasers may reasonably request
and to continue such qualification in effect so long as required for Exempt
Resales and to file such consents to service of process or other documents
as may be necessary in order to effect such registration or qualification;
provided that neither the Company nor the Guarantors shall be required in
connection therewith to register or qualify as a foreign corporation in any
jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation in
any jurisdiction in which it is not now so subject.
(f) So long as the Notes are outstanding, to furnish to the Initial Purchasers
as soon as available copies of all reports or other communications
furnished by the Company or any of the Guarantors to the holders of Notes
or furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company or any of the
Guarantors is listed and such other publicly available information
concerning the Company and/or its subsidiaries as the Initial Purchasers
may reasonably request.
(g) So long as any of the Senior Notes remain outstanding and during any period
in which the Company and the Guarantors are not subject to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the .Exchange
Act.), to make available to any holder of Senior Notes in connection with
any sale thereof and any prospective purchaser of such Senior Notes from
such holder, the information (.Rule 144A Information.) required by Rule
144A(d)(4) under the Securities Act.
(h) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the obligations of the Company and
the Guarantors under this Agreement, including (i) the fees, disbursements
and expenses of counsel to the Company and the Guarantors and accountants
of the Company and the Guarantors in connection with the sale and delivery
of the Senior Notes to the Initial Purchasers and pursuant to Exempt
Resales, and all other fees or expenses in connection with the preparation,
printing, filing and distribution of the Offering Circular and all
amendments and supplements to any of the foregoing (including financial
statements) specified in Section 5(b) and 5(c) hereof prior to or during
the period specified in Section 5(c) hereof, including the mailing and
delivery of copies thereof to the Initial Purchasers in the quantities
specified herein, (ii) all costs and expenses related to the transfer and
delivery of the Senior Notes to the Initial Purchasers and pursuant to
Exempt Resales, including any transfer or other taxes payable thereon,
(iii) all costs of printing or producing this Agreement, the other
Operative Documents
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and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Senior Notes, (iv) all expenses in
connection with the registration or qualification of the Senior Notes and
the Guarantees for offer and sale under the securities or Blue Sky laws of
the several states and all costs of printing or producing any Blue Sky
memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Initial Purchasers in connection with such
registration or qualification and memoranda relating thereto), (v) the cost
of printing certificates representing the Senior Notes and the Guarantees,
(vi) all expenses and listing fees in connection with the application for
quotation of the Senior Notes in the National Association of Securities
Dealers, Inc. (.NASD.) Automated Quotation System - PORTAL (.PORTAL.),
(vii) the fees and expenses of the Trustee and the Trustee's counsel in
connection with the Indenture, the Notes and the Guarantees, (viii) the
costs and charges of any transfer agent, registrar and/or depositary
(including DTC), (ix) any fees charged by rating agencies for the rating of
the Notes, (x) all costs and expenses of the Exchange Offer and any
Registration Statement, as set forth in the Registration Rights Agreement,
(xi) all out-of-pocket expenses incurred by Jefferies in connection with
its services rendered (including, without limitation, the fees and
disbursements of Jefferies' counsel, travel and lodging expenses, word
processing charges, messenger and duplicating services, facsimile expenses
and other customary expenditures) up to a maximum amount of $450,000 (which
maximum amount applies to all out-of-pocket expenses incurred by Jefferies
in connection with the Offering and the concurrent offering of Units by
Mrs. Fields' Holding Company, Inc.), and (xii) all other costs and expenses
incident to the performance of the obligations of the Company and the
Guarantors hereunder for which provision is not otherwise made in this
Section.
(i) To use its best efforts to effect the inclusion of the Senior Notes in
PORTAL and to maintain the listing of the Senior Notes on PORTAL for so
long as the Senior Notes are outstanding.
(j) To obtain the approval of DTC for .book-entry. transfer of the Notes, and
to comply with all of its agreements set forth in the representation
letters of the Company and the Guarantors to DTC relating to the approval
of the Notes by DTC for .book-entry. transfer.
(k) During the period beginning on the date hereof and continuing to and
including the Closing Date, not to offer, sell, contract to sell or
otherwise transfer or dispose of any debt securities of the Company or the
Guarantors or any warrants, rights or options to purchase or otherwise
acquire debt securities of the Company or the Guarantors substantially
similar to the Senior Notes and the Guarantees (other than (i) the Senior
Notes and the Guarantee and (ii) commercial paper issued in the ordinary
course of business), without the prior written consent of the Initial
Purchasers.
(l) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate
in respect of any security (as defined in the Securities Act) that would be
integrated with the sale of the Senior Notes to the Initial Purchasers or
pursuant to Exempt Resales in a manner that would require the registration
of any such sale of the Senior Notes under the Securities Act.
(m) To use its best efforts to do and perform all things required or necessary
to be done and performed under this Agreement by it prior to the Closing
Date and to satisfy all conditions precedent to the delivery of the Senior
Notes and the Guarantee.
6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
-----------------------------------------------------------------
GUARANTORS. As of the date hereof, each of the Company and MFB, jointly and
- -----------
severally, represents and warrants to, and agrees with, the Initial Purchasers
that:
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<PAGE>
(a) The Offering Circular does not, as of the date thereof, and will not, as of
the Closing Date, and any supplement or amendment to the Offering Circular,
as of the date thereof and as of the Closing Date, will not, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties contained in
this paragraph (a) shall not apply to statements in or omissions from the
Offering Circular (or any supplement or amendment thereto) based upon
information relating to the Initial Purchasers furnished to the Company in
writing by the Initial Purchasers expressly for use therein (the .Initial
Purchasers' Information.). The parties hereto acknowledge and agree that
the Initial Purchasers' Information consists solely of the statements with
respect to stabilization set forth in the fifth full paragraph on page ii
and the statements set forth under the caption .Plan of Distribution. in
the Offering Circular. No stop order preventing the use of the Offering
Circular, or any amendment or supplement thereto, or any order asserting
that any of the transactions contemplated by this Agreement are subject to
the registration requirements of the Securities Act, has been issued.
(b) Each of the Company and Material Subsidiaries (i) has been duly
incorporated and validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation, (ii) has all requisite
corporate power and authority to carry on its business as described in the
Offering Circular and to own, lease and operate its properties, and (iii)
is duly qualified and in good standing as a foreign corporation authorized
to do business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not (i) have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, or (ii)
draw into question the validity of this Agreement or the other Operative
Documents (a .Material Adverse Effect.).
(c) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights.
(d) The entities listed on SCHEDULE B hereto are the only subsidiaries, direct
or indirect, of the Company as of the date hereof and after giving effect
to the Great American Transactions. All of the outstanding shares of
capital stock of each of the Company.s Material Subsidiaries have been duly
authorized and validly issued and are, or will be, fully paid and non-
assessable, and are, or will be, owned by the Company, directly or
indirectly through one or more subsidiaries (other than 30% of the shares
of common stock of Pretzel Time), free and clear of any security interest,
claim, lien, encumbrance or adverse interest of any nature (each, a .Lien.)
other than Liens existing under the Amended and Restated Loan Agreement
between the Company and LaSalle National Bank, dated as of February 28,
1998, and the ancillary documents thereto. No subsidiary listed on
SCHEDULE B hereto, other than the Material Subsidiaries, is a .significant
subsidiary. of the Company (as such term is defined in Rule 1-02 of
Regulation S-X under the Securities Act).
(e) The Company and its subsidiaries do not have any ownership interest in any
joint venture.
(f) This Agreement has been or as of the Closing Date will have been duly
authorized, executed and delivered by the Company and the Guarantors.
(g) The Indenture has been or as of the Closing Date will have been duly
authorized by the Company and the Guarantors and, when the Indenture has
been duly executed and delivered by the Company and the Guarantors, the
Indenture will be a valid and binding agreement of the Company and the
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<PAGE>
Guarantors, enforceable against the Company and the Guarantors in
accordance with its terms except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors.
rights generally and (ii) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability.
(h) The Senior Notes have been or as of the Closing Date will have been duly
authorized and, when the Senior Notes have been issued, executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Initial Purchasers in accordance with the
terms of this Agreement, the Senior Notes will be entitled to the benefits
of the Indenture and will be valid and binding obligations of the Company,
enforceable in accordance with their terms, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors. rights generally and (ii) rights of acceleration
and the availability of equitable remedies may be limited by equitable
principles of general applicability. On the Closing Date, the Senior Notes
will conform as to legal matters to the description thereof contained in
the Offering Circular.
(i) The Exchange Notes have been or as of the Closing Date will have been duly
authorized by the Company. When the Exchange Notes are issued, executed
and authenticated in accordance with the terms of the Exchange Offer and
the Indenture, the Exchange Notes will be entitled to the benefits of the
Indenture and will be the valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
(j) The Guarantees to be endorsed on the Senior Notes by the Guarantors have
been duly authorized by the Guarantors and, when the Senior Notes have been
issued, executed and authenticated in accordance with the Indenture and
delivered to and paid for by the Initial Purchasers in accordance with the
terms of this Agreement, the Guarantees of the Guarantors endorsed thereon
will be entitled to the benefits of the Indenture and will be the valid and
binding obligation of the Guarantors, enforceable against the Guarantors in
accordance with their terms, except as (i) the enforceability thereof may
be limited by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (ii) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability. On the Closing Date, the Guarantees to be endorsed on the
Senior Notes will conform as to legal matters to the description thereof
contained in the Offering Circular.
(k) The Guarantees to be endorsed on the Exchange Notes by the Guarantors have
been or as of the Closing Date will have been duly authorized by the
Guarantors and, when the Exchange Notes have been issued, executed and
authenticated in accordance with the terms of the Exchange Offer and the
Indenture, the Guarantees of the Guarantors endorsed thereon will be
entitled to the benefits of the Indenture and will be the valid and binding
obligation of the Guarantors, enforceable against the Guarantors in
accordance with their terms, except as (i) the enforceability thereof may
be limited by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (ii) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability. When the Exchange Notes are issued, authenticated and
delivered, the Guarantees to be endorsed on the Exchange Notes will conform
as to legal matters to the description thereof in the Offering Circular.
(l) The Registration Rights Agreement has been or as of the Closing Date will
have been duly authorized by the Company and the Guarantors and, when the
Registration Rights Agreement has been duly executed and delivered by the
Company and the Guarantors, the Registration Rights Agreement will be a
8
<PAGE>
valid and binding agreement of the Company and the Guarantors, enforceable
against the Company and the Guarantors in accordance with its terms, except
as (i) the enforceability thereof may be limited by bankruptcy, insolvency
or similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability. On the Closing Date, the
Registration Rights Agreement will conform as to legal matters to the
description thereof in the Offering Circular.
(m) Neither the Company nor any of its Material Subsidiaries is in violation of
its respective charter or bylaws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its Material Subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its Material Subsidiaries or their respective property
is, or will be, bound.
(n) The execution, delivery and performance of this Agreement and the other
Operative Documents by the Company and the Guarantors, compliance by the
Company and the Guarantors with all provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will not
(i) require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (ii) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or bylaws of the Company or
any of its Material Subsidiaries or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company and its subsidiaries, taken as a whole, to which the Company or any
of its Material Subsidiaries is a party or by which the Company or any of
its Material Subsidiaries or their respective property is bound, or (iii)
violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or agency
having jurisdiction over the Company, any of its Material Subsidiaries or
their respective property.
(o) There are no legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is, or could be, subject, which
might result, singly or in the aggregate, in a Material Adverse Effect.
(p) Neither the Company nor any of its subsidiaries has violated any foreign,
federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances
or wastes, pollutants or contaminants (.Environmental Laws.) or any
provisions of the Employee Retirement Income Security Act of 1974, as
amended (.ERISA.), or the rules and regulations promulgated thereunder,
except for such violations which, singly or in the aggregate, would not
have a Material Adverse Effect.
(q) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any Authorization, any related constraints on
operating activities and any potential liabilities to third parties) which
would, singly or in the aggregate, on the date hereof and after giving
effect to the Great American Transactions, have a Material Adverse Effect.
(r) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each,
an .Authorization.) of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations
and all courts and
9
<PAGE>
other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure
to have any such Authorization or to make any such filing or notice would
not, singly or in the aggregate, have a Material Adverse Effect. Each such
Authorization is valid and in full force and effect and each of the Company
and its subsidiaries is in compliance with all the terms and conditions
thereof and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time
or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where such
failure to be valid and in full force and effect or to be in compliance,
the occurrence of any such event or the presence of any such restriction
would not, singly or in the aggregate, have a Material Adverse Effect.
(s) All leases to which the Company and its subsidiaries are a party are valid,
subsisting and enforceable leases, and no default has, or will have,
occurred or is, or will be, continuing thereunder which could, singly or in
the aggregate, reasonably be expected to have a Material Adverse Effect or
materially and adversely affect the offering of the Senior Notes, and the
Company and its subsidiaries enjoy peaceful and undisturbed possession to
which any of them is a party as lessee (with such exceptions as do not
materially interfere with the use made by the Company or such subsidiary).
(t) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms all patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names (.intellectual
property.) currently employed by them in connection with the business now
operated by them, except where the failure to own or possess or otherwise
be able to acquire such intellectual property would not, singly or in the
aggregate, have a Material Adverse Effect; and neither the Company nor any
of its subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of such intellectual
property which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse
Effect.
(u) Except as disclosed in the Offering Circular, no relationship, direct or
indirect, exists between or among the Company or any of its subsidiaries
except for Great American, on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its
subsidiaries except for Great American, on the other hand, which would be
required by the Securities Act to be described in the Offering Circular if
the Offering Circular were a prospectus included in a registration
statement on Form S-1 filed with the Commission.
(v) The Company and each of its subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management.s general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management.s general
or specific authorization and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(w) All material tax returns required to be filed by the Company and each of
its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes,
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<PAGE>
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been, or will be,
paid, other than those being contested in good faith and for which adequate
reserves have been provided.
(x) All indebtedness of the Company and the Guarantors that will be repaid with
the proceeds of the issuance and sale of the Senior Notes was incurred, and
the indebtedness represented by the Senior Notes and the Guarantees is
being incurred, for proper purposes and in good faith, and each of the
Company and the Guarantors was at the time of the incurrence of such
indebtedness that will be repaid with the proceeds of the issuance and sale
of the Senior Notes, and will be on the Closing Date (after giving effect
to the application of the proceeds from the issuance of the Senior Notes),
solvent, and had at the time of the incurrence of such indebtedness that
will be repaid with the proceeds of the issuance and sale of the Senior
Notes, and will have on the Closing Date (after giving effect to the
application of the proceeds from the issuance of the Senior Notes),
sufficient capital for carrying on their respective business and were at
the time of the incurrence of such indebtedness that will be repaid with
the proceeds of the issuance and sale of the Senior Notes, and will be on
the Closing Date (after giving effect to the application of the proceeds
from the issuance of the Senior Notes), able to pay their respective debts
as they mature.
(y) The accountants, Arthur Andersen LLP, Deloitte & Touche LLP, Price
Waterhouse LLP and Weinstein Spira & Company, P.C., that have issued their
reports on the financial statements included in the Offering Circular are
independent public accountants with respect to the Company and Cookies USA,
as required by the Securities Act and the Exchange Act. The historical
financial statements and notes, set forth in the Offering Circular comply
as to form in all material respects with the requirements applicable to
registration statements on Form S-1 under the Securities Act, except for
(i) any schedules that would be required to be included in Part II of a
registration statement on Form S-1 under the Securities Act has not been
included and (ii) the historical financial statements of the eight stores
being purchased from entities controlled by Arthur Karp have not been
included.
(z) The historical financial statements and notes forming part of the Offering
Circular (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries at the respective
dates or for the respective periods to which they apply; such statements
and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial information set forth
in the Offering Circular (and any amendment or supplement thereto) are, in
all material respects, accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Company; except that EBITDA and Adjusted EBITDA are not presented in such
historical financial statements.
(aa) The pro forma financial statements included in the Offering Circular have
been prepared on a basis consistent with the historical financial
statements of the Company and its subsidiaries and give effect to
assumptions used in the preparation thereof on a reasonable basis and in
good faith and present fairly the proposed transactions contemplated by the
Offering Circular; and such pro forma financial statements comply as to
form in all material respects with the requirements applicable to pro forma
financial statements included in registration statements on Form S-1 under
the Securities Act; except (i) that no separate columnar presentation was
made for the contemplated acquisition of the eight stores from entities
controlled by Arthur Karp, (ii) that the transactions described as "Other
Recent Transactions" were not given complete pro forma treatment but rather
only Adjusted EBITDA was impacted, and (iii) that the Staff of the
Commission does not permit adjusted EBITDA to be included in registration
statements on Form S-1 or S-4 under the Securities Act. Except as set
forth in the proviso in the preceding sentence, the other pro forma
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<PAGE>
financial information included in the Offering Circular are, in all
material respects, accurately presented and prepared on a basis consistent
with the pro forma financial statements.
(ab) The Company is not and, after giving effect to the offering and sale of the
Senior Notes and the application of the net proceeds thereof as described
in the Offering Circular, will not be, an .investment company,. as such
term is defined in the Investment Company Act of 1940, as amended (the
.Investment Company Act.).
(ac) Other than the Registration Rights Agreement and the Registration Rights
Agreement, dated as of November 26, 1997, among the Company, MFB and the
Initial Purchasers, there are no contracts, agreements or understandings
between the Company or the Guarantors and any person granting such person
the right to require the Company or the Guarantors to file a registration
statement under the Securities Act with respect to any securities of the
Company or the Guarantors or to require the Company or the Guarantors to
include such securities with the Notes and Guarantees registered pursuant
to any Registration Statement.
(ad) Neither the Company nor any of its subsidiaries nor any agent thereof
acting on the behalf of them has taken, and none of them will take, any
action that might cause this Agreement or the issuance or sale of the
Senior Notes to violate Regulation T (12 C.F.R. Part 220), Regulation U (12
C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of
Governors of the Federal Reserve System.
(ae) Since the date as of which information is given in the Offering Circular
and other than as set forth in the Offering Circular (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), (i) there has not occurred any material adverse change or any
development involving a prospective material adverse change in the
condition, financial or otherwise, or the earnings, business, management or
operations of the Company and its subsidiaries, taken as a whole, (ii)
there has not been any material adverse change or any development involving
a prospective material adverse change in the capital stock or in the long-
term debt of the Company or any of its subsidiaries and (iii) neither the
Company nor any of its subsidiaries has incurred any material liability or
obligation, direct or contingent.
(af) The Offering Circular, as of its date, contains all the information
specified in, and meeting the requirements of, Rule 144A(d)(4) under the
Securities Act.
(ag) When the Senior Notes and the Guarantees are issued and delivered pursuant
to this Agreement, neither the Senior Notes nor the Guarantees will be of
the same class (within the meaning of Rule 144A under the Securities Act)
as any security (except for the Company's Series A and Series B 10.% Senior
Notes due 2004) of the Company or the Guarantors that is listed on a
national securities exchange registered under Section 6 of the Exchange Act
or that is quoted in a United States automated inter-dealer quotation
system.
(ah) No form of general solicitation or general advertising (as defined in
Regulation D under the Securities Act) was used by the Company, the
Guarantors or any of their respective representatives (other than the
Initial Purchasers, as to whom the Company and the Guarantors make no
representation) in connection with the offer and sale of the Senior Notes
contemplated hereby, including, but not limited to, articles, notices or
other communications published in any newspaper, magazine, or similar
medium or broadcast over television or radio, or any seminar or meeting
whose attendees have been invited by any general solicitation or general
advertising. No securities (except for the Company's Series A and Series B
10.% Senior Notes due 2004) of the same class as the Senior Notes have been
issued and sold by the
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Company within the six-month period immediately prior to the date hereof.
(ai) Prior to the effectiveness of any Registration Statement, the Indenture (as
it will be amended on the Closing Date) is not required to be qualified
under the TIA.
(aj) No registration under the Securities Act of the Senior Notes or the
Guarantees is required for the sale of the Senior Notes and the Guarantees
to the Initial Purchasers as contemplated hereby or for the Exempt Resales
assuming the accuracy of the Initial Purchasers' representations and
warranties and agreements set forth in Section 7 hereof.
(ak) Each certificate signed by any officer of the Company or the Guarantors and
delivered to the Initial Purchasers or counsel for the Initial Purchasers
shall be deemed to be a representation and warranty by the Company or the
Guarantors to the Initial Purchasers as to the matters covered thereby.
The Company and the Guarantors acknowledge that the Initial Purchasers and,
for purposes of the opinions to be delivered to the Initial Purchasers
pursuant to Section 9 hereof, counsel to the Company and the Guarantors and
counsel to the Initial Purchasers will rely upon the accuracy and truth of
the foregoing representations and hereby consent to such reliance.
7. INITIAL PURCHASERS' REPRESENTATIONS AND WARRANTIES. Each of the
--------------------------------------------------
Initial Purchasers, severally and not jointly, represents and warrants to the
Company and the Guarantors, and agrees that:
(a) Such Initial Purchaser is either a QIB or an Accredited Institution, in
either case, with such knowledge and experience in financial and business
matters as is necessary in order to evaluate the merits and risks of an
investment in the Senior Notes.
(b) Such Initial Purchaser (i) is not acquiring the Senior Notes with a view to
any distribution thereof or with any present intention of offering or
selling any of the Senior Notes in a transaction that would violate the
Securities Act or the securities laws of any state of the United States or
any other applicable jurisdiction and (ii) will be reoffering and reselling
the Senior Notes only to (A) QIBs in reliance on the exemption from the
registration requirements of the Securities Act provided by Rule 144A and
(B) not more than ten Accredited Institutions that execute and deliver a
letter containing certain representations and agreements in the form
attached as Annex A to the Offering Circular.
(c) Such Initial Purchaser agrees that no form of general solicitation or
general advertising (within the meaning of Regulation D under the
Securities Act) has been or will be used by such Initial Purchaser or any
of its representatives in connection with the offer and sale of the Senior
Notes pursuant hereto, including, but not limited to, articles, notices or
other communications published in any newspaper, magazine or similar medium
or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising.
(d) Such Initial Purchaser agrees that, in connection with Exempt Resales, such
Initial Purchaser will solicit offers to buy the Senior Notes only from,
and will offer to sell the Senior Notes only to, Eligible Purchasers. Each
Initial Purchaser further agrees that it will offer to sell the Senior
Notes only to, and will solicit offers to buy the Senior Notes only from
(i) Eligible Purchasers that the Initial Purchaser reasonably believes are
QIBs, and (ii) Accredited Institutions who make the representations
contained in, and execute and return to the Initial Purchasers, a
certificate in the form of Annex A attached to the Offering Circular, in
each case, that agree that (A) the Senior Notes purchased by them may be
resold, pledged or
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otherwise transferred within the time period referred to under Rule 144(k)
(taking into account the provisions of Rule 144(d) under the Securities
Act, if applicable) under the Securities Act, as in effect on the date of
the transfer of such Senior Notes, only (1) to the Company or any of its
subsidiaries, (2) to a person whom the seller reasonably believes is a QIB
purchasing for its own account or for the account of a QIB in a transaction
meeting the requirements of Rule 144A under the Securities Act, (3) in an
offshore transaction (as defined in Rule 902 under the Securities Act)
meeting the requirements of Rule 904 of the Securities Act, (4) in a
transaction meeting the requirements of Rule 144 under the Securities Act,
(5) to an Accredited Institution that, prior to such transfer, furnishes
the Trustee a signed letter containing certain representations and
agreements relating to the registration of transfer of such Senior Note
(the form of which can be obtained from the Trustee) and, if such transfer
is in respect of an aggregate principal amount of Senior Notes less than
$250,000, an opinion of counsel acceptable to the Company that such
transfer is in compliance with the Securities Act, (6) in accordance with
another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel acceptable to the Company) or (7)
pursuant to an effective registration statement and, in each case, in
accordance with the applicable securities laws of any state of the United
States or any other applicable jurisdiction and (B) they will deliver to
each person to whom such Senior Notes or an interest therein is transferred
a notice substantially to the effect of the foregoing.
The Initial Purchasers acknowledge that the Company and the Guarantors and,
for purposes of the opinions to be delivered to each Initial Purchaser
pursuant to Section 9 hereof, counsel to the Company and the Guarantors and
counsel to the Initial Purchasers will rely upon the accuracy and truth of
the foregoing representations and the Initial Purchasers hereby consent to
such reliance.
8. INDEMNIFICATION.
---------------
(a) The Company and the Guarantors agree, jointly and severally, to indemnify
and hold harmless each Initial Purchaser, its directors, its officers and
each person, if any, who controls such Initial Purchaser within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any
action, that could give rise to any such losses, claims, damages,
liabilities or judgments) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Offering Circular (or any
amendment or supplement thereto) or any Rule 144A Information provided by
the Company or the Guarantors to any holder or prospective purchaser of
Senior Notes pursuant to Section 5(h) hereof or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement
or omission based upon the Initial Purchasers' Information.
(b) Each Initial Purchaser agrees, severally and not jointly, to indemnify and
hold harmless the Company and the Guarantors, and their respective
directors and officers and each person, if any, who controls (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) the Company or the Guarantors, to the same extent as the foregoing
indemnity from the Company and the Guarantor to the Initial Purchasers but
only with reference to Initial Purchasers' Information.
(c) In case any action shall be commenced involving any person in respect of
which indemnity may be sought pursuant to Section 8(a) or 8(b) hereof (the
.indemnified party.), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the .indemnifying party.)
14
<PAGE>
in writing, and the indemnifying party shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all fees and expenses of such counsel,
as incurred (except that, in the case of any action in respect of which
indemnity may be sought pursuant to both Sections 8(a) and 8(b) hereof, the
Initial Purchasers shall not be required to assume the defense of such
action pursuant to this Section 8(c), but may employ separate counsel and
participate in the defense thereof; however, the fees and expenses of such
counsel, except as provided below, shall be at the expense of the Initial
Purchasers). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the
indemnified party unless (i) the employment of such counsel shall have been
specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action
or employ counsel reasonably satisfactory to the indemnified party within a
reasonable period of time after notice of the institution of such action or
(iii) the named parties to any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party, and
the indemnified party shall have been advised by such counsel that there
may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case
the indemnifying party shall not have the right to assume the defense of
such action on behalf of the indemnified party). In any such case, the
indemnifying party shall not, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for
the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such
fees and expenses shall be reimbursed as they are incurred (upon written
request and presentation of reasonably satisfactory invoices). Such firm
shall be designated in writing by Jefferies & Company, Inc., in the case of
the parties indemnified pursuant to Section 8(a) hereof, and by the
Company, in the case of parties indemnified pursuant to Section 8(b)
hereof. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i)
effected with its written consent or (ii) effected without its written
consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the
indemnified party for reimbursement for the fees and expenses of counsel
(in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the
indemnifying party shall have received written notice of such settlement
and shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent to
the entry of judgment with respect to, any pending or threatened action in
respect of which the indemnified party is or could have been a party and
indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment includes
an unconditional release of the indemnified party from all liability on
claims that are or could have been the subject matter of such action.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as
a result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Guarantors, on the one hand, and the Initial
Purchasers, on the other hand, from the offering of the Senior Notes or
(ii) if the allocation provided by clause 8(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Company and the Guarantors, on the one hand, and the
Initial Purchasers, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
15
<PAGE>
relative benefits received by the Company and the Guarantors, on the one
hand, and the Initial Purchasers, on the other hand, shall be deemed to be
in the same proportion as the total net proceeds from the offering of the
Senior Notes (before deducting expenses) received by the Company, and the
total discounts and commissions received by the Initial Purchasers bear to
the total price to investors of the Senior Notes, in each case as set forth
in the table on the cover page of the Offering Circular. The relative
fault of the Company and the Guarantors, on the one hand, and the Initial
Purchasers, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company or the Guarantors, on the one hand,
or the Initial Purchasers, on the other hand.
The Company and the Guarantors and the Initial Purchasers agree that
it would not be just and equitable if contribution pursuant to this Section
8(d) were determined by pro rata allocation (even if the Initial Purchasers
were treated as one entity for such purposes) or by any other method of
allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities or judgments referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses incurred by such indemnified party in connection
with investigating or defending any matter, including any action, that
could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Initial
Purchaser shall be required to contribute any amount in excess of the
amount by which the total price of the Senior Notes purchased by it were
sold to investors in Exempt Resales exceeds the amount of any damages which
such Initial Purchaser has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) hereof of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Initial Purchasers' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective
principal amount of Senior Notes purchased by each of the Initial
Purchasers hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
9. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS. The obligations
---------------------------------------------
of the Initial Purchasers to purchase the Senior Notes under this Agreement are
subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company and the Guarantors
contained in this Agreement shall be true and correct on the Closing Date
with the same force and effect as if made on and as of the Closing Date.
(b) On or after the date hereof, (i) there shall not have occurred any
downgrading, suspension or withdrawal of, nor shall any notice have been
given of any potential or intended downgrading, suspension or withdrawal
of, or of any review (or of any potential or intended review) for a
possible change that does not indicate the direction of the possible change
in, any rating of the Company or the Guarantors or any securities of the
Company or the Guarantors (including, without limitation, the placing of
any of the foregoing ratings on credit watch with negative or developing
implications or under review with an uncertain direction) by Standard &
Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., or
Moody's Investors Service, Inc., (provided, that the foregoing shall not
include the Company's receiving a B2 rating with a negative outlook from
Moody's Investors Service, Inc.) (ii) there shall not have occurred
16
<PAGE>
any change, nor shall notice have been given of any potential or intended
change, in the outlook for any rating of the Company or the Guarantors by
any such rating organization and (iii) no such rating organization shall
have given notice that it has assigned (or is considering assigning) a
lower rating to the Notes than that on which the Notes were marketed.
(c) Since the respective dates as of which information is given in the Offering
Circular other than as set forth in the Offering Circular (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), (i) there shall not have occurred any change or any development
involving a prospective change in the condition, financial or otherwise, or
the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there shall not have been any change
or any development involving a prospective change in the capital stock or
in the long-term debt of the Company or any of its subsidiaries and (iii)
neither the Company nor any of its subsidiaries shall have incurred any
liability or obligation, direct or contingent, the effect of which, in any
such case described in clause 9(c)(i), 9(c)(ii) or 9(c)(iii), in your
judgment, is material and adverse and, in your judgment, makes it
impracticable to market the Senior Notes on the terms and in the manner
contemplated in the Offering Circular.
(d) The Initial Purchasers shall have received on the Closing Date a
certificate dated the Closing Date, signed by the President and the Chief
Financial Officer of the Company, confirming the matters set forth in
Sections 9(a), 9(b) and 9(c) hereof.
(e) The Initial Purchasers shall have received on the Closing Date an opinion
(in form and substance reasonably satisfactory to the Initial Purchasers
and counsel for the Initial Purchasers), dated the Closing Date, of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company and the
Guarantor, as to the matters set forth in Exhibit B hereto and such
additional matters or modifications as to which the parties hereto mutually
agree.
(f) The Initial Purchasers shall have received on the Closing Date an opinion
(in form and substance reasonably satisfactory to the Initial Purchasers
and counsel for the Initial Purchasers), dated the Closing Date, of Michael
Ward, Esq., general counsel for the Company and the Guarantor, as to the
matters set forth in Exhibit C hereto and such additional matters and
modifications as to which the parties hereto mutually agree.
(g) The Initial Purchasers shall have received on the Closing Date an opinion,
dated the Closing Date, of Latham & Watkins, counsel for the Initial
Purchasers, in form and substance reasonably satisfactory to the Initial
Purchasers.
(h) The Initial Purchasers shall have received, at the time this Agreement is
executed and at the Closing Date, letters dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to the
Initial Purchasers from each of Arthur Andersen L.L.P., Deloitte & Touche
LLP, Price Waterhouse LLP and Weinstein, Spira & Company, P.C., independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' .comfort letters. to the Initial
Purchasers with respect to the financial statements and certain financial
information contained in the Offering Circular.
(i) Concurrently with the issue and sale of the Senior Notes, the Great
American Transactions and the MFH Transactions (as defined in the Offering
Circular) shall be consummated on terms that conform in all material
respects to the description thereof in the Offering Circular, and the
Initial Purchasers
17
<PAGE>
shall have received true and correct copies of all documents pertaining
thereto and evidence satisfactory to the Initial Purchasers of the
consummation thereof.
(j) The Senior Notes shall have been approved by the NASD for trading and duly
listed in PORTAL.
(k) The Initial Purchasers shall have received a counterpart, conformed as
executed, of the (i) first supplement to the Indenture, dated as of the
Closing Date, which shall have been entered into by the Company, MFB and
the Trustee and (ii) second supplement to the Indenture, dated as of the
Closing Date, which shall have been entered into by the Company, MFB, Great
American and the Trustee.
(l) The Company and the Guarantors shall have executed the Registration Rights
Agreement and the Initial Purchasers shall have received an original copy
thereof, duly executed by the Company and the Guarantor.
(m) Concurrently with the issue and sale of Senior Notes, Cookies USA shall be
merged with and into the Company, and the Company shall continue as the
surviving corporation of the merger. Satisfactory evidence that such merger
has taken place shall be provided to the Initial Purchasers and their
counsel.
(n) The Company shall not have failed at or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required
to be performed or complied with by the Company at or prior to the Closing
Date.
(o) The Company shall have entered into Settlement Agreements and Waivers with
the stockholders of Deblan Corporation and Chocolate Chip Cookies of Texas,
Inc., plus a number of the remaining Great American franchisees so that, in
total, at least 80% of the Great American franchisees shall have executed
such Settlement Agreements and Waivers.
(p) The Initial Purchasers shall have delivered to the Company a letter of
representations in form satisfactory to the Company and the Initial
Purchasers.
(r) The Initial Purchasers shall have received on the Closing Date a
certificate, dated the Closing Date, signed by the Chief Financial Officer
of the Company, confirming that the Company is not in violation of the debt
incurrence covenant in the Indenture and setting forth the basis for such
conclusion.
10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
------------------------------------------
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time prior to the Closing Date by the
Initial Purchasers by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States that, in the Initial Purchasers'
judgment, is material and adverse and, in the Initial Purchasers' judgment,
makes it impracticable to market the Senior Notes on the terms and in the manner
contemplated in the Offering Circular, (ii) the suspension or material
limitation of trading in securities or other instruments on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or
limitation on prices for securities or other instruments on any such exchange or
the Nasdaq National Market, (iii) the declaration of a banking moratorium by
either federal or New York State authorities or (iv) the taking of any action by
any federal, state or local government or agency in
18
<PAGE>
respect of its monetary or fiscal affairs which in the opinion of the Initial
Purchasers has a material adverse effect on the financial markets in the United
States.
If on the Closing Date any one or more of the Initial Purchasers shall fail or
refuse to purchase the Senior Notes which it or they have agreed to purchase
hereunder on such date and the aggregate principal amount of the Senior Notes
which such defaulting Initial Purchaser or Initial Purchasers, as the case may
be, agreed but failed or refused to purchase is not more than one-tenth of the
aggregate principal amount of the Senior Notes to be purchased on such date by
all Initial Purchasers, each non-defaulting Initial Purchaser shall be obligated
severally, in the proportion which the principal amount of the Senior Notes set
forth opposite its name in SCHEDULE A bears to the aggregate principal amount of
the Senior Notes which all the non-defaulting Initial Purchasers, as the case
may be, have agreed to purchase, or in such other proportion as you may specify,
to purchase the Senior Notes which such defaulting Initial Purchaser or Initial
Purchasers, as the case may be, agreed but failed or refused to purchase on such
date; provided that in no event shall the aggregate principal amount of the
Senior Notes which any Initial Purchaser has agreed to purchase pursuant to
Section 2 hereof be increased pursuant to this Section 10 by an amount in excess
of one-ninth of such principal amount of the Senior Notes without the written
consent of such Initial Purchaser. If on the Closing Date any Initial Purchaser
or Initial Purchasers shall fail or refuse to purchase the Senior Notes and the
aggregate principal amount of the Senior Notes with respect to which such
default occurs is more than one-tenth of the aggregate principal amount of the
Senior Notes to be purchased by all Initial Purchasers and arrangements
satisfactory to the Initial Purchasers and the Company for purchase of such
Senior Notes are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Initial
Purchaser and the Company. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Offering Circular or any other
documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Initial Purchaser from liability in
respect of any default of any such Initial Purchaser under this Agreement.
11. MISCELLANEOUS. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (i) if to the Company or the
Guarantors, to Mrs. Fields' Original Cookies, Inc., 2855 East Cottonwood
Parkway, Salt Lake City, Utah 84121, ATTN: Legal Department, and (ii) if to the
Initial Purchasers, to Jefferies & Company, Inc., 11100 Santa Monica Boulevard,
Los Angeles, California 90025, Attention: Syndicate Department, or in any case
to such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Guarantors and the Initial
Purchasers set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Senior Notes, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Initial Purchaser, the officers
or directors of any Initial Purchaser, any person controlling any Initial
Purchaser, the Company, the Guarantors, the officers or directors of the Company
or the Guarantor, or any person controlling the Company or the Guarantors, (ii)
acceptance of the Senior Notes and payment for them hereunder and (iii)
termination of this Agreement.
If for any reason the Senior Notes are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10 hereof), the Company and the Guarantors,
jointly and severally, agree to reimburse the Initial Purchasers for all out-of-
pocket expenses (including the fees and disbursements of counsel) incurred by
them. Notwithstanding any termination of this Agreement, the Company shall be
liable for all expenses which it
19
<PAGE>
has agreed to pay pursuant to Section 5(i) hereof. The Company and the Guarantor
also agree, jointly and severally, to reimburse each Initial Purchaser and its
officers, directors and each person, if any, who controls such Initial Purchaser
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act for any and all fees and expenses (including, without limitation,
the fees and expenses of counsel) incurred by it in connection with enforcing
its rights under this Agreement (including, without limitation, its rights under
this Section 8).
Except as otherwise provided, this Agreement has been and is made solely for
the benefit of and shall be binding upon the Company, the Guarantors, the
Initial Purchasers, the Initial Purchasers' directors and officers, any
controlling persons referred to herein, the directors of the Company and the
Guarantors and their respective successors and assigns, all as and to the extent
provided in this Agreement, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term .successors and assigns. shall
not include a purchaser of any of the Senior Notes from the Initial Purchasers
merely because of such purchase.
This Agreement shall be governed and construed in accordance with the internal
laws of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among the
Company, the Guarantors and the Initial Purchasers.
Very truly yours,
Mrs. Fields' Original Cookies, Inc.
By: _________________________________
Name:
Title:
The Mrs. Fields' Brand, Inc.
By: _________________________________
Name:
Title:
20
<PAGE>
The foregoing Purchase Agreement is hereby agreed
to and accepted as of the consummation of the
Great American Transactions, it being understood
that the provisions thereof applicable to and
binding upon the Guarantors, including the
agreements, representations and warranties of the
Guarantors in Sections 5 and 6 of the foregoing
Purchase Agreement, and the indemnification
provisions of Section 8 of the foregoing Purchase
Agreement, shall be applicable to and binding upon
Great American Cookie Company, Inc. as of and
effective immediately upon consummation of the
Great American Transactions.
Great American Cookie Company, Inc.
By: ___________________________________
Name:
Title:
21
<PAGE>
Agreed and accepted as of the date first above written:
JEFFERIES & COMPANY, INC.
By: ___________________________________
Name:
Title:
BT ALEX. BROWN INCORPORATED
By: ___________________________________
Name:
Title:
<PAGE>
SCHEDULE A
Principal Amount of
Initial Purchasers Notes
- ---------------------------------------------------- ---------------------
Jefferies & Company, Inc............................ 28,000,000
BT Alex. Brown Incorporated......................... 12,000,000
---------------------
TOTAL $40,000,000
S-1
<PAGE>
SCHEDULE B
SUBSIDIARIES OF THE COMPANY
Airport Cookies, Inc.
Fairfield Foods, Inc.
Mrs. Fields Cookies (Canada) Ltd.
Mrs. Fields Cookies Australia
Mrs. Fields Limited
Pretzel Time, Inc.
Great American Cookie Company, Inc. (simultaneously upon consummation of the
Great American Transactions)
S-2
<PAGE>
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
A-1
<PAGE>
EXHIBIT B
FORM OF OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
A-2
<PAGE>
EXHIBIT C
FORM OF OPINION OF IN HOUSE COUNSEL TO THE COMPANY
(i) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, free and clear of
any Lien.
(ii) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws and, to the best of such counsel's knowledge
after due inquiry, neither the Company nor any of its subsidiaries is in default
in the performance of any obligation, agreement, covenant or condition contained
in any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or their respective property is bound.
(iii) After due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any of
its subsidiaries is or could be a party or to which any of their respective
property is or could be subject, which might result, singly or in the aggregate,
in a Material Adverse Effect.
(iv) To the best of such counsel's knowledge after due inquiry, there are
no contracts, agreements or understandings between the Company or the Guarantors
and any person granting such person the right to require the Company or the
Guarantors to file a registration statement under the Securities Act with
respect to any securities of the Company or the Guarantors or to require the
Company or the Guarantor to include such securities with the Notes and
Guarantees registered pursuant to any Registration Statement.
A-3
<PAGE>
EXHIBIT 2.1
______________________
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
COOKIES USA, INC.,
THE INDIVIDUALS AND ENTITIES IDENTIFIED HEREIN AS
THE SELLERS
AND
MRS. FIELDS' ORIGINAL COOKIES, INC.
DATED AS OF
AUGUST 13, 1998
______________________
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT, dated as of July 30, 1998, by and among
Cookies USA, Inc., a Delaware corporation (the "Company"), the Sellers (as
hereinafter defined) and Mrs. Fields' Original Cookies, Inc., a Delaware
corporation ("Buyer").
WHEREAS, the individuals and entities identified on Annex A hereto
(the "Sellers") own in the respective amounts indicated thereon (i) all of the
outstanding shares of common stock, par value $0.01 per share, of the Company
(the "Company Common Stock"), (ii) all of the outstanding shares of the Junior
Class A Preferred Stock of the Company and the Junior Class B Preferred Stock of
the Company (together, the "Junior Preferred Stock"), (iii) all of the
outstanding shares of the Senior Convertible Preferred Stock of the Company (the
"Senior Preferred Stock"), and (iv) all of the outstanding $10 million aggregate
principal amount of the Senior Subordinated Notes of the Company (the "Senior
Subordinated Notes" and, together with the Company Common Stock, the Junior
Preferred Stock and the Senior Preferred Stock, the "Company Securities");
WHEREAS, the Company owns all of the outstanding shares of common
stock (the "Subsidiary Common Stock"), no par value, of Great American Cookie
Company, Inc., a Delaware corporation (the "Subsidiary"); and
<PAGE>
WHEREAS, Buyer desires to purchase, and the Sellers desire to sell to
Buyer, all of the Company Securities owned by them upon the terms and conditions
hereinafter set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements hereinafter set forth, and intending
to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
SALE OF STOCK AND TERMS OF PAYMENT
----------------------------------
I.1 The Sale. Upon the terms and subject to the satisfaction of the
--------
conditions contained in this Agreement, at the Closing (as hereinafter defined),
each Seller will sell, assign, transfer and deliver to Buyer, and Buyer will
purchase and acquire from such Seller, free and clear of all Liens (as
hereinafter defined), all of the shares and/or principal amount of Company
Securities owned by such Seller. Notwithstanding anything in this Agreement to
the contrary, prior to the Closing Date, any Seller may transfer all or part of
the Company Securities owned by such Seller, subject to all of such Sellers'
rights and obligations under this Agreement, to any other Seller. Each Seller
agrees to give prompt written notice (which in no event shall be later than two
business days before the Closing) to Buyer of any such transfer of Company
Securities.
2
<PAGE>
I.2 Consideration.
-------------
(a) Upon the terms and subject to the satisfaction of the conditions
contained in this Agreement and subject to adjustment as set forth in Sections
1.2(b) and 1.2(c), in consideration of the aforesaid sale, assignment, transfer
and delivery of the Company Securities, at the Closing Buyer will pay or cause
to be paid to the respective Sellers the following amounts, in each case
allocated among the holders of each class of the Company Securities on a pro
rata basis as of the Closing Date (as hereinafter defined):
(i) $10,000,000 in the aggregate for all of the outstanding
Senior Subordinated Notes, plus the aggregate amount of any accrued but
unpaid interest thereon through the Closing;
(ii) $5,150,000 in the aggregate for all shares of the Senior
Preferred Stock outstanding on the Closing Date (including all accrued but
unpaid dividends);
(iii) in the aggregate for all shares of the Junior Preferred
Stock outstanding on the Closing Date (including all accrued but unpaid
dividends); and
(iv) $0 for all shares of the Company Common Stock outstanding
on the Closing Date.
(b) In the event that the aggregate amount of all Expenses (as
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<PAGE>
hereinafter defined) shall exceed $200,000, in addition to any other adjustment
required by this Section 1.2, the consideration payable pursuant to Section
1.2(a) shall be reduced by 100% of such excess. For purposes of this Agreement,
"Expenses" shall include all professional fees and expenses paid or payable by
the Company in connection with this Agreement and the transactions contemplated
hereby, including without limitation those expenses of the Sellers contemplated
to be paid by the Company pursuant to Section 5.6, it being agreed that
"Expenses" shall not include the fees and expenses of Price Waterhouse LLP,
legal and accounting expenses incurred in the ordinary course of business,
expenses actually paid on or prior to March 29, 1998 and the Company's share of
the HSR Act fee payable pursuant to Section 5.1.
(c) By a written notice from any Seller to Buyer on or prior to the
Closing Date, such Seller may elect to reallocate the aggregate payments to be
received by such Seller pursuant to Sections 1.2(a)(ii), 1.2(a)(iii) and
1.2(a)(iv), or elect to apply such payments against any adjustments pursuant to
Section 1.2(b), among the different classes of Company Securities to be
purchased pursuant to such Sections. In the absence of any such notice, any
adjustments pursuant to Section 1.2(b) shall be applied to reduce payments under
Section 1.2(a)(iii).
I.3 The Sellers' Releases. (a) Each Seller hereby confirms and agrees
---------------------
that, effective upon such Seller's receipt of the consideration payable to such
Seller pursuant to Section 1.2, any and all claims such Seller or any of its
partners, trustees,
4
<PAGE>
beneficiaries, shareholders, affiliates, directors or officers may have against
the Company, the Subsidiary and their respective shareholders, affiliates,
directors and officers as of the Closing Date will be deemed fully discharged
and released. Without limiting the foregoing, the claims so released include
without limitation any claims under any employment or bonus agreement, any
franchise agreement, any license agreement or any other Affiliated Arrangement
(as hereinafter defined), and any claims in respect of any failure to timely pay
dividends or interest or to perform covenants, or any options or other rights to
acquire securities of the Company or the Subsidiary (the "Options"), but do not
include any of the rights of Sellers pursuant to Section 1.4 or statutory
indemnification rights or contractual indemnification rights under agreements
that are identified on Schedule 1.3.
(b) TJC Management Corp. hereby waives its right to receive any
payment under the Management Agreement, including any fee accrued on the
Company's balance sheet as of June 30, 1998.
I.4 Other Matters. Buyer hereby agrees that, in the event the
-------------
Closing shall occur, Buyer shall (a) as of the Closing Date, cede to Messrs.
Coles and Karp the Subsidiary's rights to purchase Atlanta Braves tickets
provided that Messrs. Coles and Karp pay for any tickets which the Subsidiary
has committed to purchase as of such date as and when any such payments are due,
(b) permit Messrs. Coles and
5
<PAGE>
Karp to continue at their respective expense (including for these purposes
insurance and administrative costs) their participation in the Subsidiary's
health insurance program, subject to Buyer's right to provide such coverage
under Buyer's health insurance program until November 30, 1998, (c) permit
Messrs. Coles and Karp to each receive Great American cookies without charge in
accordance with past practice, provided that as to cookies obtained from any
store other than the GACC stores at Cumberland Mall in Atlanta, Georgia, at Town
Center at Cobb in Kennesaw, Georgia, at Perimeter Mall in Atlanta, Georgia and
at Sarasota Square in Sarasota, Florida, cookies must be purchased by Messrs.
Coles and Karp and store receipts must be promptly provided to Mrs. Fields in
order for reimbursement to be received, (d) grant to Messrs. Coles and Karp a
right of first refusal to purchase for cash the Subsidiary's batter facility
(exclusive of all equipment and furnishings and otherwise "as is, where is")
should the Subsidiary determine to sell such facility within the two year period
following the Closing, such right to be exercisable for 60 days following
Messrs. Coles' and Karp's receipt of notice of a proposed sale of such facility
to a third party but only on the same terms and subject to the same conditions
as offered by such third party and subject to the further covenant by Messrs.
Karp and Coles that they shall not use the batter facility in connection with
any business, individual, partnership, firm, corporation or other entity which
is engaged, directly or indirectly, in a business that is in competition with
Buyer, and (e) pay to David Barr
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<PAGE>
any and all amounts owing to him pursuant to any and all agreements set forth on
3.16(k) in effect immediately prior to the Closing.
I.5 Warrants. The Company and the Sellers other than Messrs. Coles
--------
and Karp shall take such action as shall be necessary under the governing
agreements to cause all of the Warrants to be cancelled on the Closing Date.
Buyer shall assist and cooperate, and shall cause its financial advisors to
assist and cooperate, with the Company and the Sellers with respect to the
foregoing matters.
ARTICLE II
THE PRE-CLOSING AND CLOSING
---------------------------
II.1 Time and Place of Pre-Closing and Closing.
-----------------------------------------
(a) Upon the terms and subject to the satisfaction of the conditions
contained in this Agreement, the pre-closing of the transactions contemplated by
this Agreement (the "Pre-Closing") will take place at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, at
10:00 A.M. (local time) on the date on which Buyer executes the purchase
agreements (the "Financing Agreements") pursuant to which Buyer is obtaining
financing (the "Financing"), or at such other place or time as the parties may
agree. At the Pre-Closing, the parties will deliver into an escrow (the "Pre-
Closing Escrow") the various documents to be delivered at the Closing, with
documents to be delivered by Sellers or the Company to be held Mayer, Brown &
Platt and with documents to be
7
<PAGE>
delivered by Buyer to be held by counsel to Buyer. The date and time at which
the Pre-Closing actually occurs is hereinafter referred to as the "Pre-Closing
Date."
(b) Upon the terms and subject to the satisfaction of the conditions
contained in this Agreement, the closing of the transactions contemplated by
this Agreement (the "Closing") will take place at the offices of Skadden, Arps,
Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, at 10:00
A.M. (local time) on the date on which the closing occurs under the Financing
Agreements, or at such other place or time as the parties may agree. The date
and time at which the Closing actually occurs is hereinafter referred to as the
"Closing Date." For accounting purposes only, the transactions contemplated by
this Agreement will be deemed to have occurred on June 30, 1998.
II.2 Deliveries by the Sellers and the Company . (a) In the event
-----------------------------------------
that each of the conditions to the Sellers' obligations to close hereunder are
met as of the Pre-Closing Date, each Seller hereby authorizes Mayer, Brown &
Platt to cause to be delivered into the Pre-Closing Escrow the following
documents in respect of such Seller that are being delivered as of the date
hereof to Mayer, Brown & Platt (the "Escrowed Seller Documents"): the
certificate or certificates representing the Company Securities set forth beside
the name of such Seller on Annex A hereto, duly executed in blank or accompanied
by duly executed instruments of transfer, and any other documents (including
without limitation written releases from First Na-
8
<PAGE>
tional Bank of Boston) that are necessary to transfer to Buyer good, valid and
marketable title to such Company Securities, free and clear of any lien, charge,
security interest, pledge, mortgage, encumbrance, claim, option, limitation or
restriction of any kind (collectively, "Liens"), with all necessary transfer tax
stamps affixed or accompanied by evidence that all securities transfer taxes
have been paid.
(b) At the Pre-Closing, the Company will deliver or cause to be
delivered into the Pre-Closing Escrow the following (the "Escrowed Company
Documents"):
(i) the stock book, stock ledger, minute book and corporate
seal of each of the Company and the Subsidiary;
(ii) resignations effective as of the Closing Date from all
directors and officers of the Company and the Subsidiary;
(iii) such documents as are reasonably requested by Buyer to
implement the Financing and the Senior Note Tender Offer (as hereinafter
defined);
(iv) executed Settlement Agreement and Releases in the form of
Annex B hereto from franchisees of the Subsidiary and related investors
sufficient to satisfy the Franchisee Condition (as hereinafter defined);
and
(v) such other documents, instruments and writings as are
required to be delivered by the Company at or prior to the Closing Date
9
<PAGE>
pursuant to Section 6.2 or otherwise required in connection herewith.
(c) The Company and each Seller hereby authorizes Mayer, Brown &
Platt to cause to be delivered at the Closing the Escrowed Seller Documents and
the Escrowed Company Documents in return for the Escrowed Buyer Documents (as
hereinafter defined) and the wire transfers contemplated by Section 2.3(b).
II.3 Deliveries by Buyer.
-------------------
(a) At the Pre-Closing, Buyer will deliver into the Pre-Closing
Escrow such documents, instruments and writings as are required to be delivered
by Buyer at or prior to the Closing Date pursuant to Section 6.3 or otherwise
required in connection herewith (the "Escrowed Buyer Documents").
(b) At the Closing, Buyer shall deliver to the Sellers the Escrowed
Buyer Documents and wire transfers of immediately available funds to such
accounts of the Sellers which are designated in writing by each Seller at least
two business days prior to the Closing in an amount representing the aggregate
payments to be made pursuant to Section 1.2 in return for the Escrowed Seller
Documents and the Escrowed Company Documents.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
AND THE SELLERS
---------------
The Company makes to Buyer the representations and warranties set
10
<PAGE>
forth in Sections 3.1 to 3.24 and the Sellers severally but not jointly make to
Buyer the representations and warranties set forth in Section 3.25.
III.1 Organization; Qualification. The Company and the Subsidiary are
---------------------------
each corporations duly organized, validly existing and in good standing under
the laws of the State of Delaware, and have full corporate power and authority
and possess all governmental franchises, licenses, permits, authorizations and
approvals to enable them to use their corporate names and to own, lease, or
otherwise hold their properties and to operate their properties and carry on
their business as are now being conducted, other than such franchises, licenses,
permits, authorizations and approvals the lack of which, individually or in the
aggregate, would not reasonably be expected to have a material adverse effect on
the business, results of operations, or financial condition of the Company or
the Subsidiary (a "Material Adverse Effect"). The Company and the Subsidiary are
duly qualified or licensed to do business as foreign corporations and are in
good standing in each jurisdiction in which the property owned, leased or
operated by them or the nature of the business conducted by them makes such
qualification or licensing necessary, except in each case in those jurisdictions
where the failure to be so duly qualified or licensed and in good standing would
not reasonably be expected to have a Material Adverse Effect. Schedule 3.1 sets
forth, as of the date of this Agreement, each jurisdiction in which the Company
and
11
<PAGE>
the Subsidiary are qualified to do business as foreign corporations. The Company
has heretofore delivered to Buyer complete and correct copies of the Certificate
of Incorporation and By-Laws of each of the Company and the Subsidiary as
currently in effect and evidence of qualification to do business as a foreign
corporation in each jurisdiction in which the Company or the Subsidiary are so
qualified.
III.2 The Company's Capitalization.
----------------------------
(a) The authorized capital stock of the Company consists of (i)
115,000 shares of Company Common Stock, of which 82,800 shares are issued and
outstanding and no shares are held in treasury, (ii) 10,500 shares of Senior
Preferred Stock, all of which are issued and outstanding, (iii) 2,500 shares of
Junior Class A Preferred Stock, all of which are issued and outstanding, and
(iv) 750 shares of Junior Class B Preferred Stock, all of which are issued and
outstanding. The Sellers own all of the issued and outstanding shares of Company
Common Stock, Junior Preferred Stock and Senior Preferred Stock. All outstanding
shares of capital stock of the Company are validly issued, fully paid and
nonassessable. Other than as set forth in (i) the Company's Certificate of
Incorporation and By-Laws as currently in effect, (ii) the Subscription and
Stockholders Agreement, dated as of December 10, 1993, among the Company and
certain of its stockholders, (iii) the Warrants, pursuant to which 7,200 shares
of Company Common Stock are issuable (collectively, the "Capitalization
Documents"), and (iv) the Options, pursuant to which 11,200 shares
12
<PAGE>
of Company Common Stock are issuable, there is no subscription, option, warrant,
call, right, agreement or commitment relating to the issuance, sale, delivery or
transfer by the Company or, to the Company's knowledge, any Seller (including
any right of conversion or exchange under any outstanding security or other
instrument) of any class of capital stock of the Company or the payment of money
based on the value of any class of capital stock of the Company. There are no
outstanding contractual obligations of the Company to repurchase, redeem or
otherwise acquire any outstanding shares of capital stock of the Company other
than as set forth in the Capitalization Documents.
(b) The authorized capital stock of the Subsidiary consists of 2,000
shares of the Subsidiary Common Stock, of which 210 are issued and outstanding
and no shares are held in treasury. The Company owns all of the issued and
outstanding shares of the Subsidiary Common Stock. All outstanding shares of the
Subsidiary Common Stock are validly issued, fully paid and nonassessable. There
is no subscription, option, warrant, call, right, agreement or commitment
relating to the issuance, sale, delivery or transfer by the Subsidiary or the
Company (including any right of conversion or exchange under any outstanding
security or other instrument) of any class of capital stock of the Subsidiary.
There are no outstanding contractual obligations of the Subsidiary to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
of the Subsidiary.
13
<PAGE>
III.3 Title to Stock. The Sellers own the Company Securities, free
--------------
and clear of any Liens. At the Closing, Buyer will acquire good, valid and
marketable title to the respective Company Securities sold by each Seller, free
and clear of any Liens. The Company owns, and at the Closing will own, the
Subsidiary Common Stock, free and clear of any Liens.
III.4 Authority Relative to this Agreement. The Company has full
------------------------------------
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and, assuming that this Agreement
constitutes a valid and binding agreement of Buyer and each Seller, constitutes
a valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms.
III.5 Subsidiaries and Equity Investments; Affiliates. Other than
-----------------------------------------------
the Subsidiary or as set forth on Schedule 3.5, the Company does not own or have
any right to acquire at any time by any means, directly or indirectly, any
interest or investment in any corporation, partnership, joint venture or other
business association or entity.
III.6 Consents and Approvals; No Violation. (a) Except as set forth
----------------------
in Schedule 3.6(a), neither the execution and delivery of this Agreement by the
Company nor the sale by the Sellers of the Company Securities
14
<PAGE>
pursuant to this Agreement will (i) conflict with or result in any breach of
(with or without notice or lapse of time, or both) any provision of the
Certificate of Incorporation or By-Laws of the Company or the Certificate of
Incorporation or By-Laws of the Subsidiary, (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, except where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, would
not reasonably be expected to have a Material Adverse Effect, (iii) result in a
violation of or default under (with or without notice or lapse of time, or both)
or give rise to any right of termination, cancellation or acceleration or result
in the creation of any Lien under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, license, agreement or other instrument or
obligation (other than with respect to any leases of real property or an
interest therein (the "Leases"), to which this representation shall not apply)
to which the Company or the Subsidiary is a party or by which the Company or the
Subsidiary or any of their assets may be bound, except for such defaults or
rights of termination, cancellation or acceleration or Liens as to which
requisite waivers or consents have been obtained or which, in the aggregate,
would not reasonably be expected to have a Material Adverse Effect, or (iv)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, the Subsidiary or any of their assets, which
violation would reasonably be expected to have a Material Adverse Effect.
15
<PAGE>
(b) Except for the filings by the Company and Buyer required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and except as set forth in Schedule 3.6(b), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the consummation
by the Company or the Sellers of the transactions contemplated hereby, other
than such filings, registrations, authorizations consents or approvals which, if
not obtained or made, would not, in the aggregate, reasonably be expected to
have a Material Adverse Effect.
III.7 Reports. The Subsidiary has filed, pursuant to the Securities
-------
Act of 1933, as amended (the "Securities Act"), or the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), as the case may be, all material
forms, statements, reports and documents (including all exhibits, amendments and
supplements thereto) (the "SEC Documents") required to be filed by them with
respect to the business and operations of the Subsidiary under each of the
Securities Act and the Exchange Act, and the respective rules and regulations
thereunder, and all of the SEC Documents complied in all material respects with
all applicable requirements of the Securities Act or the Exchange Act, as the
case may be, and the appropriate act and the rules and regulations thereunder in
effect on the date each such report was filed. At the respective dates they were
filed, none of the SEC Documents contained any untrue statement of a material
fact or omitted to state any material fact required to be stated
16
<PAGE>
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Subsidiary included in the SEC Documents complied as
to form in all material respects with the applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the period involved (except as may be indicated
therein or in the notes thereto) and fairly present the consolidated financial
position, results of operations and cash flows of the Subsidiary as of the dates
or for the periods indicated therein, subject, in the case of the unaudited
statements, to normal year-end adjustments and the absence of certain footnote
disclosures.
III.8 Financial Statements. The Company has previously furnished to
--------------------
Buyer audited balance sheets of the Company and the Subsidiary as of June 29,
1997, June 30, 1996 and June 29, 1995 and the related audited statements of
operations, changes in stockholders' equity and cash flows of the Company and
the Subsidiary for the fiscal periods then ended, together with the respective
reports thereon of Price Waterhouse LLP, the Company's and the Subsidiary's
independent auditors. The Company has also furnished unaudited balance sheets of
the Company and the Subsidiary for the fiscal quarters ended December 31, 1997
and March 29, 1998, togeth
17
<PAGE>
er with the related unaudited operations, changes in stockholders' equity
and cash flows of the Company and the Subsidiary. The balance sheet of the
Company as of March 29, 1998, together with the balance sheet of the Subsidiary
as of March 29, 1998 are hereinafter referred to as the "Company Balance
Sheets." Each of the balance sheets included in the financial statements
referred to in this Section 3.8 (including the related notes thereto) presents
fairly the financial position of the Company or of the Subsidiary as of their
respective dates, and the other related statements included therein (including
the related notes thereto) present fairly the results of operations, changes in
financial position and cash flows for the periods then ended, all in conformity
with GAAP applied on a consistent basis, except as otherwise noted therein or in
the notes thereto and subject, in the case of unaudited statements, to normal
year-end adjustments and the absence of certain footnote disclosures. All such
financial statements are or will be complete in all material respects and have
been prepared from, and are in accordance with, the books of account and records
of the Company and the Subsidiary. Since June 30, 1997, neither the Company nor
the Subsidiary has made any change in its accounting practices or policies
applied in the preparation of its financial statements.
III.9 Undisclosed Liabilities. Except as set forth in Schedule 3.9,
-----------------------
neither the Company nor the Subsidiary has any liability or obligation, secured
or unsecured (whether absolute, accrued, contingent or otherwise, and whether
due or to
18
<PAGE>
become due), of a nature required by GAAP to be reflected in a corporate balance
sheet or disclosed in the notes thereto, except for those that either (i) are
accrued or reserved against in the Company Balance Sheets or disclosed in the
notes thereto in accordance with GAAP or (ii) were incurred in the ordinary
course of business consistent with past practice, whether before or after the
date of the Company Balance Sheet. Neither the Company nor the Subsidiary is
directly or indirectly liable upon or with respect to (by discount, repurchase
agreements or otherwise), or obligated in any other way to provide funds in
respect of, or to guarantee or assume, any material debt, obligation or dividend
of any person, except for those that are accrued or reserved against in the
Company Balance Sheets or disclosed in the notes thereto in accordance with
GAAP. Schedule 3.9 sets forth the amounts of any accrued but unpaid interest
and/or dividends on the Senior Notes or the Company Securities as of March 29,
1998.
III.10 Absence of Certain Changes or Events. Except (a) as set forth
------------------------------------
in Schedule 3.10, or in the SEC Documents, and (b) as otherwise contemplated by
this Agreement, since the date of the Company Balance Sheets there has not been:
(i) any Material Adverse Effect; (ii) any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock, property or any
combination thereof) in respect of any class of capital stock of the Company or
of the Subsidiary,
19
<PAGE>
or any redemption or other acquisition by the Company or the Subsidiary of any
shares of capital stock of the Company or the Subsidiary, or any payment by the
Company or the Subsidiary to any Seller in its capacity as a stockholder; (iii)
any damage, destruction or casualty loss, whether covered by insurance or not,
which had a Material Adverse Effect; (iv) any increase in the rate or terms of
compensation or other benefits payable or to become payable by the Company or
the Subsidiary to their directors, officers or key employees, except increases
occurring in the ordinary course of business in accordance with their customary
practices; (v) any entry into any agreement, commitment or transaction
(including without limitation any borrowing, capital expenditure or capital
financing) by the Company or the Subsidiary, which is material to the Company or
the Subsidiary, except (a) Leases and (b) agreements, commitments or
transactions in the ordinary course of business or as contemplated herein; (vi)
any change by the Company or the Subsidiary, in their respective accounting
methods, principles or practices except as required by GAAP; or (vii) any sale,
franchise, relocation or closure of any store of the Subsidiary. Since March 29,
1998, each of the Company and the Subsidiary has conducted its business in the
ordinary course, consistent with past practice, and has made all reasonable
efforts to preserve its relationships with customers, suppliers and others with
whom it deals, the absence of which would be reasonably likely to have a
Material Adverse Effect, and neither the Company nor the Subsidiary has taken
any action that, if taken after
20
<PAGE>
the date hereof unless otherwise consistent with the transactions contemplated
hereby, would constitute or result in a material breach of any of the covenants
set forth herein.
III.11 Personal Property. Schedule 3.11 sets forth as of the date of
-----------------
this Agreement a complete and correct list of each item of machinery, equipment,
furniture, fixtures and other tangible personal property owned, leased or used
by the Company or the Subsidiary having an original purchase cost or aggregate
lease cost to the Company or the Subsidiary exceeding $25,000 (the "Machinery
and Equipment"). Except as set forth on Schedule 3.11, the Company or the
Subsidiary own outright and have good, valid and marketable title, free and
clear of all Liens (other than Permitted Exceptions (as hereinafter defined)),
to the Machinery and Equipment as owned by them and to all the machinery,
equipment, furniture, fixtures, inventory, receivables and other tangible or
intangible personal property reflected on the Company Balance Sheets and all
such property acquired since the date thereof, except for sales and dispositions
in the ordinary course of business consistent with past practice since the date
of the Company Balance Sheets, except to the extent that any such failure to
have good title would not, in the aggregate with any and all such failures,
reasonably be expected to have a Material Adverse Effect. None of the Liens
listed on Schedule 3.11 materially adversely affects the conduct of the business
of the Company or the Subsidiary. Except as set forth in Schedule 3.11, each of
the
21
<PAGE>
Company and the Subsidiary holds good and transferable leaseholds in all of
the Machinery and Equipment as leased by it, in each case under valid and
enforceable leases. The Machinery and Equipment and other personal property now
owned, leased, or used by the Company or the Subsidiary are sufficient and
adequate to carry on their businesses as presently conducted and all items
thereof are in good operating condition and repair (normal wear and tear
excepted). Neither the Company nor the Subsidiary holds any personal property
of any other person, firm or corporation pursuant to any consignment or similar
arrangement.
III.12 Real Property.
-------------
(a) Schedule 3.12(a) sets forth a true and complete list of all real
properties owned by the Company and the Subsidiary. The Company or the
Subsidiary has good, valid and marketable title to all real properties shown in
Schedule 3.12(a). Other than as set forth on Schedule 3.12(a), none of the real
properties owned by the Company or the Subsidiary is subject to any Liens (other
than Permitted Exceptions), and none of such real properties is subject to any
easements, rights of way, licenses, grants, building or use restrictions,
exceptions, reservations, limitations or other impediments which materially
adversely affect the value thereof or which materially interfere with or impair
the present and continued use thereof in the usual and normal conduct of the
business of the Company or the Subsidiary. All buildings, structures,
improvements and fixtures owned by the Company or the
22
<PAGE>
Subsidiary are in good operating condition and repair (normal wear and tear
excepted).
(b) Schedule 3.12(b) lists, as of the date of this Agreement, all
Leases under which the Company or the Subsidiary is a lessee or lessor. Except
as set forth in Schedule 3.12(b) or as may result from the consummation of the
transactions contemplated hereby, all such Leases are valid, binding and
enforceable obligations of the Company or the Subsidiary in accordance with
their terms, and to the Company's and the Subsidiary's knowledge, are in full
force and effect, there are no existing defaults by the Company or the
Subsidiary thereunder, and no event has occurred which (whether with or without
notice, lapse of time or both) would constitute a default thereunder, except in
each case for defaults which individually or in the aggregate would not have a
Material Adverse Effect.
III.13 Insurance. All policies of fire, liability, workmen's
---------
compensation and other forms of insurance owned or held by and insuring the
Company or the Subsidiary are listed on Schedule 3.13. Except as set forth in
Schedule 3.13, all policies of fire, liability, workmen's compensation and other
forms of insurance owned or held by and insuring the Company and the Subsidiary
are in full force and effect, all premiums with respect thereto covering all
periods up to and including the date as of which this representation is being
made have been paid
23
<PAGE>
(other than retroactive premiums which may be payable with respect to
comprehensive general liability and workmen's compensation insurance policies),
and no notice of cancellation or termination has been received with respect to
any such policy which was not replaced on substantially similar terms prior to
the date of such cancellation. Other than as set forth on Schedule 3.13, such
policies are valid, outstanding and enforceable policies and will not in any way
be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement. Except as described in Schedule 3.13, as of the
date of this Agreement neither the Company nor the Subsidiary has been refused
any insurance with respect to its assets or operations nor has their coverage
been limited in any material respect by any insurance carrier to which either of
them has applied for any such insurance or with which it has carried insurance
during the last three years. The Company and the Subsidiary have heretofore made
available to Buyer true and complete copies of all such policies.
III.14 Environmental Matters.
---------------------
(a) Each of the Company and the Subsidiary is in compliance with all
applicable Environmental Laws (which compliance includes, but is not limited to,
the possession by the Company and the Subsidiary of all permits and other
governmental authorizations ("Environmental Permits") required under applicable
Environmental Laws, and compliance with the terms and conditions thereof),
except where failure to be in compliance would not reasonably be expected to
have a Material Adverse
24
<PAGE>
Effect. Other than as set forth on Schedule 3.14, since January 1, 1995, neither
the Company nor the Subsidiary has received any communication (written or oral),
whether from a governmental authority, citizens group, employee or otherwise,
alleging that the Company or the Subsidiary is not in such compliance, and there
are no past or present actions, activities, circumstances, conditions, events or
incidents that may prevent or interfere with such compliance in the future in
all material respects. All Environmental Permits and other governmental
authorizations currently held by the Company and the Subsidiary pursuant to
applicable Environmental Laws are identified in Schedule 3.14(a).
(b) There is no Environmental Claim pending or threatened against the
Company or the Subsidiary, or, to the best knowledge of the Company and the
Subsidiary, against any person or entity whose liability for any Environmental
Claim the Company or the Subsidiary has or may have retained or assumed either
contractually or by operation of law, which would reasonably be expected to have
a Material Adverse Effect.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the Release or
presence of any Hazardous Material which could form the basis of any
Environmental Claim against the Company or the Subsidiary, or to the best
knowledge of the Company and the Subsidiary, against any person or entity whose
liability for any Environmental
25
<PAGE>
Claim the Company or the Subsidiary has or may have retained or assumed either
contractually or by operation of law which would reasonably be expected to have
a Material Adverse Effect.
(d) The Company has delivered or otherwise made available for
inspection to Buyer true, complete and correct copies and results of all "Phase
One" reports relating to the Subsidiary's batter facility and any reports,
studies, analyses, tests or monitoring possessed or initiated by the Company or
the Subsidiary pertaining to Hazardous Materials in, on, beneath or adjacent to
any property currently or formerly owned, operated or leased by the Company or
the Subsidiary, or regarding the Company's or the Subsidiary's compliance with
applicable Environmental Laws.
(e) Definitions.
-----------
(i) "Environmental Claim" means any claim, action, cause of
action, investigation or notice (written or oral) by any person or entity
alleging potential liability (including, without limitation, potential
liability for investigatory costs, remediation costs, governmental response
costs, natural resources damages, property damages, personal injuries, or
penalties) arising out of, based on or resulting from (A) the presence, or
Release of any Hazardous Materials at any location, whether or not owned or
operated by the Company or the Subsidiary, or (B) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
26
<PAGE>
(ii) "Environmental Laws" means all federal, state, local and
foreign laws and regulations relating to pollution or protection of human
health or the environment, including, without limitation, laws relating to
Releases or threatened Releases of Hazardous Materials or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, Release, disposal, transport or handling of Hazardous Materials
and all laws and regulations with regard to recordkeeping, notification,
disclosure and reporting requirements respecting Hazardous Materials.
(iii) "Hazardous Materials" means all substances defined as
Hazardous Substances, Oils, Pollutants or Contaminants in the National Oil
and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. ' 300.5, or
defined as such by, or regulated as such under, any Environmental Law.
(iv) "Release" means any release, spill, emission, discharge,
leaking, pumping, injection, deposit, disposal, dispersal, leaching or
migration into the indoor or outdoor environment or into or out of any
property, including the movement of Hazardous Materials through or in the
air, soil, surface water, groundwater or property.
III.15 Labor Matters.
-------------
(a) (i) There is no labor strike, dispute, or work stoppage or lockout
actually pending or, to the Company's or the Subsidiary's knowledge, threatened,
27
<PAGE>
against or affecting the Company and the Subsidiary, and since January 1, 1995
there has not been any such action; (ii) to the Company's and the Subsidiary's
knowledge, no union organizational campaign is in progress with respect to the
employees of the Subsidiary; (iii) the Company and the Subsidiary are in
compliance in all material respects with all laws applicable to the Company and
the Subsidiary with respect to employment and employment practices, terms and
conditions of employment and wages and hours, and are not engaged in any unfair
labor practice; and (iv) there is no charge, complaint or other proceeding
involving the Company or the Subsidiary or, to the Company's or the Subsidiary's
knowledge, threatened, before the National Labor Relations Board, the Equal
Employment Opportunity Commission or any state or local agency responsible for
the prevention of unlawful employment practices.
(b) Neither the Company nor the Subsidiary is a party to any labor
union or collective bargaining agreement.
(c) Neither the Company nor the Subsidiary has any liability under
the Worker Adjustment and Retraining Act or any similar state law relating to
employment termination in connection with a mass layoff or plant closing
("WARN").
III.16 ERISA; Benefit Plans.
--------------------
(a) Schedule 3.16(a) contains a list of all "employee pension benefit
plans" (as defined in Section 3(2) of the Employee Retirement Income Security
Act
28
<PAGE>
of 1974, as amended ("ERISA")) (sometimes referred to herein as "Pension
Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of ERISA),
bonus, stock option, stock purchase and deferred compensation plans or
arrangements, and other employee fringe benefit plans (all the foregoing being
herein referred to as "Benefit Plans") maintained, or contributed to, by the
Company, the Subsidiary or any entity that is treated as under common control
with the Company or the Subsidiary under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended (the "Code"), for the benefit of, or
relating to, any employees or former employees of the Company or the Subsidiary.
The Company has delivered to Buyer true, complete and correct copies of (i) each
Benefit Plan (or, in the case of any unwritten Benefit Plan, a description
thereof), (ii) the most recent determination letter received from the Internal
Revenue Service, (iii) the latest actuarial evaluations, (iv) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with respect
to each Benefit Plan (if any such report was required), including Schedule A and
Schedule B thereto, (v) the most recent summary plan description for each
Benefit Plan for which such a summary plan description is required and (vi) each
trust agreement and group annuity contract relating to any Benefit Plan.
(b) Each Benefit Plan has been administered in all material respects
in accordance with its terms and the applicable provisions of ERISA and the
Code. Except as disclosed in Schedule 3.16(b)(i), all material reports, returns
and similar
29
<PAGE>
documents with respect to the Benefit Plans required to be filed with any
governmental agency or distributed to any Benefit Plan participant have been
duly and timely filed or distributed. Except as disclosed in Schedule
3.16(b)(ii), there are no investigations by any governmental agency, termination
proceedings or other claims (except for benefits payable in the normal operation
of the Benefit Plans), suits or proceedings or against or involving any Benefit
Plan or asserting any rights or claims to benefits under any Benefit Plan that
could reasonably give rise to any material liability and, to the Company's and
the Subsidiary's knowledge, there are no facts that could reasonably give rise
to any material liability in the event of any such investigation, claim, suit or
proceeding.
(c) Except as disclosed in Schedule 3.16(c), all contributions to,
and payments from, the Benefit Plans that may have been required to be made in
accordance with the Benefit Plans have been timely made.
(d) No "prohibited transaction" (as defined in Section 4975 of the
Code or Section 406 of ERISA) has occurred that involves the assets of any
Benefit Plan and that could subject the Company or the Subsidiary or any of
their employees or, to the Company's and the Subsidiary's knowledge, a trustee,
administrator or other fiduciary of any trusts created under any Benefit Plan,
to any material tax or penalty on prohibited transactions imposed by Section
4975 of ERISA or the sanctions imposed under Title I of ERISA. None of the
Company, the Subsidiary or any trust-
30
<PAGE>
ee, administrator or other fiduciary of any Benefit Plan nor any agent of any of
the foregoing has engaged in any transaction or acted or failed to act in a
manner that could subject the Company or the Subsidiary to any material
liability for breach of fiduciary duty under ERISA or any other applicable law.
No liability under Title IV of ERISA has been incurred by the Company, the
Subsidiary or their affiliates within six years prior to the date hereof that
has not been satisfied in full, and no condition exists that presents a material
risk of incurring such liability.
(e) Except as disclosed in Schedule 3.16(e), at no time within the
five years preceding the Closing Date has either of the Subsidiary or the
Company been required to contribute to any "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) or incurred any withdrawal liability, within the
meaning of Section 4201 of ERISA, which liability has not been fully paid as of
the date hereof, or announced an intention to withdraw, but not yet completed
such withdrawal, from any multiemployer plan.
(f) Neither the Company nor the Subsidiary contributes to a Pension
Plan that is subject to Section 302 of ERISA or Section 412 of the Code.
(g) With respect to any Benefit Plan that is an employee welfare
benefit plan, except as disclosed in Schedule 3.16(g), (1) no such Benefit Plan
is funded through a welfare benefits fund, as such term is defined in Section
419(e) of the Code, and (2) each such Benefit Plan that is a group health plan,
as such term is
31
<PAGE>
defined in Section 5000(b)(1) of the Code, complies with the applicable
requirements of Section 4980B(f) of the Code.
(h) Neither the Company nor the Subsidiary has incurred any liability
under Section 4062(b) of ERISA to the Pension Benefit Guaranty Corporation in
connection with any Benefit Plan which is subject to Title IV of ERISA. Except
as set forth in Schedule 3.16(h), the Internal Revenue Service has issued a
letter for each Benefit Plan determining that such plan is exempt from United
States Federal Income Tax under Sections 401(a) and 501(a) of the Code, and
there has been no occurrence since the date of any such determination letter
which has adversely affected such qualification.
(i) Except as set forth in Schedule 3.16(i), neither the Company, the
Subsidiary nor any of their affiliates maintains or contributes to, or has any
liability (fixed, contingent or otherwise, under any current or former plan)
for, medical, health or life insurance benefits for terminated employees of the
Company or the Subsidiary or for present employees of the Company or the
Subsidiary after termination of their employment (other than any such welfare
benefits provided pursuant to Code Section 4980B or ERISA Sections 601-608).
(j) Schedule 3.16(j) contains a true and complete list, as of the
date of this Agreement, showing the names of all employees who during the last
fiscal year received, or in the current fiscal year are expected to receive,
compensation
32
<PAGE>
(including commissions and bonuses) in excess of $50,000. Except as disclosed on
Schedule 3.16(j), neither the Company nor the Subsidiary has agreed to increase
the salary payable to any employee listed on Schedule 3.16 by more than five
percent.
(k) The Company has made available to Buyer true and complete copies
of all contracts, agreements, plans or arrangements covering any employee or
former employee of the Company or the Subsidiary with "change of control" or
similar provisions or providing for "stay on" bonuses or severance payments
(each, a "Change of Control Arrangement"). No Change of Control Arrangement
individually or collectively could give rise to the payment of any amount that
would not be deductible pursuant to the terms of Section 280G of the Code.
(l) Except as disclosed in Schedule 3.16(l) or as a result of the
transactions contemplated hereby, there has been no amendment to or announcement
by the Company, the Subsidiary or any of their affiliates relating to a change
in employee participation or coverage or benefits under any Benefit Plan that is
reasonably expected to increase materially the expense of maintaining such
Benefit Plan above the level of expense incurred in respect thereof for the
fiscal year ended June 29, 1997.
III.17 Certain Contracts and Arrangements. (a) Schedule 3.17(a)
----------------------------------
sets forth, as of the date of this Agreement, a true and complete list of all
contracts to which the Company or the Subsidiary is a party relating to the
33
<PAGE>
business or assets of the Company or the Subsidiary (except, with respect to
clauses (ii) and (iv) below, any of the foregoing calling for aggregate payments
of less than $50,000), including, without limitation, all written or oral,
express or implied (i) contracts not made in the ordinary course of business
consistent with past practice; (ii) purchase, supply and customer contracts;
(iii) contracts relating to the borrowing of money or for lines of credit; (iv)
contracts involving leases and subleases of real or personal property; (v)
contracts for the sale of any assets other than in the ordinary course of
business consistent with past practice or for the grant of any options or
preferential rights to purchase any assets, property or rights; (vi) contracts
granting any power of attorney with respect to the affairs of either the Company
or the Subsidiary; (vii) suretyship contracts, working capital maintenance or
other forms of guaranty contracts; (viii) contracts limiting or restraining the
Company or the Subsidiary from engaging or competing in any lines of business or
with any person, firm, or corporation; (ix) partnership and joint venture
contracts; (x) employment contracts; (xi) indentures, mortgages, notes,
installment obligations, or other instruments relating to the borrowing of money
in excess of $50,000 by the Company or the Subsidiary; (xii) contracts which
have remaining terms, as of the date of this Agreement, of over one year in
length of obligation on the part of the Company or the Subsidiary and provide
for aggregate payments in excess of $50,000; (xiii) franchise contracts; and
(xiv) all amendments, modifications, extensions or renewals of any of the
foregoing. To the knowledge of the Company and the Subsidiary, each of
34
<PAGE>
such contracts is valid, binding and enforceable against the parties thereto in
accordance with its terms, and in full force and effect on the date hereof.
(b) Except as set forth on Schedule 3.17(b), the Company and the
Subsidiary have performed all obligations required to be performed by them to
date under, and are not in default in respect of, any of such contracts, and no
event has occurred which, with due notice or lapse of time or both, would
constitute such a default other than defaults which would not, individually or
in the aggregate, have a Material Adverse Effect. Except as set forth on
Schedule 3.17(b), no other party to any such contract is in default in respect
thereof, and no event has occurred which, with due notice or lapse of time or
both, would constitute such a default other than defaults which would not,
individually or in the aggregate, have a Material Adverse Effect. The Company
has made available to Buyer or its representatives true and complete originals,
copies or accurate summaries of all such contracts.
III.18 Intellectual Property. Schedule 3.18 sets forth a true and
---------------------
and complete list of all material patents, trademarks (registered or
unregistered), trade names (registered or unregistered), service marks
(registered or unregistered), registered copyrights and computer software
applications (excluding noncritical, uncustomized shrink-wrap or off-the-shelf
software) owned or used by or licensed to the Company or the Subsidiary, and all
license agreements related thereto to which the Company or the Subsidiary is a
party (collectively, the "Intellectual Property"), and, with respect to
trademarks, contains a list of all jurisdictions in which such
35
<PAGE>
trademarks are registered or applied for by the Company or the Subsidiary and
all corresponding registration and application numbers. Except as disclosed on
Schedule 3.18 or as provided in any agreement listed on Schedule 3.18, each of
the Company and the Subsidiary owns or has the right to use, without payment to
any other party, the Intellectual Property used in or necessary for the conduct
of its business and the consummation of the transactions contemplated hereby
will not, by itself, materially alter or impair any such rights. Except as
disclosed on Schedule 3.18, all Intellectual Property owned or used by the
Company and the Subsidiary is free and clear of all Liens arising through
actions of the Company or the Subsidiary. Except as disclosed on Schedule 3.18,
to the knowledge of the Company and the Subsidiary, no material claims or other
proceedings are pending or threatened against the Company or the Subsidiary by
any third party person or entity with respect to the ownership, validity,
enforceability or the right to use any Intellectual Property.
III.19 Customers, Suppliers and Competitors. Schedule 3.19 sets
------------------------------------
forth a complete and correct list of (a) the ten largest suppliers of the
Subsidiary by dollar volume for the latest fiscal year, (b) the ten largest
franchisees of the Subsidiary by dollar volume of royalties paid to the
Subsidiary for the latest fiscal year and (c) all suppliers or franchisees who
since June 29, 1997 have terminated any agreement, contract or other arrangement
with the Subsidiary or with whom the Subsidiary has terminated any agreement,
contract or other arrangement resulting in
36
<PAGE>
aggregate payments in any fiscal year in excess of $50,000, in each case with or
without cause, prior to the stated expiration thereof. Except as disclosed in
Schedule 3.19, since January 1, 1998, the Subsidiary has not at any time
delivered to, or received from, any supplier or franchisee any formal notice or
written allegation of a default or breach with respect to any agreement,
contract or other arrangement, and none of such suppliers or franchisees has
delivered any formal notice stating its intention to terminate or change
significantly its relationship with the Subsidiary.
III.20 Legal Proceedings, etc. Except as set forth in Schedule 3.20,
-----------------------
there are no claims, actions, or proceedings pending, or investigations pending
or, to the knowledge of the Company and the Subsidiary, threatened, against or
relating to the Company or the Subsidiary before any court, governmental or
regulatory authority or body acting in an adjudicative capacity, which (a)
relate to or involve more than $50,000, (b) seek any injunctive relief, or (c)
relate to the transactions contemplated by this Agreement. Except as disclosed
on Schedule 3.20, neither the Company nor the Subsidiary is in default under any
material judgment, order or decree of any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, applicable to the Company or the Subsidiary.
III.21 Tax Matters. All material tax and information returns,
-----------
reports
37
<PAGE>
and other documents required to have been filed by the Company and the
Subsidiary (either separately or as part of a consolidated, unitary, combined or
similar group) with the United States, any state and local governmental
authority and any foreign jurisdiction ("Returns") have been duly and timely
filed, and each such Return is accurate and complete in all material respects.
Copies of Returns for the fiscal years ended June 29, 1997, June 30, 1996 and
June 29, 1995 which relate to the income of the Company and the Subsidiary have
been made available to Buyer or its representatives, and such copies are
accurate and complete in all material respects as of the date hereof. The
Company has also made available to Buyer correct and complete copies of all
material notices and correspondence sent or received since January 1, 1995 by
the Company or the Subsidiary to or from any federal, state, local or foreign
tax authorities. Except as set forth in Schedule 3.21, each of the Company and
the Subsidiary has paid in full all income, franchise, business, property,
sales, use, value-added, withholding, payroll, excise, capital and other taxes
shown to be due and payable on said Returns, and all penalties, assessments or
deficiencies of every nature and description incurred with respect to such
taxes, except to the extent that the Company or the Subsidiary, as the case may
be, has established on its books appropriate reserves for such amounts in
accordance with GAAP. The United States federal and state income tax Returns of
the Company and the Subsidiary (or such Returns for the consolidated group of
which the Company and the Subsidiary is a member)
38
<PAGE>
have been audited, and the audits thereof completed or the statute of
limitations has run, for all years through 1993. Except as set forth on Schedule
3.21, neither the Company nor the Subsidiary has received any notice of
deficiency or assessment from any taxing authority with respect to liabilities
for taxes of the Company or the Subsidiary which have not been fully paid or
finally settled, and any such deficiencies have been paid or are being contested
in good faith and have been adequately reserved. Except as set forth in Schedule
3.21, neither the Company nor the Subsidiary is a party to any agreement with
respect to the sharing or allocation of taxes or tax costs. There are no liens
for any material amount of federal, state, local or foreign taxes upon the
property or assets of the Company or the Subsidiary, except liens for taxes not
yet due or delinquent or the validity of which is being contested in good faith
by appropriate proceedings. Except as set forth on Schedule 3.21, there are no
outstanding waivers or comparable consents given by the Company or the
Subsidiary regarding the application of the statute of limitations with respect
to any federal, state, local or foreign taxes or Returns. Except as set forth on
Schedule 3.21, no power of attorney has been granted by the Company or the
Subsidiary with respect to any matter relating to federal, state, local or
foreign taxes that is currently in force. Except as set forth on Schedule 3.21,
neither the Company nor the Subsidiary has been a member of any other
consolidated, unitary, combined or similar group for federal, state, local or
foreign tax purposes for any taxable period for which the
39
<PAGE>
statute of limitations has not yet expired.
III.22 Arrangements with Directors, Officers and Affiliates. Except
----------------------------------------------------
for the agreements and other arrangements disclosed in Schedule 3.22 (the
"Affiliate Arrangements"), as of the date hereof, there are no agreements or
other arrangements between the Company or the Subsidiary, on the one hand, and
any director, officer, employee, stockholder or other affiliate, as defined in
Rule 405 under the Securities Act (an "Affiliate," or, collectively,
"Affiliates"), of the Company or the Subsidiary, on the other hand, including,
without limitation, management agreements and loans to or by the Company or the
Subsidiary from or to any of such persons. Except as disclosed in Schedule 3.22,
since January 1, 1995, none of the officers or directors of the Company or the
Subsidiary, or any spouse or immediate relative of any of such persons, has been
a director or officer of, or has had any direct interest in, any firm,
corporation, association or business enterprise which during such period has
been a supplier, customer or sales agent of the Company or the Subsidiary or has
competed with or been engaged in any business of the kind being conducted by the
Company or the Subsidiary. Except as disclosed in Schedule 3.22, no Affiliate of
the Company or the Subsidiary owns or has any rights in or to any of the assets,
properties or rights used by the Company or the Subsidiary in its ordinary
course of business.
III.23 Compliance with Law. Except as set forth in Schedule 3.33 and
-------------------
except with respect to environmental matters which are covered exclusively by
40
<PAGE>
Section 3.14, the operations of the Company and the Subsidiary are being
conducted in accordance with all franchising and other applicable laws,
regulations, orders and other requirements of all courts and other governmental
or regulatory authorities having jurisdiction over the Company and the
Subsidiary and their assets, properties and operations, except where non-
compliance with such laws, regulations, orders and other requirements would not
reasonably be expected to have a Material Adverse Effect. Except as set forth in
Schedule 3.23 and except with respect to environmental matters which are covered
exclusively by Section 3.14, neither the Company nor the Subsidiary has received
notice within the past year of any violation of any such law, regulation, order
or other legal requirement, or is in default with respect to any order, writ,
judgment, award, injunction or decree of any federal, state or local court or
governmental or regulatory authority or arbitrator, domestic or foreign,
applicable to the Company or the Subsidiary or any of their assets, properties
or operations, except for such violations or defaults that do not have a
Material Adverse Effect.
III.24 Fees and Commissions. No broker, finder or other person is
--------------------
entitled to any brokerage fees, commissions or finder's fees in connection with
the transaction contemplated hereby by reason of any action taken by the Company
or the Subsidiary. Schedule 3.24 sets forth a complete and accurate list of all
transaction expenses (including management or other fees payable to the Sellers
or their
41
<PAGE>
respective Affiliates pursuant to any Affiliate Arrangement) previously or to be
paid or reimbursed by the Company or the Subsidiary on their own behalf or on
the behalf of the Sellers in connection with the transactions contemplated by
this Agreement (the "Company Transaction Expenses").
III.25 Representations of the Sellers. Each Seller represents
------------------------------
severally and not jointly that:
(a) Such Seller has all requisite power and authority to own and to
dispose of the Company Securities owned by such Seller.
(b) The number of shares and/or principal amount of the Company
Securities owned by such Seller as of the date of this Agreement is set forth
beside the name of such Seller on Annex A hereto. Except as set forth on
Schedule 3.25(b), such Seller owns his respective Company Securities, free and
clear of any Liens, and at the Closing, Buyer will acquire good, valid and
marketable title to the Company Securities owned by such Seller, free and clear
of any Liens.
(c) Such Seller has full power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby and to
sell to Buyer such Seller's Company Securities. This Agreement has been duly
and validly executed and delivered by such Seller and, assuming that this
Agreement constitutes a valid and binding agreement of Buyer, the Company and
each other Seller, constitutes a valid and binding agreement of such Seller,
enforceable against such
42
<PAGE>
Seller in accordance with its terms, except (i) as such enforceability may be
limited by bankruptcy, insolvency, moratorium and other similar laws affecting
or relating to enforcement of creditors' rights generally and (ii) as such
enforceability may be limited by general principles of equity, regardless of
whether asserted in a proceeding in equity or at law.
(d) Neither the execution and delivery of this Agreement by such
Seller nor the sale by such Seller of the Company Securities owned by such
Seller pursuant to this Agreement at the Closing will (i) conflict with or
result in any breach of (with or without notice or lapse of time, or both) any
provision of the Certificate of Incorporation, By-Laws or similar governing
documents of such Seller which is not a natural person, (ii) except for filings
required under the HSR Act, require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or regulatory
authority by such Seller, except where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, would
not reasonably be expected to have a Material Adverse Effect, (iii) result in a
violation of or default under (with or without notice or lapse of time, or both)
or give rise to any right of termination, cancellation or acceleration or result
in the creation of any Lien under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, license, agreement or other instrument or
obligation to which such Seller is a party or by which such Seller or any of its
assets may be
43
<PAGE>
bound, except for such defaults or rights of termination, cancellation or
acceleration or Liens as to which requisite waivers or consents have been
obtained or which, in the aggregate, would not reasonably be expected to have a
Material Adverse Effect, or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to such Seller or any of its assets,
which violation would reasonably be expected to have a Material Adverse Effect.
(e) No broker, finder or other person is entitled to any brokerage
fees, commissions or finder's fees in connection with the transaction
contemplated hereby by reason of any action taken by such Seller.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer represents and warrants to the Sellers as follows:
IV.1 Organization. Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware. Buyer has
heretofore delivered to the Company complete and correct copies of the
Certificate of Incorporation and By-Laws of Buyer as currently in effect.
IV.2 Authority Relative to this Agreement. Buyer has full
------------------------------------
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and
44
<PAGE>
the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Buyer, and no other corporate
proceedings on the part of Buyer are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Buyer and, assuming that this Agreement
constitutes a valid and binding agreement of the Sellers, constitutes a valid
and binding agreement of Buyer, enforceable against Buyer in accordance with its
terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency, moratorium and other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) as such enforceability may
be limited by general principles of equity, regardless of whether asserted in a
proceeding in equity or at law.
IV.3 Consents and Approvals; No Violation. (a) Except as set forth
------------------------------------
in Schedule 4.3, neither the execution and delivery of this Agreement by Buyer
nor the purchase by Buyer of the Company Securities pursuant to this Agreement
will (i) conflict with or result in any breach of (with or without notice or
lapse of time, or both) any provision of the Articles of Incorporation or By-
Laws of Buyer, (ii) require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental or regulatory authority,
(iii) result in a violation of or default under (with or without notice or lapse
of time, or both), or give rise to any right of termination, cancellation or
acceleration under, any of the terms, conditions
45
<PAGE>
or provisions of any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation to which Buyer is a party or by which Buyer or
any of its assets may be bound, except for such defaults or rights of
termination, cancellation or acceleration as to which requisite waivers or
consents have been obtained, or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Buyer.
(b) Except as set forth in Schedule 4.3, and except for the filings
by the Sellers and Buyer required by the HSR Act, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the consummation
by Buyer of the transactions contemplated hereby.
IV.4 Acquisition of Stock for Investment. Buyer is acquiring the
-----------------------------------
Company Securities for investment and not with a view toward, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling such Company Securities. Buyer agrees that the Company
Securities may not be sold, transferred, offered for sale, pledged, hypothecated
or otherwise disposed of without registration under the Securities Act, except
pursuant to an exemption from such registration available under the Securities
Act.
IV.5 Financing. Buyer has provided to the Company and the Seller
---------
accurate information as to its plans to obtain the Financing.
46
<PAGE>
IV.6 Fees and Commissions. Buyer represents and warrants that no
--------------------
broker, finder or other person is entitled to any brokerage fees, commissions or
finder's fees in connection with the transaction contemplated hereby by reason
of any action taken by Buyer.
IV.7 Knowledge of Inaccuracies. Buyer represents and warrants that
-------------------------
as of the date of this Agreement it has no actual knowledge that any of the
representations or warranties of the Company, the Subsidiary or any of the
Sellers in this Agreement are inaccurate or that any of such parties are in
breach of any agreement or covenant contained in this Agreement.
ARTICLE V
COVENANTS OF THE PARTIES
------------------------
V.1 HSR Act Compliance. The parties shall resist vigorously
------------------
(including, without limitation, the institution or defense of legal proceedings)
any assertion that the transactions contemplated herein constitute a violation
of the antitrust laws, all to the end of expediting consummation of the
transactions contemplated herein. The costs and expenses of compliance with this
Section 5.1 shall be borne by the Company, in the case of costs and expenses of
the Company or the Sellers, or by Buyer, in the case of costs and expenses of
Buyer, except that 50% of the fees previously paid in connection with the
notifications required to be filed in connection
47
<PAGE>
with the HSR Act shall be reimbursed by the Company.
V.2 Conduct of Business of the Company. Except as described in
----------------------------------
Schedule 5.2, during the period from the date of this Agreement to the Closing
Date, the Company will conduct its business and operations according to its
ordinary course of business consistent with past practice and will cause the
Subsidiary to conduct its business and operations according to its ordinary
course of business consistent with past practice and to keep its retail
operations substantially intact. The Company will cause the Subsidiary to
maintain in inventory, at all times prior to the Closing Date, quantities of raw
materials and other supplies and materials sufficient to allow Buyer to continue
and operate the business of the Subsidiary, after the Closing Date, free from
any shortage of such items (assuming Buyer continues to purchase such items
after the Closing Date in the ordinary course of business consistent with past
practice). The Company will use commercially reasonable efforts to preserve
intact the business organization of the Subsidiary and its goodwill, and keep
available the services of its present officers and key employees, and preserve
intact the business relationships with suppliers, customers and others having a
business relationship with the Subsidiary or the Company, and will also maintain
its present relationship in all material respects with the Subsidiary and the
Company. Without limiting the generality of the foregoing, and, except as
contemplated in this Agree-
48
<PAGE>
ment or as described in Schedule 5.2, prior to the Closing Date, without the
prior written consent of Buyer, the Company will not, and will not permit the
Subsidiary to:
(a) make any change in its Certificate of Incorporation or By-
Laws, issue any additional shares of capital stock or equity security or
grant any option, warrant, or right to acquire any capital stock or equity
securities, or issue any security convertible into or exchangeable for its
capital stock, or alter any material term of any of its outstanding
securities or make any change in its outstanding shares of capital stock or
other ownership interests in its capitalization, whether by reason of a
reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares, stock dividend or otherwise, or declare, set aside
or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock, or
redeem or otherwise acquire any shares of its capital stock;
(b) (i) create, incur or assume any indebtedness for money
borrowed, including obligations in respect of capital leases; or (ii)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person; provided, that the Subsidiary and the Company may endorse
--------
negotiable in-
49
<PAGE>
struments in the ordinary course of business consistent with past practice;
(c) sell, franchise, move or close any of its stores or make any
other sale, assignment, transfer, abandonment or other conveyance of any of
its assets having a fair market value in excess of $50,000 or any material
part thereof, except transactions pursuant to existing contracts set forth
in the Schedules and dispositions of inventory or of worn-out or obsolete
equipment for fair or reasonable value in the ordinary course of business
consistent with past practice;
(d) subject any of its assets, or any part thereof, to any Lien,
or suffer such to be imposed, except for Permitted Exceptions and such
Liens as may arise in the ordinary course of business consistent with past
practice which will not, individually or in the aggregate, have a Material
Adverse Effect;
(e) acquire any assets, raw materials or properties, or enter
into any other transaction in an amount in excess of $10,000 individually
or $25,000 in the aggregate, other than in the ordinary course of business
consistent with past practice;
(f) (i) increase the rate or terms of compensation payable or to
become payable by the Subsidiary or the Company to its directors, officers
or key employees, except increases occurring in the ordinary course of
business
50
<PAGE>
in accordance with its customary practices (which shall include normal
periodic performance reviews and related compensation and benefit
increases); or (ii) increase the rate or terms of any bonus, insurance,
pension or other employee benefit plan, payment or arrangement made to, for
or with any such directors, officers or key employees;
(g) enter into any agreement, commitment or transaction
(including without limitation any borrowing, capital expenditure or capital
financing) relating to the business, operations or financial condition of
the Subsidiary or the Company other than in the ordinary course of business
consistent with past practice;
(h) pay, loan or advance any amount to, or sell, transfer or
lease any properties or assets to, or enter into any agreement or
arrangement with, any of its Affiliates;
(i) make any change in any method of accounting or accounting
principle, method, estimate or practice, except for any such change
required by reason of a concurrent change in GAAP, or write-down the value
of any inventory or write-off as uncollectible any accounts receivable,
except in the ordinary course of business consistent with past practice;
(j) settle, release or forgive any claim or litigation or waive
51
<PAGE>
any right involving an amount greater than $50,000;
(k) amend in any material respect or terminate any of the
agreements identified in Schedule 3.17 other than in the ordinary course of
business consistent with past practice;
(l) commence actual construction of any new facilities other
than those identified on Schedule 5.2;
(m) engage in any activity which would cause a material change
in the regulatory status of the Subsidiary or the Company which would be
reasonably expected to have a Material Adverse Effect; or
(n) commit itself to do any of the foregoing in any manner.
V.3 Access to Information.
---------------------
(a) Between the date of this Agreement and the Closing Date, the
Company will and will cause the Subsidiary to, during ordinary business hours
and upon reasonable notice, (i) give Buyer and its accountants, counsel,
environmental consultants, financial advisors and other authorized
representatives (the "Buyer Representatives") reasonable access to all books,
records, plants, offices and other facilities and properties of the Company to
which Buyer is permitted access by law, (ii) permit Buyer to make such
reasonable inspections thereof as Buyer may reasonably request, (iii) cause its
officers and advisors to furnish Buyer with such financial and operating data
and other information with respect to the business and properties
52
<PAGE>
of the Subsidiary and the Company as Buyer may from time to time reasonably
request, (iv) cause its officers and advisors to furnish Buyer a copy of each
report, schedule or other document filed with or received by them from the SEC
with respect to the Subsidiary and the Company; provided, however, that (A) any
-------- -------
such investigation shall be conducted in such a manner as not to interfere
unreasonably with the operation of the business of the Subsidiary and the
Company, (B) the Subsidiary and the Company shall not be required to take any
action which would constitute a waiver of the attorney-client privilege, and (C)
the Subsidiary and the Company need not supply Buyer with any information which
the Subsidiary or the Company, as the case may be, is under a legal obligation
not to supply.
(b) All information furnished to or obtained by Buyer and the Buyer
Representatives pursuant to this Section 5.3 shall be subject to the provisions
of the Confidentiality Agreement, dated May 10, 1997, between the Company and
Buyer (the "Confidentiality Agreement") and shall be treated as "Information"
(as defined in the Confidentiality Agreement). In the event that this Agreement
shall be terminated without the Closing having occurred, Buyer agrees that for a
period of one year from the date of this Agreement it will not use "Information"
(as defined in the Confidentiality Agreement) to compete with the Company's
franchisees to obtain lease renewals in the malls where the Company's franchised
stores are presently located as of the date of this Agreement.
---------
53
<PAGE>
V.4 Insurance. The Company shall keep, and shall cause the
---------
Subsidiary to keep, all insurance policies set forth on Schedule 3.13, or
replacements therefor with reputable firms and providing no lesser coverage (in
amount or scope), in full force and effect through the close of business on the
Closing Date.
V.5 WARN Act. To the extent required by law, the Company shall cause
--------
the Subsidiary to timely give any required notices under the WARN Act relating
to any "plant closing" or "mass layoff" (as those terms are defined in WARN)
arising prior to the Closing.
V.6 Expenses. Except as specifically provided in this Agreement,
--------
whether or not the transactions contemplated hereby are consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be borne by the party incurring such costs and
expenses. The Company shall be liable for the legal, accounting and professional
fees of the Sellers specified on Schedule 5.6 hereto.
V.7 Further Assurances. Subject to the terms and conditions of this
------------------
Agreement, each of the parties hereto will use all commercially reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the sale of Company Common Stock
pursuant to this Agreement. From time to time after the date hereof, without
further consideration, the Sellers
54
<PAGE>
will, at Buyer's expense, execute and deliver such documents to Buyer as Buyer
may reasonably request in order more effectively to vest in Buyer good title to
the Company Securities. From time to time after the date hereof, without
further consideration, Buyer will, at its own expense, execute and deliver such
documents to the Sellers as the Sellers may reasonably request in order more
effectively to consummate the sale of the Company Securities pursuant to this
Agreement.
V.8 Public Statements. The parties shall consult with each other
-----------------
prior to issuing any public announcement, statement or other disclosure with
respect to this Agreement or the transactions contemplated hereby and shall not
issue any such public announcement, statement or other disclosure prior to such
consultation, except as may be required by law and except that the parties may
make public announcements, statements or other disclosures with respect to this
Agreement and the transactions contemplated hereby to the extent and under the
circumstances in which the parties are expressly permitted by the
Confidentiality Agreement to make disclosures of "Information" (as defined in
the Confidentiality Agreement).
V.9 Consents and Approvals.
----------------------
(a) The Company and Buyer shall cooperate with each other and (i)
promptly prepare and file all necessary documentation, (ii) effect all necessary
applications, notices, petitions and filings and execute all agreements and
documents, (iii) use all commercially reasonable efforts to obtain all necessary
permits, consents, ap-
55
<PAGE>
provals and authorizations of all governmental bodies and (iv) use all
commercially reasonable efforts to obtain all necessary Environmental Permits,
Permits, consents, approvals and authorizations of all other parties, in the
case of each of the foregoing clauses (i), (ii), (iii) and (iv), necessary or
advisable to consummate the transactions contemplated by this Agreement or
required by the terms of any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other instrument to
which the Company or Buyer or any of its subsidiaries is a party or by which any
of them is bound. Without limiting the foregoing, the Company shall cooperate
with Buyer in connection with Buyer's efforts to obtain the Financing and to
successfully complete the Senior Note Tender Offer (as hereinafter defined),
such cooperation to include without limitation (i) facilitating due diligence
investigations by potential financing sources, (ii) assuring cooperation by the
Company's and the Subsidiary's independent accountants in any audit of the
Company's and the Subsidiary's, financial statements by Arthur Andersen LLP and
providing customary consents, comfort letters and access to work papers, and
(iii) executing and delivering any required supplemental indenture and other
documents in connection with the Financing and the Senior Note Tender Offer.
(b) The Sellers shall have the right but not the obligation to review
and approve in advance all characterizations of the information relating to the
Subsidiary and the Company, and each of the Sellers and Buyer shall have the
right
56
<PAGE>
but not the obligation to review and approve in advance all characterizations of
the information relating to the transactions contemplated by this Agreement,
which appear in any filing made in connection with the transactions contemplated
hereby or in the Offering Memorandum relating to the Financing. The Sellers and
Buyer agree that they will consult with each other with respect to the obtaining
of all such necessary Environmental Permits, consents, approvals and
authorizations of all third parties and governmental bodies. The Sellers and
Buyer shall designate separate counsel with respect to all applications,
notices, petitions and filings (joint or otherwise), relating to this Agreement
and the transactions contemplated hereby, on behalf of the Sellers, the
Subsidiary or the Company, on the one hand, and Buyer, on the other hand, with
all governmental bodies.
(c) The parties hereto shall consult with each other prior to
proposing or entering into any stipulation or agreement with any Federal, State
or local governmental authority or agency or any third party in connection with
any Federal, State, or local governmental consents and approvals legally
required for the consummation of the transactions contemplated hereby and shall
not propose or enter into any such stipulation or agreement without the other
party's prior written consent, which consent shall not be unreasonably withheld.
V.10 Sales and Transfer Taxes. All securities and other transfer
------------------------
taxes incurred in connection with this Agreement and the transactions
contemplated hereby
57
<PAGE>
shall be borne by the Company. Buyer will file all necessary tax returns and
other documentation with respect to all such transfer taxes, and, if required by
applicable law, the Sellers will join in the execution of any such tax returns
or other documentation, subject to their reasonable prior review thereof and
opportunity to comment thereon.
V.11 Supplemental Information. From time to time prior to the Closing
------------------------
Date and upon becoming aware of any such matter, condition or occurrence, the
Company and the Subsidiary will promptly disclose to Buyer, and Buyer will
promptly disclose to the Company, (i) any material development affecting the
ability of such party to consummate the transactions contemplated by this
Agreement, (ii) any matter, condition, occurrence or knowledge which, if
existing or occurring at the date of this Agreement, would have been required to
be excepted from any representation and warranty contained herein in order for
such representation or warranty to be true and correct on the date hereof or
otherwise set forth or described in the respective Schedule or (iii) any breach
of any covenant or agreement contained in this Agreement of which such party has
knowledge.
V.12 Employees. Buyer agrees that it will cause the Subsidiary to
---------
honor the agreements and arrangements with its employees that are identified in
Schedule 3.16. Notwithstanding the foregoing, it is understood that nothing in
this Agreement shall prohibit or restrict Buyer from terminating the employment
of any
58
<PAGE>
of the Subsidiary's employees, changing compensation levels or other terms and
conditions of employment (other than service credit for past employment with the
Subsidiary) subsequent to the Closing Date, subject to the obligations of Buyer
and the Subsidiary with respect to the items identified on Schedule 3.16.
Nothing in this Section 5.12, express or implied, is intended to confer or shall
confer upon any of the Subsidiary's employees or former employees any rights or
remedies of any nature or kind whatsoever under or by reason of this Agreement,
including, without limitation, any rights of employment.
ARTICLE VI
CLOSING CONDITIONS
------------------
VI.1 Conditions to Each Party's Obligations to Effect the
----------------------------------------------------
Transactions Contemplated Hereby. The respective obligations of each party to
- --------------------------------
effect the transactions contemplated hereby shall be subject to no preliminary
or permanent injunction or other order or decree by any federal or state court
which prevents the consummation of the transactions contemplated hereby having
been issued and remaining in effect (each party agreeing to use its reasonable
best efforts to have any such injunction, order or decree lifted), and no
statute, rule or regulation having been enacted by any Federal, State, or local
governmental agency in the United States which prohibits the consummation of the
transactions contemplated
59
<PAGE>
hereby.
VI.2 Conditions to Obligations of Buyer.
----------------------------------
(a) The obligation of Buyer to effect the transactions contemplated
by this Agreement shall be subject to the fulfillment at or prior to the Pre-
Closing Date of the following additional conditions:
(i) Buyer shall have entered into the Financing Agreements;
(ii) Buyer shall have received binding and irrevocable tenders
and consents from the holders of not less than 75% of the Subsidiary's
outstanding 10f% Senior Secured Notes due 2001 (the "Senior Notes") to sell
their Senior Notes to Buyer and to consent to such amendments to or waivers
under the Indenture under which the Senior Notes were issued as Buyer
determines are necessary to facilitate the Financing (such tender offer and
consent solicitation, collectively, the "Senior Note Tender Offer");
(iii) Buyer shall received executed Settlement Agreement and
Releases in the form of Annex B hereto from franchisees of the Subsidiary
and related investors accounting for at least 80% of the Subsidiary's
franchisees, excluding for such purposes the franchisees owned or
controlled by any of the Sellers or other significant franchisees that have
already been received;
(iv) the Company shall have provided to Buyer the
60
<PAGE>
information necessary to permit the calculation of any adjustments pursuant
to Section 1.2(b);
(v) the Company shall have provided evidence reasonably
satisfactory to Buyer that all of the Warrants have been cancelled
consistent with Section 1.5 and that the Affiliate Arrangements identified
on Schedule 6.2(a)(v) other than the Franchise Agreements for franchisees
in which Mr. Karp is an investor, as amended in accordance with Annex B
hereto, have been terminated effective not later than the Closing Date with
no additional amounts payable thereunder by the Company or the Subsidiary;
and
(vi) the Company and the Sellers shall have performed and
complied with in all material respects the covenants and agreements
contained in this Agreement required to be performed and complied with by
it or them at or prior to the Closing Date, the representations and
warranties of the Company and the Sellers set forth in this Agreement shall
be true and correct in all material respects as of the date of this
Agreement and as of the Pre-Closing Date as though made at and as of the
Pre-Closing Date, there shall not have occurred and be continuing a
Material Adverse Effect, and Buyer shall have received a certificate to the
foregoing effect signed by an authorized officer of the Company.
(b) The obligation of Buyer to effect the transactions contemplated
61
<PAGE>
by this Agreement shall be subject to the fulfillment at or prior to the Closing
Date of the following additional conditions:
(i) the delivery to it of the Escrowed Seller Documents and the
Escrowed Company Documents; and
(ii) the Company and the Sellers shall have performed and complied
with in all material respects the covenants and agreements contained in this
Agreement required to be performed and complied with by it or them at or prior
to the Closing Date.
VI.3 Conditions to Obligations of the Sellers.
----------------------------------------
The obligation of the Sellers to effect the transactions contemplated by this
Agreement shall be subject to the fulfillment at or prior to the Pre-Closing
Date of the following additional conditions:
(a) Buyer shall have performed in all material respects its covenants
and agreements contained in this Agreement required to be performed at or prior
to the Pre-Closing Date; and
(b) the representations and warranties of Buyer set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date as though made at and as of the
Closing Date, and the Company and the Sellers the Sellers shall have received a
certificate to that effect signed by an authorized officer of Buyer.
62
<PAGE>
ARTICLE VII
TERMINATION AND ABANDONMENT
---------------------------
VII.1 Termination.
-----------
(a) This Agreement may be terminated at any time prior to the Closing
Date, by mutual written consent of Buyer, the Company and the Sellers.
(b) This Agreement may be terminated by the Company, Buyer or the
Sellers if the transactions contemplated hereby shall not have been consummated
on or before August 24, 1998; provided that the right to terminate this
--------
Agreement under this Section 7.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing Date to occur on or before such date.
(c) This Agreement may be terminated by either the Company or Buyer
if any court of competent jurisdiction in the United States or any State shall
have issued an order, judgment or decree permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated hereby and such order,
judgment or decree shall have become final and nonappealable.
(d) This Agreement may be terminated by Buyer if there has been a
material violation or breach by the Company or the Sellers of any agreement,
representation or warranty contained in this Agreement which has rendered the
satis-
63
<PAGE>
faction of any condition to the obligations of Buyer impossible and such
violation or breach has not been waived by Buyer.
(e) This Agreement may be terminated by the Company or the Sellers if
there has been a material violation or breach by Buyer of any agreement,
representation or warranty contained in this Agreement which has rendered the
satisfaction of any condition to the obligations of the Sellers impossible and
such violation or breach has not been waived by the Sellers.
VII.2 Procedure and Effect of Termination. In the event of
-----------------------------------
termination of this Agreement and abandonment of the transactions contemplated
hereby by either or both of the parties pursuant to Section 7.1, written notice
thereof shall forthwith be given by the terminating party to the other party and
this Agreement shall terminate and the transactions contemplated hereby shall be
abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein:
(a) none of the parties hereto nor any of their respective
directors, officers or affiliates, as the case may be, shall have any
liability or further obligation to the other party or any of their
respective directors, officers or affiliates, as the case may be, pursuant
to this Agreement, except for liability for any breach of this Agreement
and except in each case as stated in this Section 7.2 and in Sections
5.3(b), 5.6 and 5.8; provided, that the sole
--------
64
<PAGE>
recourse of Buyer with respect to any such liability arising out of this
Section 7.2(a) shall be to assert a claim against the Company (which shall
be responsible for any breaches by the Company or by the Sellers) and not
the Sellers; and
(b) all filings, applications and other submissions made
pursuant to this Agreement, to the extent practicable, shall be withdrawn
from the agency or other person to which they were made.
ARTICLE VIII
INDEMNIFICATION
---------------
VIII.1 Coverage. Each of the Sellers, severally, but not jointly,
--------
shall indemnify, defend and hold harmless Buyer from all damages, liabilities,
losses, costs, expenses (including all reasonable fees), claim or cause of
action ("Losses") arising out of or resulting from, or shall pay or become
obligated to pay any sum on account of, any breach of representation and
warranty as to such Seller in Section 3.25.
VIII.2 Limitation of Liability. Any Seller's liability with respect
-----------------------
to indemnification in Section 8.1 shall be limited to that portion of the cash
purchase price received for Company Securities sold by such Seller.
ARTICLE IX
65
<PAGE>
MISCELLANEOUS PROVISIONS
------------------------
IX.1 Amendment and Modification. Subject to applicable law, this
--------------------------
Agreement may be amended, modified or supplemented only by written agreement of
the Company, the Sellers and Buyer.
IX.2 Waiver of Compliance; Consents. Except as otherwise provided in
------------------------------
this Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party entitled to
the benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
IX.3 No Survival of Representations and Warranties. Each and every
---------------------------------------------
representation and warranty contained in this Agreement and each and every
covenant contained in this Agreement (other than the covenants in Section
5.3(b), 5.6, 5.8 and 5.12 and the representations and warranties in Section
3.25) shall expire with, and be terminated and extinguished by, (i) the
consummation of the sale of the Company Securities pursuant to this Agreement
and shall not survive the Closing Date, or (ii) the termination of this
Agreement pursuant to Section 7.1 or otherwise.
IX.4 Notices. All notices and other communications hereunder shall
-------
66
<PAGE>
be in writing and shall be deemed given if delivered personally or by facsimile
transmission or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses or
facsimile numbers (or at such other address or facsimile number for a party as
shall be specified by like notice; provided that notices of a change of address
--------
shall be effective only upon receipt thereof):
(a If to Buyer, to:
Mrs. Fields' Original Cookies, Inc.
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
facsimile no.: (801) 736-5943
Attention: Mr. Larry A. Hodges
with copies to:
Mrs. Fields' Original Cookies, Inc.
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
facsimile no.: (801) 736-5943
Attention: Legal Department
Capricorn Management, G.P.
30 East Elm Street
Greenwich, Connecticut 06830
facsimile no.: (203) 861-6671
Attention: Mr. Herbert S. Winokur, Jr.
and
Skadden, Arps, Slate, Meagher
67
<PAGE>
& Flom LLP
919 Third Avenue
New York, New York 10022
facsimile no.: (212) 735-2000
Attention: Randall H. Doud, Esq.
(b) if to the Company or the Sellers, to:
Cookies USA, Inc.
c/o The Jordan Company
9 West 57th Street, Suite 4000
New York, New York 10019
facsimile no.: (212) 755-5263
Attention: Mr. Adam Max
with copies to:
Mayer Brown & Platt
1675 Broadway
New York, New York 10019-5820
facsimile no.: (212) 262-1910
Attention: Martin J. Collins, Esq., and
Michael Coles
2450 Kirk Lane
Kennesaw, Georgia 30144, and
Arthur S. Karp
7902 Sanderling Road
Sarasota, Florida 34242
IX.5 Assignment. This Agreement and all of the provisions hereof
----------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but, except to the extent
specifically
68
<PAGE>
provided in Section 1.1, neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto, including by
operation of law, without the prior written consent of the other party, nor is
this Agreement intended to confer upon any other person except the parties
hereto any rights or remedies hereunder.
IX.6 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York (regardless of
the laws that might otherwise govern under applicable New York principles of
conflicts of law) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
IX.7 Counterparts. This Agreement may be executed in two
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IX.8 Interpretation. The article and section headings contained in
--------------
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. All references to Schedules are to the
Disclosure Schedule delivered by the Company to Buyer as of the date of this
Agreement, as they may be amended pursuant to Section 5.11 subject to Buyer's
rights under Section 7.1(d). As used in
69
<PAGE>
this Agreement, the term "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a governmental entity or any department or agency thereof. As
used in this Agreement, the term "Permitted Exceptions" shall mean and include
(i) those exceptions to title to the properties and assets of the Company listed
in Schedule 3.11; (ii) all exceptions, restrictions, easements, rights of way
and encumbrances set forth in title reports or title insurance binders which
have been made available to Buyer; (iii) mortgages, liens, pledges, charges,
encumbrances and restrictions which secure debt that is reflected as a liability
on the Company Balance Sheet or which are otherwise reflected in the Company
Balance Sheet or disclosed in the notes thereto; (iv) mortgages, liens, pledges,
charges, encumbrances and restrictions incurred in connection with the Company's
purchase of properties and assets after the date of the Company Balance Sheet
securing all or a portion of the purchase price therefor; (v) statutory liens
for current taxes or assessments not yet due or delinquent or the validity of
which is being contested in good faith by appropriate proceedings; (vi)
mechanics', carriers', workers', repairers' and other similar liens arising or
incurred in the ordinary course of business relating to obligations as to which
there is no default on the part of the Company; (vii) zoning, entitlement and
other land use and environmental regulations by governmental authorities and
(viii) such other liens, imperfections in title, charges, easements,
restrictions and encumbrances which do not materi-
70
<PAGE>
ally detract from the value of or materially interfere with the present use of
any property subject thereto or affected thereby that is material to the
business, operations or financial condition of the Company or which relate to
properties that are not material to the Company and do not, in the aggregate
have a Material Adverse Effect. As used in this Agreement, the term "subsidiary"
when used in reference to any other person shall mean any corporation of which
outstanding securities having ordinary voting power to elect a majority of the
Board of Directors of such corporation are owned directly or indirectly by such
other person.
IX.9 Entire Agreement. This Agreement, including the documents,
----------------
Schedules, certificates and instruments referred to herein, and the
Confidentiality Agreement embody the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated by this Agreement.
There are no restrictions, promises, representations, warranties, covenants or
undertakings, other than those expressly set forth or referred to herein or
therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such transactions other than the
Confidentiality Agreement.
71
<PAGE>
IN WITNESS WHEREOF, the Company, the Sellers and Buyer have caused
this agreement to be signed by their respective duly authorized officers as of
the date first above written.
MRS. FIELDS' ORIGINAL COOKIES,
INC.
By /s/ Larry A. Hodges
-------------------------------
Name: Larry A. Hodges
Title: CEO
COOKIES USA, INC.
By /s/ Adam E. Max
Name: Adam E. Max
Title: VP
THE SELLERS:
LEUCADIA INVESTORS, INC.
By /s/ Joseph A. Orlardo
Name: Joseph A. Orlardo
Title: Vice President
JOHN W. JORDAN, II REVOCABLE TRUST
By /s/ John W. Jordan
Name: John W. Jordan
Title:
72
<PAGE>
UNIVERSITY OF NOTRE DAME/THE JOHN
W. JORDAN II FUND
By: /s/ E. William Beauchamze
Name: E. William Beauchamze
Title: EVP
/s/ David W. Zalaznick
-------------------------------
David W. Zalaznick
/s/ Johnathan F. Boucher
-------------------------------
Johnathan F. Boucher
/s/ John R. Lowden
-------------------------------
John R. Lowden
DELEWARE CHARTER GUARANTEE & TRUST
CO. F/B/O JOHN R. LOWDEN
By: /s/ John R. Lowden
Name: John R. Lowden
Title: Trustee
/s/ Adam E. Max
---------------
Adam E. Max
/s/ John M. Camp
-------------------------------
John M. Camp
JOHN M. CAMP III, PROFIT SHARING PLAN, 1/1/88,
JOHN M. CAMP III, TRUSTEE
By /s/ John M. Camp
Name: John M. Camp
Title: Trustee
/s/ A. Richard Caputo, Jr.
-------------------------------
A. Richard Caputo, Jr.
73
<PAGE>
JAMES E. JORDAN, JR. PROFIT SHARING PLAN & TRUST
By /s/ James E. Jordan, Jr.
Name: James E. Jordan, Jr.
Title: Trustee
PAUL RODZEVIK PROFIT SHARING PLAN & TRUST
By /s/ Paul Rodzevik
Name: Paul Rodzedvik
Title: Trustee
/s/ Thomas H. Quinn
-------------------------------
Thomas H. Quinn
JII PARTNERS
By /s/ Thomas H. Quinn
Name: Thomas H. Quinn
Title:
MCIT (EXISTING POOL) LIMITED
By /s/ James E. Jordan
Name: James E. Jordan
Title: Director
74
<PAGE>
COOKIES USA PARTNERS, L.P.
By Jefferies & Company, Inc. Its General Partner
By /s/ Jerry M. Gluck
Name: Jerry M. Gluck
Title: Executive Vice President
/s/ Michael J. Coles
-------------------------------
Michael J. Coles
/s/ Arthur S. Karp
-------------------------------
Arthur S. Karp
GEORGIA COOKIES, INC.
By /s/ Arthur S. Karp
Name: Arthur S. Karp
Title: President
THE ARTHUR S. KARP FAMILY FOUNDATION, INC.
By /s/Arthur S. Karp
Name: Arthur S. Karp
Title: Chair
75
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I SALE OF STOCK AND TERMS OF PAYMENT............................ 2
1.1 The Sale........................................................ 2
1.2 Consideration................................................... 3
1.3 The Sellers' Releases........................................... 5
1.4 Other Matters................................................... 6
1.5 Warrants........................................................ 8
ARTICLE II THE PRE-CLOSING AND CLOSING................................... 8
2.1 Time and Place of Pre-Closing and Closing....................... 8
2.2 Deliveries by the Sellers and the Company....................... 10
2.3 Deliveries by Buyer............................................. 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANYAND THE SELLERS.. 12
3.1 Organization; Qualification..................................... 13
3.2 The Company's Capitalization.................................... 14
3.3 Title to Stock.................................................. 16
3.4 Authority Relative to this Agreement............................ 16
3.5 Subsidiaries and Equity Investments; Affiliates................. 17
3.6 Consents and Approvals; No Violation............................ 17
3.7 Reports......................................................... 19
3.8 Financial Statements............................................ 20
3.9 Undisclosed Liabilities......................................... 22
3.10 Absence of Certain Changes or Events........................... 23
3.11 Personal Property.............................................. 25
3.12 Real Property.................................................. 26
3.13 Insurance...................................................... 28
3.14 Environmental Matters.......................................... 29
3.15 Labor Matters.................................................. 33
3.16 ERISA; Benefit Plans........................................... 34
3.17 Certain Contracts and Arrangements............................. 40
3.18 Intellectual Property.......................................... 42
</TABLE>
lxxvi
<PAGE>
<TABLE>
<S> <C>
3.19 Customers, Suppliers and Competitors.......................... 44
3.20 Legal Proceedings, etc........................................ 44
3.21 Tax Matters................................................... 45
3.22 Arrangements with Directors, Officers
and Affiliates................................................ 48
3.23 Compliance with Law........................................... 49
3.24 Fees and Commissions.......................................... 50
3.25 Representations of the Sellers................................ 50
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER........................ 53
4.1 Organization................................................... 53
4.2 Authority Relative to this Agreement........................... 53
4.3 Consents and Approvals; No Violation........................... 54
4.4 Acquisition of Stock for Investment............................ 56
4.5 Financing...................................................... 56
4.6 Fees and Commissions........................................... 56
4.7 Knowledge of Inaccuracies...................................... 56
ARTICLE V COVENANTS OF THE PARTIES........................................ 57
5.1 HSR Act Compliance............................................. 57
5.2 Conduct of Business of the Company............................. 57
5.3 Access to Information.......................................... 63
5.4 Insurance...................................................... 64
5.5 WARN Act....................................................... 65
5.6 Expenses....................................................... 65
5.7 Further Assurances............................................. 65
5.8 Public Statements.............................................. 66
5.9 Consents and Approvals......................................... 67
5.10 Sales and Transfer Taxes...................................... 69
5.11 Supplemental Information...................................... 70
5.12 Employees..................................................... 70
ARTICLE VI CLOSING CONDITIONS............................................. 71
6.1 Conditions to Each Party's Obligations to
Effect the Transactions Contemplated Hereby.................... 71
6.2 Conditions to Obligations of Buyer............................. 72
6.3 Conditions to Obligations of the Sellers....................... 74
</TABLE>
lxxvii
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII TERMINATION AND ABANDONMENT................................... 75
7.1 Termination.................................................... 75
7.2 Procedure and Effect of Termination............................ 77
ARTICLE VIIIINDEMNIFICATION............................................... 78
8.1 Coverage....................................................... 78
8.2 Limitation of Liability........................................ 78
ARTICLE IXMISCELLANEOUS PROVISIONS........................................ 79
9.1 Amendment and Modification..................................... 79
9.2 Waiver of Compliance; Consents................................. 79
9.3 No Survival of Representations and Warranties.................. 79
9.4 Notices........................................................ 80
9.5 Assignment..................................................... 81
9.6 Governing Law.................................................. 82
9.7 Counterparts................................................... 82
9.8 Interpretation................................................. 82
9.9 Entire Agreement............................................... 84
</TABLE>
lxxviii
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE ORIGINAL GREAT AMERICAN CHOCOLATE
CHIP COOKIE COMPANY, INC.
(Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware)
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC., a
corporation organized and existing under the laws of the State of Delaware,
hereby certifies as follows:
1. The original Certificate of Incorporation of the corporation was
filed with the Secretary of State of the State of Delaware on June 10, 1977.
2. This Amended and Restated Certificate of Incorporation amends and
restates the provisions of the Certificate of Incorporation of this corporation,
was duly adopted in accordance with the provisions of Sections 242 and 245 of
the General Corporation Law of the State of Delaware, and was duly approved at
a meeting of the majority stockholders of the Corporation pursuant to Section
228 (d) of the General Corporation Law of the State of Delaware, with those
stockholders requiring written notice of a meeting having received and
acknowledged such notice.
3. The text of the Certificate of Incorporation is hereby amended
and restated to read in its entirety as follows:
ARTICLE I
---------
The name of the corporation is GREAT AMERICAN COOKIE COMPANY, INC.
ARTICLE II
----------
The address of the registered office of the corporation is 1013 Centre
Road, Wilmington, New Castle County, Delaware 19805. The name of its registered
agent at such address is Corporation Service Company.
ARTICLE III
-----------
<PAGE>
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE I-V
-----------
The total number of shares of stock which the corporation shall have
authority to issue is Two Thousand (2,000) shares, all of which shares shall be
Common Stock, no par value.
ARTICLE V
---------
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors- of the corporation is expressly authorized to
adopt, alter or repeal its By-Laws.
ARTICLE VI
----------
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for injury resulting from a
breach of his fiduciary duty as a director, except for liability (i) for injury
resulting from a breach of his duty of loyalty to the corporation and its
stockholders, (ii) for injury resulting from acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, as the same exists or
hereafter may be amended, or (iv) for injury resulting from any transaction from
which the director derives an improper personal benefit. If the Delaware General
Corporation Law hereafter is amended so as to authorize the further elimination
or limitation of the liability of directors to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
then the liability of a director of the corporation for monetary damages, in
addition to the limitation on personal liability provided in the preceding
sentence, shall automatically, by virtue hereof and without any further action
on the part of the corporation or its stock holders, be further limited so as to
be limited to the fullest extent permitted by the Delaware General Corporation
Law. Any repeal or modification of this Section by the stockholders of the
corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the corporation-with
regard to actions taken or omitted before such repeal or modification.
ARTICLE VII
-----------
2
<PAGE>
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, or
by or in the right of the corporation to procure a judgment in its favor, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, in accordance with and to the full extent
permitted by statute. Expenses incurred in defending a civil or criminal action,
suit or proceeding shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific cast upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation as authorized in this section. The indemnification provided by this
section shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under this Certificate of Incorporation or any
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
3
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been executed on behalf of this corporation this 10th day of December, 1993.
THE ORIGINAL GREAT AMERICAN
CHOCOLATE CHIP COOKIE COMPANY, INC.
By: /s/ Adam E. Max
---------------------------
Adam E. Max, Vice President
Attest:
/s/ Herbert B. Max
------------------
Herbert B. Max
Assistant Secretary
THE ORIGINAL GREAT AMERICAN
CHOCOLATE CHIP COMPANY COOKIE
COMPANY, INC.
By: /s/ Arthur S. Karp
------------------------
Chairman of the Board of
Directors or President
Attest: /s/ Michael J. Coles
----------------------
Secretary or Assistant
Secretary
Board of Directors of
Pennsylvania Cookies, Inc.
/s/ Arthur S. Karp
------------------
Arthur S. Karp
/s/ Michael J. Coles
--------------------
Michael J. Coles
4
<PAGE>
Shareholder of Pennsylvania
Cookies, Inc.
The Original Great American
Chocolate Chip Cookie Company, Inc.
By: /s/ Arthur S. Karp
-----------------------------
Arthur S. Karp, President; or
Michael J. Coles, Vice
President
5
<PAGE>
BY-LAWS
OF
GREAT AMERICAN COOKIE COMPANY, INC.
(A Delaware corporation)
Effective 9:00 a.m. est - December, 1993
----------------------------------------
ARTICLE I
Meetings of Stockholders
------------------------
SECTION 1. Annual Meeting. The annual meeting of the stockholders of
--------------
GREAT AMERICAN COOKIE COMPANY, INC. (hereinafter, the "Corporation") for the
election of directors and for the transaction of such other proper business
shall be held on such date and at such time as may be fixed by the Board of
Directors, at the office of the Corporation or at such other place, and at such
hour as shall be designated by the Board of Directors, or, if no such time be
fixed, then at 10:00 in the forenoon.
SECTION 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise prescribed by statute, may be called at any time by the Board of
Directors or by the holder or holders of more than 10% of the outstanding shares
of Common Stock entitled to vote at such meeting.
SECTION 3. Notice of Meetings. Written notice of each meeting of the
------------------
stockholders, which shall state the place, date and hour of the meeting and the
purpose or purposes for which it is called, shall be given not less than ten nor
more than sixty days before the date of such meeting to each stockholder
entitled to vote at such meeting, and, if mailed, shall be deposited in the
United States mail, postage prepaid, directed to the stockholder at the
stockholder's address as it appears on the records of the Corporation. Any such
notice for any meeting other than the annual meeting shall indicate that it is
being issued at the direction of the Board or other-wise, as the case may be.
Whenever notice is required to be given, a written waiver thereof signed by the
person entitled thereto, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
<PAGE>
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. When a meeting is adjourned to another time or place, notice need not
be given if the time and place thereof are announced at the meeting at which the
adjournment is taken. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 4. Quorum. At any meeting of the stockholders the holders of the
------
majority of the shares, issued and outstanding and entitled to vote, shall be
present in person or represented by proxy in order to constitute a quorum for
the transaction of any business. In the absence of a quorum, the holders of a
majority of the shares present in person or represented by proxy and entitled to
vote may adjourn the meeting from time to time. At any such adjourned meeting at
which a quorum may be present, the Corporation may transact any business which
might have been transacted at the original meeting.
SECTION 5. Organization. At each meeting of the stockholders, the Chairman
------------
of the Board, or in his absence or inability to act, the Vice Chairman, if any,
or, in his absence or inability to act, the President or, in his absence or
inability to act, any Vice President or, in his absence of inability to act, any
person chosen by the majority of those stockholders present in person or
represented by proxy shall act as chairman of the meeting. The Secretary or, in
his or her absence or inability to act, any person appointed by the chairman of
the meeting shall act as secretary of the meeting and keep the minutes thereof.
SECTION 6. Order of Business. The order of business at all meetings of the
-----------------
stockholders shall be as determined by the chairman of the meeting.
SECTION 7. Voting. Unless otherwise provided in the Certificate of
------
Incorporation, and subject to statute, each stockholder shall be entitled to one
vote for each share of capital stock held by such stockholder:
(1) on the date fixed pursuant to the provisions of Section 5 of
Article V of these By-Laws as the record date for the determination of the
stockholders to be entitled to notice of or to vote at such meeting; or
2
<PAGE>
(2) if no record date is fixed, then at the close of business on the
day next preceding the day on which notice is given. Each stockholder
entitled to vote at any meeting of stockholders or to express consent or
dissent to corporate action in writing without a meeting may authorize
another person or persons to act for him by proxy. Any such proxy shall be
delivered to the secretary of such meeting at or prior to the time
designated in the order of business for so delivering such proxies. Except
as otherwise required by statute or by the Certificate of Incorporation, a
majority of the votes cast at a meeting of the stockholders shall be
necessary to authorize any corporate action to be taken by vote of the
stockholders. Unless required by statute, or determined by the chairman of
the meeting to be advisable, the vote on any question other than the
election of directors need not be by ballot. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by his proxy if there
be such proxy, and shall state the number of shares voted.
SECTION 8. List of Stockholders. A list of the stockholders entitled to
--------------------
vote at any meeting shall be produced and kept and made available for at least
days prior to and at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder.
SECTION 9. Inspectors. The Board may, in advance of any meeting of
----------
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting shall appoint
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote thereat, the inspectors shall
make a report in writing of any challenge, question or matter determined by them
and shall execute a certificate of any fact found by them. No director or
candidate for the office of
3
<PAGE>
director shall act as an inspector of an election of directors. Inspectors need
not be stockholders.
ARTICLE II
Board of Directors
------------------
SECTION 10. General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of a Board of Directors. The Board
may exercise all such authority and powers of the Corporation and do all such
lawful acts and things as are not by statute or the Certificate of Incorporation
directed or required to be exercised or done by the stockholders.
SECTION 11. Number, Qualifications, Election and Term of Office. The Board
---------------------------------------------------
of Directors shall consist of three persons so long as there is three or less
holders of the Corporation's common stock, thereafter at least four and no more
than five Directors beginning the day after the stock of the Corporation has
been acquired by Cookies USA, Inc. Each director shall hold office until the
annual meeting of stockholders of the Corporation next succeeding his election
or until his successor is duly elected and qualified. Directors need not be
stockholders. One of the directors may be designated a Senior Director.
SECTION 12. Place of Meeting. The Board of Directors shall hold its
----------------
meetings at such place, within or without the State of Delaware, as it may from
time to time determine or as shall be specified in the notice of any such
meeting.
SECTION 13. Annual Meeting. The Board shall meet for the purpose of
--------------
organization, the election of officers and the transaction of other business as
soon as practicable after each annual meeting of the stockholders, on the same
day and at the same place where such annual meeting shall be held. Notice of
such meeting need not be given. Such meeting may be held at any other time or
place, within or without the State of Delaware, which shall be specified in a
notice thereof given as hereinafter provided in Section 7 of this Article II.
SECTION 14. Regular Meetings. Regular meetings of the Board shall be held
----------------
at such time as the Board may fix. If any day fixed for a regular meeting shall
be a legal holiday at the place where the meeting is to be held, then the
meeting which would otherwise be held on that day shall be held at the same hour
on the next
4
<PAGE>
succeeding business day. Notice of regular meetings of the Board need not be
given except as otherwise required by statute or these By-Laws.
SECTION 15. Special Meetings. Special meetings of the Board may be called
----------------
by the Chairman of the Board, the President or by any two directors.
SECTION 16. Notice of Meetings. Notice of each special meeting of the Board
------------------
(and of each regular meeting for which notice shall be required) shall be given
by the Secretary as hereinafter provided in this Section 7, in which notice
shall be stated the time and place of the meeting. Except as otherwise required
by these By-laws, such notice need not state the purposes of such meeting.
Notice of each such meeting shall be mailed by first class mail, postage
prepaid, or by overnight delivery service, to each director, addressed to him at
his residence or usual place of business, at least two (2) days before the day
on which such meeting is to be held, or shall be sent addressed to him at such
place by telegraph, telex, cable or wireless, or be delivered to him personally
or by facsimile, at least 24 hours before the time at which such meeting is to
be held. A written waiver of notice, signed by the director entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Notice of any such meeting need not be given to any director who shall,
either before or after the meeting, submit a signed waiver of notice or who
shall attend such meeting without protesting, prior to or at its commencement,
the lack of notice to him.
SECTION 17. Quorum and Manner of Acting. Except as hereinafter provided, a
---------------------------
majority of the entire Board shall be present in person or by means of a
conference telephone or similar communications equipment which allows all
persons participating in the meeting to hear each other at the same time at any
meeting of the Board in order to constitute a quorum for the transaction of
business at such meeting. In the absence of a quorum at any meeting of the
Board, a majority of the directors present thereat may adjourn such meeting to
another time and place. Notice of the time and place of any such adjourned
meeting shall be given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the meeting at
which the adjournment was taken, to the other directors. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called. The directors shall
act only as a Board and the individual directors shall have no power as such.
5
<PAGE>
Except as otherwise required by statute, the Certificate of Incorporation,
the By-Laws or any Subscription Agreement in writing to which the Corporation is
a party, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board.
SECTION 18. Action Without a Meeting. Any action required or permitted to
------------------------
be taken at any meeting of the Board of Directors may be taken without a meeting
if all members of the Board consent thereto in writing, and the writing or
writings are filed with the minutes of the Board.
SECTION 19. Telephonic Participation. Members of the Board of Directors may
------------------------
participate in a meeting of the Board by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation in such a meeting
shall constitute presence in person at such meeting.
SECTION 20. Organization. At each meeting of the Board, the Chairman of the
------------
Board or, in his absence or inability to act, the President or, in his absence
or inability to act, the Senior Director or another director chosen by a
majority of the directors present shall act as chairman of the meeting and
preside thereat. The Secretary or, in his or her absence or inability to act,
any person appointed by the chairman shall act as secretary of the meeting and
keep the minutes thereof.
SECTION 21. Resignations. Any director may resign at any time upon written
------------
notice to the Corporation. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 22. Vacancies. Vacancies and newly created directorships resulting
---------
from any increase in the authorized number of directors to the extent permitted
herein may be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. If there are no directors
in office, then a special meeting of stockholders for the election of directors
may be called and held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding
6
<PAGE>
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office, in the manner provided by
statute. When one or more directors shall resign from the Board, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office until the next election
of directors and until their successors shall be elected and qualified.
SECTION 23. Removal of Directors. Except as otherwise provided in the
--------------------
Certificate of Incorporation or in these By-Laws, and subject to the
Subscription Agreements, any director may be removed, either with or without
cause, at any time, by the affirmative vote of the holders of record of a
majority of the issued and outstanding stock entitled to vote for the election
of directors of the Corporation given at a special meeting of the stockholders
called and held for the purpose; and the vacancy in the Board caused by such
removal may be filled by such stockholders at such meeting, or, if the
stockholders shall fail to fill such vacancy, as in these By-Laws provided.
SECTION 24. Compensation. The Board of Directors shall have authority to
------------
fix the compensation, including fees and reimbursement of expenses, of directors
for services to the corporation in any capacity.
ARTICLE III
Executive and Other Committees
------------------------------
SECTION 25. Executive and Other Committees. The Board may, by resolution
------------------------------
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of two or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. Any such committee, to the extent provided in the resolution shall
have and may exercise the powers of the Board in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; provided, however, that in the
absence or disqualification of any member of such committee or committees, the
member or
7
<PAGE>
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any such absent or disqualified
member. Each committee shall keep written minutes of its proceedings and shall
report such minutes to the Board when required. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
SECTION 26. General. A majority of any committee may determine its action
-------
and fix the time and place of its meetings, unless the Board shall otherwise
provide. Notice of such meeting shall be given to each member of the committee
in the manner provided for in Article II, Section 7. The Board shall have any
power at any time to fill vacancies in, to change the membership of, or to
dissolve any such committee. Nothing herein shall be deemed to prevent the Board
from appointing one or more committees consisting in whole or in part of persons
who are not directors of the Corporation; provided, however, that no such
committee shall have or may exercise any authority of the Board.
SECTION 27. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by any committee at a meeting may be taken without a meeting if all of
the members of the committee consent in writing to the adoption of the
resolutions authorizing such action. The resolutions and written consents
thereto shall be filed with the minutes of the committee.
SECTION 28. Telephonic Participation. One or more members of a committee
------------------------
may participate in a meeting by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at the meeting.
ARTICLE IV
Officers
--------
SECTION 29. Number and Qualifications. The officers of the Corporation
-------------------------
shall include the Chairman of the Board, the Vice Chairman of the Board, the
President, one or more Vice Presidents (including Executive Vice Presidents and
Senior Vice Presidents), the Treasurer, the Secretary and the Control-
8
<PAGE>
ler. Any number of offices may be held by the same person. Such officers shall
be elected from time to time by the Board. Each officer shall hold his office
until his successor is elected and qualified or until his earlier resignation or
removal. The Board may from time to time elect, or delegate to the Chairman of
the Board or the President the power to appoint such other officers (including
one or more Assistant Treasurers and one or more Assistant Secretaries) and such
agents as may be necessary or desirable for the business of the Corporation.
Such other officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
SECTION 30. Resignations. Any officer may resign at any time upon written
------------
notice to the Corporation. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 31. Removal. Any officer or agent of the corporation may be
-------
removed, either with or without cause, at any time, by the Board at any meeting
of the Board or, except in the case of an officer or agent elected or appointed
by the Board, by the Chairman of the Board or the President.
SECTION 32. Vacancies. Any vacancy occurring in any office of the
---------
Corporation by death, resignation, removal or otherwise shall be filled for the
unexpired portion of the term of the office which shall be vacant, in the manner
prescribed in these By-laws for the regular election or appointment to such
office.
SECTION 33. The Chairman of the Board. The Chairman of the Board shall have
-------------------------
the general and active supervision and direction over the other officers, agents
and employees and shall see that their duties are properly performed and shall
be the chief executive officer. He shall, if present, preside at each meeting of
the stockholders and of the Board and shall be an ex officio member of all
committees of the Board. He shall perform all duties incident to the office of
Chairman of the Board and such other duties as may from time to time be assigned
to him by the Board.
SECTION 34. The President. The President shall have general and active
-------------
supervision and direction over the business operations and affairs of the
Corporation and over its several officers, agents and employees, subject,
however, to the direction of the Chairman of the Board and the control of the
Board of Directors.
9
<PAGE>
At the request of the Chairman of the Board, or in the case
of his absence or inability to act, the President shall perform the duties of
the Chairman of the Board and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the Chairman of the Board. In general,
the President shall have such other powers and shall perform such other duties
as usually pertain to the office of President or as from time to time may be
assigned to him by the Board, the Chairman of the Board or these By-Laws.
SECTION 35. Vice Presidents. Each Vice President shall have such powers
---------------
and perform such duties as from time to time may be assigned to him by the
Board.
SECTION 36. The Treasurer. The Treasurer shall
-------------
(1) have charge and custody of, and be responsible for, all the
funds and securities of the Corporation;
(2) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(3) cause all monies and other valuables to be deposited to the
credit of the Corporation in such depositories as may be designated by
the Board;
(4) receive, and give receipts for, monies due and payable to
the Corporation from any source whatsoever;
(5) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking
proper vouchers therefor; and
(6) in general, have all the powers and perform all the duties
incident to the office of Treasurer and such other duties as from time
to time may be assigned to him by the Board, the Chairman of the
Board, the Vice Chairman of the Board or the President.
SECTION 37. The Secretary. The Secretary shall
-------------
10
<PAGE>
(1) record the proceedings of the meetings of the stockholders
and directors in a minute book to be kept for that purpose;
(2) see that all notices are duly given in accordance with the
provisions of these By-laws and as required by law;
(3) be custodian of the records and the seal of the Corporation
and affix and attest the seal to all stock certificates of the
Corporation (unless the seal of the Corporation on such certificates
shall be a facsimile, as hereinafter provided) and affix and attest
the seal to all other documents to be executed on behalf of the
Corporation under its seal;
(4) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(5) in general, have all the powers and perform all the duties
incident to the office of Secretary and such other duties as from time
to time may be assigned to him or her by the Board, the Chairman of
the Board, or the President.
SECTION 38. The Controller. The Controller shall be responsible for
--------------
preparation of all required financial statements of the Corporation, subject to
the direction of such officer or officers as shall be designated by the Chairman
of the Board, and shall perform such other duties and have such other
responsibilities as shall be assigned to him by the Chairman of the Board or the
Board of Directors.
SECTION 39. Officers' Bonds or Other Security. The Board may secure
---------------------------------
the fidelity of any or all of its officers or agents by bond or otherwise, in
such amount and with such surety or sureties as the Board may require.
SECTION 40. Compensation. Subject to any employment agreement entered
------------
into by the Corporation and any officer, the compensation of the officers of the
Corporation for their services as such officers shall be fixed from time to time
by the Board; provided, however, that the Board may delegate to the Chairman of
the Board or the President the power to fix the compensation of officers and
agents appointed by the Chairman of the Board or the President, as the case may
be. An officer of the Corporation shall not be prevented from receiving
compensation by
11
<PAGE>
reason of the fact that he is also a director of the Corporation, but any such
officer who shall also be a director (except in the event there is only one
director of the Corporation) shall not have any vote in the determination of the
amount of compensation paid to him.
ARTICLE V
Shares, etc.
------------
SECTION 41. Stock Certificates. Every holder of stock in the
------------------
Corporation shall be entitled to have a certificate signed by or in the name of
the Corporation by the Chairman of the Board or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, certifying the number of shares owned by him in the
Corporation. Any of or all the signatures on the certificate may be a facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer, transfer agent or registrar before such certificate is issued,
it may nevertheless be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
SECTION 42. Books of Account and Record of Stockholders. The books and
-------------------------------------------
records of the Corporation may be kept at such places, within or without the
State of Delaware, as the Board of Directors may from time to time determine.
The stock record books and the blank stock certificate books shall be kept by
the Secretary or by any other officer or agent designated by the Board of
Directors.
SECTION 43. Transfer of Shares. Transfers of shares of stock of the
------------------
Corporation shall be made on the stock records of the Corporation only upon
authorization by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation may hold any such stockholder of
record liable for calls and assessments and the Corporation shall not be bound
to recognize any equitable or legal claim to or interest in any
12
<PAGE>
such shares or shares on the part of any other person whether or not it shall
have express or other notice thereof. Whenever any transfers of shares shall be
made for collateral security and not absolutely, and both the transferor and
transferee request the Corporation to do so, such fact shall be stated in the
entry of the transfer.
SECTION 44. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
SECTION 45. Fixing of Record Date. In order that the Corporation may
---------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action.
SECTION 46. Lost, Stolen or Destroyed Stock Certificates. The holder of
--------------------------------------------
any certificate representing shares of stock of the Corporation shall notify the
Corporation of any loss, destruction or mutilation of such certificate, and the
corporation may issue a new certificate of stock in the place of any certificate
theretofore issued by it, alleged to have been lost, stolen or destroyed, and
the Board may, in its discretion, require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient, as the Board in its absolute discretion shall determine, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion, may refuse to issue any
such new certificate, except pursuant to judicial proceedings under the laws of
the State of Delaware.
ARTICLE VI
13
<PAGE>
Contracts, Checks, Drafts, Bank Accounts, Etc.
----------------------------------------------
SECTION 47. Execution of Contracts. Except as otherwise required by
----------------------
statute, the Certificate of Incorporation or these By-Laws, any contract or
other instrument may be executed and delivered in the name and on behalf of the
Corporation by such officer or officers (including any assistant officer) of the
Corporation as the Board may from time to time direct. Such authority may be
general or confined to specific instances as the Board may determine.
SECTION 48. Loans. Unless the Board shall otherwise determine, the
-----
Chairman of the Board, the President or a Vice President may effect loans and
advances at any time for the Corporation from any bank, trust company or other
institution, or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
certificates or evidences of indebtedness of the Corporation, but no officer or
officers shall mortgage, pledge, hypothecate or transfer any securities or other
property of the Corporation other than in connection with the purchase of
chattels for use in the Corporation's operations, except when authorized by the
Board.
SECTION 49. Checks, Drafts, etc. All checks, drafts, bills of exchange
-------------------
or other orders for the payment of money out of the funds of the Corporation,
and all notes or other evidence of indebtedness of the Corporation, shall be
signed in the name and on behalf of the Corporation by such persons and in such
manner as shall from time to time be authorized by the Board.
SECTION 50. Deposits. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositaries as the Board may from time
to time designate or as may be designated by any officer or officers of the
Corporation to whom such power of designation may from time to time be delegated
by the Board. For the purpose of deposit and for the purpose of collection for
the account of the Corporation, checks, drafts and other orders for the payment
of money which are payable to the order of the Corporation may be endorsed,
assigned and delivered by any officer or agent of the Corporation.
SECTION 51. General and Special Bank Accounts. The Board may from time
---------------------------------
to time authorize the opening and keeping of general and special bank accounts
with such banks, trust companies or other depositaries as the Board may
14
<PAGE>
designate or as may be designated by any officer or officers of the Corporation
to whom such power of designation may from time to time be delegated by the
Board. The Board may make such special rules and regulations with respect to
such bank accounts, not inconsistent with the provisions of these By-Laws, as it
may deem expedient.
ARTICLE VII
Offices
-------
SECTION 52. Registered Office. The registered office and registered
-----------------
agent of the Corporation will be as specified in the Certificate of
Incorporation of the Corporation.
SECTION 53. Other Offices. The Corporation may also have such offices,
-------------
both within or without the State of Delaware, as the Board of Directors may from
time to time determine or the business of the Corporation may require.
ARTICLE VIII
Fiscal Year
-----------
The fiscal year of the Corporation shall be so determined by the Board
of Directors.
ARTICLE IX
Seal
----
The seal of the Corporation shall be circular in form, shall bear the
name of the Corporation and shall include the words and numbers "Corporate
Seal," "Delaware" and the year of incorporation.
ARTICLE X
Indemnification
---------------
15
<PAGE>
SECTION 54. General. The Corporation shall indemnify any person who
-------
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, or by or in the right of the Corporation to procure a judgment
in its favor, by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, in accordance
with and to the full extent permitted by statute and by the Certificate of
Incorporation of the Corporation. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized by the
Board of Directors in the specific case upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount unless
it shall ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this section. The indemnification provided by this
section shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under these By-Laws or any agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 55. Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of statute or of this section.
ARTICLE XI
Amendment
---------
16
<PAGE>
The By-Laws may be amended, repealed or altered by vote of the holders
of a majority of the shares of stock at the time entitled to vote in the
election of directors, except as otherwise provided in the Certificate of
Incorporation. The By-Laws may also be amended, repealed or altered by the Board
of Directors, but any By-Law adopted by the Board of Directors may be amended,
repealed or altered by the stockholders entitled to vote thereon as herein
provided.
17
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as
of August 24, 1998, among Mrs. Fields' Original Cookies, Inc. (or its permitted
successor), a Delaware corporation (the "Company"), The Mrs. Fields' Brand, Inc.
(the "Guaranteeing Subsidiary"), and The Bank of New York, as trustee under the
indenture referred to below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (the "Indenture"), dated as of November 26, 1997,
providing for the issuance of an aggregate principal amount of up to $200.0
million of 101/8% Notes due 2004 (the "Notes");
WHEREAS, the Company has previously issued $100 million aggregate
principal amount of Notes designated as Series A or Series B Notes;
WHEREAS, the Company desires to issue $40 million aggregate principal
amount of Notes on the date hereof, to be designated Series C Notes; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Company and the Trustee mutually covenant and agree for the equal and ratable
benefit of the Holders of the Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without
-----------------
definition shall have the meanings assigned to them in the Indenture.
2. Designation of Series C Notes. The Company, the Guaranteeing
------------------------------
Subsidiary and the Trustee hereby agree as follows:
The second paragraph of the preamble to the Indenture is replaced by
the following:
"The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the 101/8% Series
A Notes
<PAGE>
due 2004 (the "Series A Notes" ), the 101/8% Series B Notes due 2004 (the
"Series B Notes") and such additional 101/8% notes in any series that the
Company may choose to designate in amounts that are permitted to be issued under
the Indenture (collectively, the "Notes"):"
3. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK
SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
4. Counterparts. The parties may sign any number of copies of this
-------------
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
5. Effect of Headings. The Section headings herein are for
------------------
convenience only and shall not affect the construction hereof.
6. The Trustee. The Trustee shall not be responsible in any manner
-----------
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by the Guaranteeing Subsidiary and the Company.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: August 24, 1998
MRS. FIELDS' ORIGINAL COOKIES, INC.
By: __________________________
Name:
Title:
THE MRS. FIELDS' BRAND, INC.
By: _________________________
Name:
Title
THE BANK OF NEW YORK,
AS TRUSTEE
By: __________________________
Name:
Title:
<PAGE>
SECOND SUPPLEMENTAL INDENTURE
SECOND SUPPLEMENTAL INDENTURE (this Supplemental Indenture), dated
as of August 24, 1998, among Mrs. Fields' Original Cookies, Inc., a Delaware
corporation (or its permitted successor) (the "Company"), Great American Cookie
Company, Inc. (the Guaranteeing Subsidiary), a Delaware corporation and a
subsidiary of the Company, The Mrs. Fields' Brand, Inc., a Delaware corporation
("MFB" and, together with the Guaranteeing Subsidiary, the "Guarantors"), and
The Bank of New York, as trustee under the Indenture referred to herein (the
Trustee).
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (the Indenture), dated as of November 26, 1997, as
amended by the First Supplemental Indenture, dated August 24, 1998, providing
for the issuance of an aggregate principal amount of up to $200.0 million of
10 1/8% Notes due 2004 (the Notes);
WHEREAS, the Indenture provides that under certain circumstances the
Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental
indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally
guarantee all of the Company,s Obligations under the Notes and the Indenture on
the terms and conditions set forth herein (the Guarantee); and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Guaranteeing Subsidiary and the Trustee mutually covenant and agree for the
equal and ratable benefit of the Holders of the Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without
-----------------
definition shall have the meanings assigned to them in the Indenture.
2. Agreement to Guarantee. The Guaranteeing Subsidiary hereby agrees
----------------------
as follows:
<PAGE>
(a) Along with MFB, to jointly and severally Guarantee to each
Holder of a Note authenticated and delivered by the Trustee and to the
Trustee and its successors and assigns, irrespective of the validity
and enforceability of the Indenture, the Notes or the obligations of
the Company hereunder or thereunder, that:
(i) the principal of and interest on the Notes will be promptly
paid in full when due, whether at maturity, by acceleration,
redemption or otherwise, and interest on the overdue
principal of and interest on the Notes, if any, if lawful,
and all other obligations of the Company to the Holders or
the Trustee hereunder or thereunder will be promptly paid in
full or performed, all in accordance with the terms hereof
and thereof; and
(ii) in case of any extension of time of payment or renewal of
any Notes or any of such other obligations, that same will
be promptly paid in full when due or performed in accordance
with the terms of the extension or renewal, whether at
stated maturity, by acceleration or otherwise. Failing
payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the
Guarantors shall be jointly and severally obligated to pay
the same immediately.
(b) The obligations hereunder shall be unconditional,
irrespective of the validity, regularity or enforceability of the
Notes or the Indenture, the absence of any action to enforce the same,
any waiver or consent by any Holder of the Notes with respect to any
provisions hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance
which might otherwise constitute a legal or equitable discharge or
defense of a guarantor.
(c) The following is hereby waived: diligence presentment,
demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of the Company, any right to require a
2
<PAGE>
proceeding first against the Company, protest, notice and all demands
whatsoever.
(d) This Guarantee shall not be discharged except by complete
performance of the obligations contained in the Notes and the
Indenture.
(e) If any Holder or the Trustee is required by any court or
otherwise to return to the Company, the Guaranteeing Subsidiary, MFB,
or any Custodian, Trustee, liquidator or other similar official acting
in relation to either the Company or the Guaranteeing Subsidiary or
MFB, any amount paid by either to the Trustee or such Holder, this
Guarantee, to the extent theretofore discharged, shall be reinstated
in full force and effect.
(f) The Guaranteeing Subsidiary shall not be entitled to any
right of subrogation in relation to the Holders in respect of any
obligations guaranteed hereby until payment in full of all obligations
guaranteed hereby.
(g) As between the Guarantors, on the one hand, and the Holders
and the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in
Article 6 of the Indenture for the purposes of this Guarantee,
notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the obligations guaranteed hereby, and
(y) in the event of any declaration of acceleration of such
obligations as provided in Article 6 of the Indenture, such
obligations (whether or not due and payable) shall forthwith become
due and payable by the Guarantors for the purpose of this Guarantee.
(h) The Guarantors shall have the right to seek contribution from
any non-paying Guarantor so long as the exercise of such right does
not impair the rights of the Holders under the Guarantee.
(i) Pursuant to Section 10.02 of the Indenture, after giving
effect to any maximum amount and any other contingent and fixed
liabilities that are relevant under any applicable Bankruptcy or
fraudulent conveyance laws, and after giving effect to any collections
from, rights
3
<PAGE>
to receive contribution from or payments made by or on
behalf of any other Guarantor in respect of the obligations of such
other Guarantor under Article 10 of the Indenture shall result in the
obligations of such Guarantor under its Guarantee not constituting a
fraudulent transfer or conveyance.
3 Execution and Delivery. The Guaranteeing Subsidiary agrees that
----------------------
the Guarantee shall remain in full force and effect notwithstanding any failure
to endorse on each Note a notation of such Guarantee.
4. Guaranteeing Subsidiary May Consolidate, Etc. on Certain Terms.
--------------------------------------------------------------
(a) The Guaranteeing Subsidiary may not consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person)
another corporation, Person or entity whether or not affiliated with
such Guarantor unless:
(i) subject to Section 10.05 of the Indenture, the Person formed
by or surviving any such consolidation or merger (if other
than a Guarantor or the Company) unconditionally assumes all
the obligations of such Guarantor, pursuant to a
supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes, the Indenture
and the Guarantee on the terms set forth herein or therein;
and
(ii) immediately after giving effect to such transaction, no
Default or Event of Default exists.
(b) In case of any such consolidation, merger, sale or
conveyance and upon the assumption by the successor corporation, by
supplemental indenture, executed and delivered to the Trustee and
satisfactory in form to the Trustee, of the Guarantee endorsed upon
the Notes and the due and punctual performance of all of the covenants
and conditions of the Indenture to be performed by the Guarantor, such
successor corporation shall succeed to and be substituted for the
Guarantor with the same effect as if it had been named herein as a
Guarantor. Such successor corporation thereupon may cause to be signed
any or all of the Guarantees to be endorsed upon all of the Notes
4
<PAGE>
issuable hereunder which theretofore shall not have been signed by the
Company and delivered to the Trustee. All the Guarantees so issued
shall in all respects have the same legal rank and benefit under the
Indenture as the Guarantees theretofore and thereafter issued in
accordance with the terms of the Indenture as though all of such
Guarantees had been issued at the date of the execution hereof.
(c) Except as set forth in Articles 4 and 5 of the Indenture, and
notwithstanding clauses (a) and (b) above, nothing contained in the
Indenture or in any of the Notes shall prevent any consolidation or
merger of a Guarantor with or into the Company or another Guarantor,
or shall prevent any sale or conveyance of the property of a Guarantor
as an entirety or substantially as an entirety to the Company or
another Guarantor.
5. Releases.
---------
(a) In the event of a sale or other disposition of all of the
assets of any Guarantor, by way of merger, consolidation or otherwise,
or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of merger, consolidation or otherwise, of all of
the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or
substantially all of the assets of such Guarantor) will be released
and relieved of any obligations under its Guarantee; provided that the
Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture, including
without limitation Section 4.10 of the Indenture. Upon delivery by the
Company to the Trustee of an Officers' Certificate and an Opinion of
Counsel to the effect that such sale or other disposition was made by
the Company in accordance with the provisions of the Indenture,
including without limitation Section 4.10 of the Indenture, the
Trustee shall execute any documents reasonably required in order to
evidence the release of any Guarantor from its obligations under its
Guarantee.
(b) Any Guarantor not released from its obligations under its
Guarantee shall remain liable for the full amount of principal of and
5
<PAGE>
interest on the Notes and for the other obligations of any Guarantor
under the Indenture as provided in Article 10 of the Indenture.
6. No Recourse Against Others. No past, present or future director,
----------------------------
officer, employee, incorporator, stockholder or agent of the Guaranteeing
Subsidiary, as such, shall have any liability for any obligations of the
Company, the Guaranteeing Subsidiary or under the Notes, any Guarantees, the
Indenture or this Supplemental Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of the
Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
8. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK
----------------------
SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
9. Counterparts. The parties may sign any number of copies of this
------------
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
10. Effect of Headings. The Section headings herein are for
------------------
convenience only and shall not affect the construction hereof.
11. The Trustee. The Trustee shall not be responsible in any manner
-----------
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by the Guaranteeing Subsidiary, MFB and the Company.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: August 24, 1998
GREAT AMERICAN COOKIE COMPANY, INC.
By:___________________________
Name:
Title:
MRS. FIELDS' ORIGINAL COOKIES, INC.
By: __________________________
Name:
Title:
THE MRS. FIELDS' BRAND, INC.
By: __________________________
Name:
Title:
THE BANK OF NEW YORK,
AS TRUSTEE
By: __________________________
Name:
Title:
7
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
MRS. FIELDS' ORIGINAL COOKIES, INC.
$40,000,000
Aggregate Principal Amount of
10% Series C Senior Notes due 2004
____________________________________
REGISTRATION RIGHTS AGREEMENT
Dated as of August 24, 1998
____________________________________
Jefferies & Company, Inc. BT Alex. Brown Incorporated
- --------------------------------------------------------------------------------
<PAGE>
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into
as of August 13, 1998, by and among Mrs. Fields' Original Cookies, Inc., a
Delaware corporation (the "Company"), The Mrs. Fields' Brand, Inc., a Delaware
corporation ("MFB") and Great American Cookie Company, Inc., a Delaware
corporation ("Great American" and, together with MFB, the "Guarantors") and
Jefferies & Company, Inc. and BT Alex. Brown Incorporated (each, an "Initial
Purchaser" and, collectively, the "Initial Purchasers"), each of whom has agreed
to purchase the Company's 10% Series C Senior Notes due 2004 (the "Senior
Notes") pursuant to the Purchase Agreement (as defined).
This Agreement is made pursuant to the Purchase Agreement, dated, as of August
13, 1998 (the "Purchase Agreement"), by and among the Company, the Guarantors
and the Initial Purchasers. In order to induce the Initial Purchasers to
purchase the Senior Notes, the Company has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this
Agreement is a condition to the obligations of the Initial Purchasers set forth
in Section 3 of the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Advice: As defined in Section 6(d) hereof.
Business Day: Any day except a Saturday, Sunday or other day in the City of
New York, or in the city of the corporate trust office of the Trustee, on which
banks are authorized to close.
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
Broker-Dealer Transfer Restricted Securities: New Notes that are acquired
by a Broker-Dealer in the Exchange Offer in exchange for Senior Notes that such
Broker-Dealer acquired for its own account as a result of market-making
activities or other trading activities (other than Senior Notes acquired
directly from the Company or any of its affiliates).
Certificated Securities: As defined in the Indenture.
Closing Date: The date hereof.
Commission: The Securities and Exchange Commission.
Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of
this Agreement upon the occurrence of (a) the filing and effectiveness under the
Securities Act of the Exchange Offer Registration Statement relating to the New
Notes to be issued in the Exchange Offer, (b) the maintenance of such
Registration Statement continuously effective and the keeping of the Exchange
Offer open for a period not less than the minimum period required pursuant to
Section 3(b) hereof and (c) the delivery by the Company to the Registrar under
the Indenture of New Notes in the same aggregate principal amount as the
aggregate principal amount of Senior Notes tendered by Holders thereof pursuant
to the Exchange Offer.
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<PAGE>
controlling person: As defined in Section 8(a) hereof.
Damages Payment Date: With respect to the Senior Notes, each Interest Payment
Date.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Offer: The registration by the Company under the Securities Act of
the New Notes pursuant to the Exchange Offer Registration Statement pursuant to
which the Company shall offer the Holders of all outstanding Transfer Restricted
Securities the opportunity to exchange all such outstanding Transfer Restricted
Securities for New Notes in an aggregate principal amount equal to the aggregate
principal amount of the Transfer Restricted Securities tendered in such exchange
offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement relating to
the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers propose to
sell the Senior Notes to certain "qualified institutional buyers," as such term
is defined in Rule 144A under the Securities Act, and to persons permitted to
purchase the Senior Notes in offshore transactions in reliance upon Regulation S
under the Securities Act.
Global Note Holder: As defined in the Indenture.
Holders: As defined in Section 2 hereof.
Indemnified Holder: As defined in Section 8(a) hereof.
Indenture: The Indenture, dated as of November 26, 1997, among the Company,
the Guarantors and The Bank of New York, as trustee (the "Trustee"), pursuant to
which the Notes are to be issued, as such Indenture is amended or supplemented
from time to time in accordance with the terms thereof.
Interest Payment Date: As defined in the Indenture and the Notes.
Liquidated Damages: As defined in Section 5 hereof.
NASD: The National Association of Securities Dealers, Inc.
New Notes: The Company's 10% Senior Notes due 2004, identical in all
material respects to the Senior Notes, which are to be issued pursuant to the
Indenture (i) in the Exchange Offer or (ii) upon the request of any Holder of
Senior Notes covered by a Shelf Registration Statement, in exchange for such
Senior Notes.
Notes: The Senior Notes and the New Notes.
Person: An individual, partnership, corporation, trust, unincorporated
organization, or a government or agency or political subdivision thereof.
2
<PAGE>
Prospectus: The prospectus included in a Registration Statement at the time
such Registration Statement is declared effective, as amended or supplemented by
any prospectus supplement and by all other amendments thereto, including post-
effective amendments, and all material incorporated by reference into such
Prospectus.
Record Holder: With respect to any Damages Payment Date, each Person who is a
Holder of Notes on the record date with respect to the Interest Payment Date on
which such Damages Payment Date shall occur.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any registration statement of the Company and the
Guarantors (on the appropriate form under the Securities Act selected by the
Company) relating to (a) an offering of New Notes pursuant to an Exchange Offer
or (b) the registration for resale of Transfer Restricted Securities pursuant to
the Shelf Registration Statement, in each case, (i) which is filed pursuant to
the provisions of this Agreement and (ii) including the Prospectus included
therein, all amendments and supplements thereto (including post-effective
amendments) and all exhibits and material incorporated by reference therein.
Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer Transfer
Restricted Securities.
Securities Act: The Securities Act of 1933, as amended.
Shelf Registration Statement: As defined in Section 4(a) hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb), as in
effect on the date of the Indenture.
Transfer Restricted Securities: Each Note, until the earliest to occur of (a)
the date on which such Note is exchanged in the Exchange Offer and entitled to
be resold to the public by the Holder thereof without complying with the
prospectus delivery requirements of the Securities Act, (b) the date on which
such Note has been disposed of in accordance with a Shelf Registration
Statement, (c) the date on which such Note is disposed of by a Broker-Dealer
pursuant to the "Plan of Distribution" contemplated by the Exchange Offer
Registration Statement (including delivery of the Prospectus contained therein)
or (d) the date on which such Note is distributed to the public pursuant to Rule
144 under the Securities Act.
underwriters: As defined in Section 11 hereof.
Underwritten Registration or Underwritten Offering: A registration in which
securities of the Company are sold to an underwriter for reoffering to the
public.
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities (each, a
"Holder") whenever such Person owns Transfer Restricted Securities.
3
<PAGE>
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by applicable federal
law (after the procedures set forth in Section 6(a)(i) hereof have been complied
with), the Company and the Guarantors shall (i) cause to be filed with the
Commission as soon as practicable after the Closing Date, but in no event later
than 90 days after the Closing Date, the Exchange Offer Registration Statement,
(ii) use their best efforts to cause such Exchange Offer Registration Statement
to become effective at the earliest possible time, but in no event later than
150 days after the Closing Date, (iii) in connection with the foregoing, (A)
file all pre-effective amendments to such Exchange Offer Registration Statement
as may be necessary in order to cause such Exchange Offer Registration Statement
to become effective, (B) file, if applicable, a post-effective amendment to such
Exchange Offer Registration Statement pursuant to Rule 430A under the Securities
Act and (C) cause all necessary filings, if any, in connection with the
registration and qualification of the New Notes to be made under the Blue Sky
laws of such jurisdictions as are necessary to permit Consummation of the
Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer
Registration Statement, commence and Consummate the Exchange Offer. The Exchange
Offer shall be on the appropriate form permitting registration of the New Notes
to be offered in exchange for the Senior Notes that are Transfer Restricted
Securities and to permit sales of Broker-Dealer Transfer Restricted Securities
by Restricted Broker-Dealers as contemplated by Section 3(c) hereof.
(b) The Company and the Guarantors shall use their respective best efforts to
cause the Exchange Offer Registration Statement to be effective continuously,
and shall keep the Exchange Offer open for a period of not less than the minimum
period required under applicable federal and state securities laws to Consummate
the Exchange Offer; provided that in no event shall such period be less than 20
Business Days. The Company and the Guarantors shall cause the Exchange Offer to
comply with all applicable federal and state securities laws. No securities
other than the Notes shall be included in the Exchange Offer Registration
Statement. The Company and the Guarantors shall use their respective best
efforts to cause the Exchange Offer to be Consummated on the earliest
practicable date after the Exchange Offer Registration Statement has become
effective, but in no event later than 30 Business Days thereafter.
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Restricted Broker-Dealer who holds Senior Notes that are
Transfer Restricted Securities and that were acquired for the account of such
Broker-Dealer as a result of market-making activities or other trading
activities, may exchange such Senior Notes (other than Transfer Restricted
Securities acquired directly from the Company or any Affiliate of the Company)
pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be
an "underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with its initial sale of each New Note received by such Broker-Dealer
in the Exchange Offer, which prospectus delivery requirement may be satisfied by
the delivery by such Broker-Dealer of the Prospectus contained in the Exchange
Offer Registration Statement. Such "Plan of Distribution" section shall also
contain all other information with respect to such sales of Broker-Dealer
Transfer Restricted Securities by Restricted Broker-Dealers that the Commission
may require in order to permit such sales pursuant thereto, but such "Plan of
Distribution" shall not name any such Broker-Dealer or disclose the amount of
Notes held by any such Broker-Dealer, except to the extent required by the
Commission as a result of a change in policy after the date of this Agreement.
4
<PAGE>
The Company and the Guarantors shall use their respective best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended as required by the provisions of Section 6(c) hereof to the extent
necessary to ensure that it is available for sales of Broker-Dealer Transfer
Restricted Securities by Restricted Broker-Dealers, and to ensure that such
Registration Statement conforms with the requirements of this Agreement, the
Securities Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period of 120 days from the date on which the
Exchange Offer is Consummated.
The Company and the Guarantors shall promptly provide sufficient copies of the
latest version of such Prospectus to such Restricted Broker-Dealers promptly
upon request, and in no event later than one day after such request, at any time
during such 120-day period in order to facilitate such sales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Company is not required to file an
------------------
Exchange Offer Registration Statement with respect to the New Notes because the
Exchange Offer is not permitted by applicable law (after the procedures set
forth in Section 6(a)(i) hereof have been complied with) or (ii) if any Holder
of Transfer Restricted Securities shall notify the Company within 20 Business
Days following the Consummation of the Exchange Offer that (A) such Holder was
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) such Holder 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 Exchange Offer Registration Statement is not appropriate or available for
such resales by such Holder or (C) such Holder is a Broker-Dealer and holds
Senior Notes acquired directly from the Company or one of its affiliates, then
the Company and the Guarantors shall (x) cause to be filed on or prior to 30
days after the date on which the Company determines that it is not required to
file the Exchange Offer Registration Statement pursuant to clause (i) above or
60 days after the date on which the Company receives the notice specified in
clause (ii) above a shelf registration statement pursuant to Rule 415 under the
Securities Act, which may be an amendment to the Exchange Offer Registration
Statement (in either event, the "Shelf Registration Statement"), relating to all
Transfer Restricted Securities the Holders of which shall have provided the
information required pursuant to Section 4(b) hereof, and shall (y) use their
respective best efforts to cause such Shelf Registration Statement to become
effective on or prior to 120 days after the date on which the Company becomes
obligated to file such Shelf Registration Statement. If, after the Company has
filed an Exchange Offer Registration Statement which satisfies the requirements
of Section 3(a) above, the Company is required to file and make effective a
Shelf Registration Statement solely because the Exchange Offer shall not be
permitted under applicable federal law, then the filing of the Exchange Offer
Registration Statement shall be deemed to satisfy the requirements of clause (x)
above. Such an event shall have no effect on the requirements of clause (y)
above. The Company and the Guarantors shall use their respective best efforts to
keep the Shelf Registration Statement discussed in this Section 4(a)
continuously effective, supplemented and amended as required by and subject to
the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure
that it is available for sales of Transfer Restricted Securities by the Holders
thereof entitled to the benefit of this Section 4(a), and to ensure that it
conforms with the requirements of this Agreement, the Securities Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period of at least two years (as extended pursuant to Section
6(c)(i) hereof) following the date on which such Shelf Registration Statement
first becomes effective under the Securities Act or for such shorter period
which will terminate when (i) all of the Transfer
5
<PAGE>
Restricted Securities covered by the Shelf Registration Statement have been sold
pursuant to the Shelf Registration Statement, (ii) the date on which, in the
opinion of counsel to the Company, all of the Transfer Restricted Securities
then held by the Holders may be sold by the Holders in the public United States
securities markets in the absence of a registration statement covering such
sales or (iii) the date on which there ceases to be outstanding any Transfer
Restricted Securities.
(b) Provision by Holders of Certain Information in Connection with the Shelf
------------------------------------------------------------------------
Registration Statement. No Holder of Transfer Restricted Securities may include
- ----------------------
any of its Transfer Restricted Securities in any Shelf Registration Statement
pursuant to this Agreement unless and until such Holder furnishes to the Company
in writing, within 20 days after receipt of a request therefor, such information
specified in item 507 of Regulation S-K under the Securities Act for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. No Holder of Transfer Restricted Securities shall
be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until
such Holder shall have used its best efforts to provide all such information.
Each Holder as to which any Shelf Registration Statement is being effected
agrees to furnish promptly to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Holder not materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any Registration Statement required by this Agreement is not filed with
the Commission on or prior to the date specified for such filing in this
Agreement, (ii) any such Registration Statement has not been declared effective
by the Commission on or prior to the date specified for such effectiveness in
this Agreement, (iii) the Exchange Offer has not been Consummated within 30
Business Days after the Exchange Offer Registration Statement is first declared
effective by the Commission or (iv) any Registration Statement required by this
Agreement is filed and declared effective but shall thereafter cease to be
effective or fail to be usable for its intended purpose without being succeeded
immediately by a post-effective amendment to such Registration Statement that
cures such failure and that is itself declared effective immediately (each such
event referred to in clauses (i) through (iv), a "Registration Default"), then
the Company and the Guarantors hereby jointly and severally agree to pay
liquidated damages ("Liquidated Damages") to each Holder of Transfer Restricted
Securities with respect to the first 90-day period immediately following the
occurrence of such Registration Default, in an amount equal to $.05 per week per
$1,000 principal amount of Transfer Restricted Securities held by such Holder
for each week or portion thereof that the Registration Default continues. The
amount of the Liquidated Damages shall increase by an additional $.05 per week
per $1,000 in principal amount of Transfer Restricted Securities 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 Transfer Restricted Securities. Notwithstanding anything to
the contrary set forth herein, (1) upon filing of the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration
Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange
Offer Registration Statement (and/or, if applicable, the Shelf Registration
Statement), in the case of (ii) above, (3) upon Consummation of the Exchange
Offer, in the case of (iii) above, or (4) upon the filing of a post-effective
amendment to the Registration Statement or an additional Registration Statement
that causes the Exchange Offer Registration Statement (and/or, if applicable,
the Shelf Registration Statement) to again be declared effective or made usable
in the case of (iv) above, the accrual of Liquidated Damages payable with
respect to the Transfer Restricted Securities as a result of such clause (i),
(ii), (iii) or (iv), as applicable, shall cease.
6
<PAGE>
All accrued Liquidated Damages shall be paid to the Global Note Holder by wire
transfer of immediately available funds or by federal funds check and to Holders
of Certificated Securities by mailing checks to their registered addresses on
each Damages Payment Date. All obligations of the Company and the Guarantors
set forth in the preceding paragraph that are outstanding with respect to any
Transfer Restricted Security at the time such security ceases to be a Transfer
Restricted Security shall survive until such time as all such obligations with
respect to such security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the Exchange
-------------------------------------
Offer, the Company and the Guarantors shall comply with all applicable
provisions of Section 6(c) hereof, shall use their respective best efforts to
effect such exchange and to permit the sale of Broker-Dealer Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof, and shall comply with all reasonable requests from, or
conditions specified by the Commission in connection therewith, including,
without limitation, as a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Company, prior to the
Consummation of the Exchange Offer, a written representation to the Company and
the Guarantors (which may be contained in the letter of transmittal contemplated
by the Exchange Offer Registration Statement) to the effect that (A) it is not
an affiliate of the Company, (B) it is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the New Notes to be issued in the Exchange
Offer and (C) it is acquiring the New Notes in its ordinary course of business.
Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such
Holder using the Exchange Offer to participate in a distribution of the
securities to be acquired in the Exchange Offer (1) could not under Commission
policy as in effect on the date of this Agreement rely on the position of the
Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991)
----------------------
and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted
----------------------------------
in the Commission's letter to Shearman & Sterling dated July 2, 1993, and
similar no-action letters (including, if applicable, any no-action letter
obtained by the Company), and (2) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction and that such a secondary resale transaction must
be covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable, of
Regulation S-K if the resales are of New Notes obtained by such Holder in
exchange for Senior Notes acquired by such Holder directly from the Company or
an affiliate thereof.
(b) Shelf Registration Statement. In connection with the Shelf Registration
----------------------------
Statement, the Company and the Guarantors shall comply with all the provisions
of Section 6(c) hereof and shall use their respective best efforts to effect
such registration to permit the sale of the Transfer Restricted Securities being
sold in accordance with the intended method or methods of distribution thereof
(as indicated in the information furnished to the Company pursuant to Section
4(b) hereof), and pursuant thereto the Company and the Guarantors will prepare
and file with the Commission a Registration Statement relating to the
registration on any appropriate form under the Securities Act, which form shall
be available for the sale of the Transfer Restricted Securities in accordance
with the intended method or methods of distribution thereof within the time
periods and otherwise in accordance with the provisions hereof.
(c) General Provisions. In connection with any Registration Statement and
------------------
related
7
<PAGE>
Prospectus required by this Agreement to permit the sale or resale of Transfer
Restricted Securities (including, without limitation, any Exchange Offer
Registration Statement and the related Prospectus, to the extent that the same
are required to be available to permit sales of Broker-Dealer Transfer
Restricted Securities by Restricted Broker-Dealers), the Company and the
Guarantors shall:
(i) use their respective best efforts to keep such Registration
Statement continuously effective and provide all requisite financial
statements for the period specified in Section 3 or 4 hereof, as
applicable. Upon the occurrence of any event that would cause any such
Registration Statement or the Prospectus contained therein (A) to contain a
material misstatement or omission or (B) not to be effective and usable for
resale of Transfer Restricted Securities during the period required hereby,
the Company and the Guarantors shall file promptly an appropriate amendment
to such Registration Statement, (1) in the case of clause (A), correcting
any such misstatement or omission, and (2) in the case of clauses (A) and
(B), use their respective best efforts to cause such amendment to be
declared effective and such Registration Statement and the related
Prospectus to become usable for their intended purpose(s) as soon as
practicable thereafter.
(ii) prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period set
forth in Section 3 or 4 hereof, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration
Statement have been sold; cause the Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Securities Act, and to comply fully with Rules 424,
430A and 462, as applicable, under the Securities Act in a timely manner;
and comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement during
the applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders of
Transfer Restricted Securities covered by the applicable Shelf Registration
Statement, promptly and, if requested by such Persons, confirm such advice
in writing, (A) when the Prospectus or any Prospectus supplement or post-
effective amendment has been filed, and, with respect to any Registration
Statement or any post-effective amendment thereto, when the same has become
effective, (B) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or
for additional information relating thereto, (C) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement under the Securities Act or of the suspension by any
state securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of
any proceeding for any of the preceding purposes, (D) of the existence of
any fact or the happening of any event that makes any statement of a
material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes
in the Registration Statement in order to make the statements therein not
misleading, or that requires the making of any additions to or changes in
the Prospectus in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If at any time
the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, or any state
8
<PAGE>
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the
Transfer Restricted Securities under state securities or Blue Sky laws, the
Company and the Guarantors shall use their respective best efforts to
obtain the withdrawal or lifting of such order at the earliest possible
time;
(iv) furnish to the Initial Purchasers, each selling Holder named in
any Registration Statement or Prospectus and each of the underwriter(s) in
connection with such sale, if any, before filing with the Commission,
copies of any Registration Statement or any Prospectus included therein or
any amendments or supplements to any such Registration Statement or
Prospectus (including all documents incorporated by reference after the
initial filing of such Registration Statement), which documents will be
subject to the review and comment of such Holders and underwriter(s) in
connection with such sale, if any, for a period of at least five Business
Days, and the Company will not file any such Registration Statement or
Prospectus or any amendment or supplement to any such Registration
Statement or Prospectus (including all such documents incorporated by
reference) to which the selling Holders of the Transfer Restricted
Securities covered by such Registration Statement or the underwriter(s) in
connection with such sale, if any, shall reasonably object within five
Business Days after the receipt thereof;
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to the selling Holders and to the
underwriter(s) in connection with such sale, if any, make the Company's and
the Guarantors' representatives available for discussion of such document
and other customary due diligence matters, and include such information in
such document prior to the filing thereof as such selling Holders or
underwriter(s), if any, reasonably may request;
(vi) make available at reasonable times for inspection by the
selling Holders, any managing underwriter participating in any disposition
pursuant to such Registration Statement and any attorney or accountant
retained by such selling Holders or any of such underwriter(s), all
financial and other records, pertinent corporate documents and properties
of the Company and the Guarantors and cause the Company's and the
Guarantors' officers, directors and employees to supply all information
reasonably requested by any such Holder, underwriter, attorney or
accountant in connection with such Registration Statement or any post-
effective amendment thereto subsequent to the filing thereof and prior to
its effectiveness as shall be reasonably necessary to enable them to
exercise any applicable due diligence responsibilities, provided that each
such person shall first agree in writing with the Company and the
Guarantors that (A) any information that is designated in writing by the
Company or the Guarantors in good faith as confidential at the time of
delivery of such information (the "Information") to such person shall be
kept confidential by such person, unless such disclosure is made in
connection with a court proceeding or required by law, or such Information
becomes available to the public generally or through a third party without
an accompanying obligation of confidentiality, (B) such Information shall
be deemed confidential and shall not be used by such person as the basis
for any market transactions in the securities of the Company or the
Guarantors unless and until such Information is made generally available to
the public, and (C) such person will, upon learning that disclosure of such
Information is sought in a court of competent jurisdiction, give notice to
the Company or the Guarantors and allow the Company or the Guarantors (at
the Company's or the Guarantors' expense, as applicable) to undertake
appropriate action to prevent disclosure of such Information;
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(vii) if requested by any selling Holders or the underwriter(s) in
connection with such sale, if any, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective
amendment if necessary, such information as such selling Holders and
underwriter(s), if any, may reasonably request to have included therein,
including, without limitation, information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, information with
respect to the principal amount of Transfer Restricted Securities being
sold to such underwriter(s), the purchase price being paid therefor and any
other terms of the offering of the Transfer Restricted Securities to be
sold in such offering; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of the matters to be included in such Prospectus
supplement or post-effective amendment; provided, that the Company shall
not be required to take any action pursuant to this Section 6(c)(vii) that
would, in the opinion of counsel to the Company, violate applicable law;
(viii) furnish to each selling Holder and each of the underwriter(s)
in connection with such sale, if any, without charge, at least one copy of
the Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by
reference);
(ix) deliver to each selling Holder and each of the underwriter(s),
if any, without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such
Persons reasonably may request; the Company and the Guarantors hereby
consent to the use (in accordance with law) of the Prospectus and any
amendment or supplement thereto by each of the selling Holders (but, in the
case of a Shelf Registration Statement, only those holders selling Transfer
Restricted Securities included in such Shelf Registration Statement) and
each of the underwriter(s), if any, in connection with the offering and the
sale of the Transfer Restricted Securities covered by the Prospectus or any
amendment or supplement thereto;
(x) in the case of a Shelf Registration Statement, enter into such
agreements (including an underwriting agreement) and make such customary
representations and warranties and take all such other actions in
connection therewith reasonably necessary in order to expedite or
facilitate the disposition of the Transfer Restricted Securities pursuant
to any Shelf Registration Statement contemplated by this Agreement as may
be reasonably requested by any Holder of Transfer Restricted Securities or
underwriter in connection with any sale or resale pursuant to any Shelf
Registration Statement contemplated by this Agreement, and in such
connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an Underwritten Registration, the
Company and the Guarantors shall:
(A) furnish to each selling Holder and each underwriter, if
any, upon the effectiveness of the Shelf Registration Statement (1) an
opinion, dated the date of Consummation of the Exchange Offer or the
date of effectiveness of the Shelf Registration Statement, as the case
may be, of counsel for the Company and the Guarantors, in form and
substance reasonably satisfactory to the underwriters, if any, and the
Holders of a majority in principal amount of the Transfer Restricted
Securities being sold, covering customary matters, and (2) a customary
comfort letter, dated as of the date of effectiveness of the
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Shelf Registration Statement or the date of Consummation of the
Exchange Offer, as the case may be, from the Company's independent
accountants, in the customary form and covering matters of the type
customarily covered in comfort letters to underwriters in connection
with primary underwritten offerings; and
(B) deliver such other documents and certificates as may be
reasonably requested by the selling Holders, the underwriter(s), if
any, and Restricted Broker Dealers, if any, to evidence compliance
with clause (A) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the
Company and the Guarantors pursuant to this clause (x).
The above shall be done at each closing under such underwriting or similar
agreement, as and to the extent required thereunder, and if at any time the
representations and warranties of the Company and the Guarantors contained
in such underwriting or similar agreement cease to be true and correct, the
Company and the Guarantors shall so advise the underwriter(s), if any, the
selling Holders and each Restricted Broker-Dealer promptly and if requested
by such Persons, shall confirm such advice in writing;
(xi) prior to any public offering of Transfer Restricted Securities,
cooperate with the selling Holders, the underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of
the Transfer Restricted Securities under the securities or Blue Sky laws of
such jurisdictions as the selling Holders or underwriter(s), if any, may
request and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Transfer Restricted
Securities covered by the applicable Registration Statement; provided that
neither the Company nor any Guarantor shall be required to register or
qualify as a foreign corporation where it is not now so qualified or to
take any action that would subject it to the service of process in suits or
to taxation, other than as to matters and transactions relating to the
Registration Statement, in any jurisdiction where it is not now so subject;
(xii) issue, upon the request of any Holder of Senior Notes covered
by any Shelf Registration Statement contemplated by this Agreement, and
upon surrender of the Senior Notes held by such Holder to the Company for
cancellation, New Notes having an aggregate principal amount equal to the
aggregate principal amount of Senior Notes surrendered to the Company by
such Holder in exchange therefor or being sold by such Holder; such New
Notes to be registered in the name of such Holder or in the name of the
purchaser(s) of such Notes, as the case may be; in return, the Senior Notes
held by such Holder shall be surrendered to the Company for cancellation;
(xiii) in connection with any sale of Transfer Restricted Securities
that will result in such securities no longer being Transfer Restricted
Securities, cooperate with the selling Holders and the underwriter(s), if
any, to facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing any
restrictive legends; and to register such Transfer Restricted Securities in
such denominations and such names as the Holders or the underwriter(s), if
any, may request at least two Business Days prior to such sale of Transfer
Restricted Securities;
(xiv) subject to Section 6(c)(i) hereof, if any fact or event
contemplated by Section
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6(c)(iii)(D) hereof shall exist or have occurred, prepare a supplement or
post-effective amendment to the Registration Statement or related
Prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the purchasers
of Transfer Restricted Securities, the Prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(xv) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of a Registration Statement covering such
Transfer Restricted Securities and provide the Trustee under the Indenture
with printed certificates for the Transfer Restricted Securities which are
in a form eligible for deposit with The Depository Trust Company;
(xvi) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use their respective best efforts to cause such Registration
Statement to become effective and approved by and the disposition of the
Transfer Restricted Securities covered by such Registration Statement to be
registered with or approved by, such governmental agencies or authorities
as may be necessary to enable the Holders selling Transfer Restricted
Securities to consummate the disposition of such Transfer Restricted
Securities;
(xvii) otherwise use their respective best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders with regard to any applicable
Registration Statement, as soon as practicable, a consolidated earnings
statement meeting the requirements of Rule 158 (which need not be audited)
covering a twelve-month period beginning after the effective date of the
Registration Statement (as such term is defined in paragraph (c) of Rule
158 under the Securities Act);
(xviii) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by
this Agreement and, in connection therewith, cooperate with the Trustee and
the Holders of Notes to effect such changes to the Indenture as may be
required for such Indenture to be so qualified in accordance with the terms
of the TIA; and execute and use its best efforts to cause the Trustee to
execute, all documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to
enable such Indenture to be so qualified in a timely manner; and
(d) Restrictions on Holders.
-----------------------
(i) Each Holder agrees by acquisition of a Transfer Restricted
Security that, upon receipt of the notice referred to in Section 6(c)(i) hereof
or any notice from the Company of the existence of any fact of the kind
described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue
disposition of Transfer Restricted Securities pursuant to the applicable
Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 6(c)(xiv) hereof, or
until it is advised in writing by the Company that the use of the Prospectus may
be resumed, and has received copies of any additional or supplemental filings
that are incorporated by reference in the Prospectus (the "Advice"). If so
directed by the Company, each Holder will deliver to the
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<PAGE>
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Transfer
Restricted Securities that was current at the time of receipt of either such
notice. In the event the Company shall give any such notice, the time period
regarding the effectiveness of such Registration Statement set forth in Section
3 or 4 hereof, as applicable, shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 6(c)(i) or Section 6(c)(iii)(D) hereof to and including the date when
each selling Holder covered by such Registration Statement shall have received
the copies of the supplemented or amended Prospectus contemplated by Section
6(c)(xiv) hereof or shall have received the Advice.
(ii) The Holders will furnish the information required to be
furnished pursuant to Section 4(b) hereof within the time period set forth
herein.
(iii) Sales of such Transfer Restricted Securities pursuant to a
Registration Statement shall only be made in the manner set forth in such
currently effective Registration Statement.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's and the Guarantors' performance
of or compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including, without
limitation,: (i) all registration and filing fees and expenses (including
filings made by any Initial Purchaser or Holder with the NASD (and, if
applicable, the fees and expenses of any "qualified independent underwriter")
and its counsel that may be required by the rules and regulations of the NASD);
(ii) all fees and expenses of compliance with federal securities and state Blue
Sky or securities laws; (iii) all expenses of printing (including printing
certificates for the New Notes to be issued in the Exchange Offer and printing
of Prospectuses), messenger and delivery services and telephone; (iv) all fees
and disbursements of counsel for the Company, the Guarantors and, subject to
Section 7(b) hereof, the Holders of Transfer Restricted Securities; (v) all
application and filing fees in connection with listing the Notes on a national
securities exchange or automated quotation system pursuant to the requirements
hereof; and (vi) all fees and disbursements of independent certified public
accountants of the Company and the Guarantors (including the expenses of any
special audit and comfort letters required by or incident to such performance).
The Company will, in any event, bear its and the Guarantors' internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses of
any annual audit and the fees and expenses of any Person, including special
experts, retained by the Company or the Guarantors.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company and the Guarantors
will reimburse the Initial Purchasers and the Holders of Transfer Restricted
Securities being tendered in the Exchange Offer and/or resold pursuant to the
"Plan of Distribution" contained in the Exchange Offer Registration Statement or
registered pursuant to the Shelf Registration Statement, as applicable, for the
reasonable fees and disbursements of not more than one counsel (which counsel
shall be reasonably satisfactory to the Company), who shall be chosen by the
Holders of a majority in principal amount of the Transfer Restricted Securities
for whose benefit such Registration Statement is being prepared; provided that
such fees and disbursements of such counsel shall not exceed $50,000.
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<PAGE>
SECTION 8. INDEMNIFICATION
(a) The Company and the Guarantors, jointly and severally, agree to
indemnify and hold harmless (i) each Holder and (ii) each person, if any, who
controls (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) any Holder (any of the persons referred to in this clause
(ii) being hereinafter referred to as a "controlling person") and (iii) the
respective officers, directors, partners, employees, representatives and agents
of any Holder or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"), to the
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities, judgments, actions and expenses (including, without limitation, and
as incurred, reimbursement of all reasonable costs of investigating, preparing,
pursuing or defending any claim or action, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, including the
reasonable fees and expenses of counsel to any Indemnified Holder) directly or
indirectly caused by, related to, based upon, arising out of or in connection
with any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement, preliminary prospectus or Prospectus
(or any amendment or supplement thereto), or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except (i) insofar as such losses,
claims, damages, liabilities or expenses are caused by an untrue statement or
omission or alleged untrue statement or omission that is made in reliance upon
and in conformity with information relating to any of the Holders furnished in
writing to the Company by any of the Holders expressly for use therein or (ii)
to the extent that any such loses, claims, damages, liabilities, or expenses
result solely from an untrue statement of a material fact contained in, or the
omission of a material fact from the Registration Statement or Prospectus, which
untrue statement or omission was corrected in an amended or supplemented
Registration Statement or Prospectus, if the person alleging such loss, claim,
damage, liability or expense was not sent or given, at or prior to the written
confirmation of such sale, a copy of the amended or supplemented Registration
Statement or Prospectus if the Company had previously furnished copies thereof
to such indemnified party and if delivery of a prospectus was required by the
Securities Act and was not so made.
In case any action or proceeding (including any governmental or regulatory
investigation or proceeding) shall be brought or asserted against any of the
Indemnified Holders with respect to which indemnity may be sought against the
Company or the Guarantors, such Indemnified Holder (or the Indemnified Holder
controlled by such controlling person) shall promptly notify the Company and the
Guarantors in writing, and the Company or the Guarantors shall assume the
defense of such action, including the employment of counsel reasonably
satisfactory to such Indemnified Holder and the payment of all fees and expenses
of such counsel, as incurred (except that, in the case of any action in respect
of which indemnity may be sought pursuant to both Section 8(a) and 8(b) hereof,
such Indemnified Holder shall not be required to assume the defense of such
action pursuant hereto, but may employ separate counsel and participate in the
defense thereof; however, the fees and expense of such counsel, except as
provided below, shall be at the expense of such Indemnified Holder). Such
Indemnified Holder shall have the right to employ it own counsel; any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expenses of such Indemnified Holder unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the Company or the Guarantors, (ii) the Company or the Guarantors shall have
failed to assume the defense of such action or employ counsel reasonably
satisfactory to such Indemnified Holder within a reasonable period of time after
notice of the institution of such action or (iii) the named parties to any such
action (including any impleaded parties)
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include both such Indemnified Holder and the Company or the Guarantors, and such
Indemnified Holder shall have been advised by such counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the Company or the Guarantors (in which case the Company or
the Guarantors shall not have the right to assume the defense of such action on
behalf of such Indemnified Holder). In any such case, the Company and the
Guarantors shall not, in connection with any one action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expense of more than on separate firm of attorneys (in addition to any local
counsel) for all indemnified parties and all such fees and expenses shall be
reimbursed as they are incurred (upon written request and presentation of
reasonably satisfactory invoices). Such firm shall be designated in writing by
all Indemnified Holders, in the case of the parties indemnified pursuant to
Section 8(a) hereof, and by the Company, in the case of parties indemnified
pursuant to Section 8(b) hereof. The Company and the Guarantors shall indemnify
and hold harmless such Indemnified Holder from and against any and all losses,
claims, damages, liabilities and judgments by reason of any settlement of any
action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the Company or the Guarantors shall have received a request form such
Indemnified Holder for reimbursement for the fees and expenses of counsel (in
any case where such fees and expenses are at the expense of the Company or the
Guarantors), and prior to the date of such settlement, the Company or the
Guarantors shall have received written notice of such settlement and shall have
failed to comply with such reimbursement request. Neither the Company nor the
Guarantors shall, without the prior written consent of such Indemnified Holder,
effect any settlement or compromise of, or consent to the entry of judgment with
respect to, any pending or threatened action in respect of which such
Indemnified Holder is or could have been a party and indemnity or contribution
may be or could have been sought hereunder by such Indemnified Holders, unless
such settlement, compromise or judgement includes an unconditional release of
such Indemnified Holder from all liability on claims that are or could have been
the subject matter of such action.
(b) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Company and the Guarantors, and
their respective directors, officers, and any person controlling (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
the Company, and the respective officers, directors, partners, employees,
representatives and agents of each such person, to the same extent as the
foregoing indemnity from the Company and the Guarantors to each of the
Indemnified Holders, but only with respect to claims and actions based on
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement. In case any action or
proceeding shall be brought against the Company, any Guarantor or its directors
or officers or any such controlling person in respect of which indemnity may be
sought against a Holder of Transfer Restricted Securities, such Holder shall
have the rights and duties given the Company and the Guarantors, and the
Company, such Guarantors, such directors or officers or such controlling person
shall have the rights and duties given to each Holder by the preceding
paragraph. In no event shall any Holder be liable or responsible for any amount
in excess of the amount by which the total received by such Holder with respect
to its sale of Transfer Restricted Securities pursuant to a Registration
Statement exceeds (i) the amount paid by such Holder for such Transfer
Restricted Securities and (ii) the amount of any damages which such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(c) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under Section 8(a) or 8(b) hereof (other than by reason
of exceptions provided in those Sections) in respect
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<PAGE>
of any losses, claims, damages, liabilities or expenses referred to therein,
then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Guarantors, on the one hand, and the Holders, on
the other hand, from their sale of Transfer Restricted Securities or if such
allocation is not permitted by applicable law, the relative fault of the Company
and the Guarantors, on the one hand, and of the Indemnified Holder, on the other
hand, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Company and the Guarantors,
on the one hand, and of the Indemnified Holder, on the other hand, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or such Guarantor
or by the Indemnified Holder. The amount paid or payable by a party as a result
of the losses, claims, damages, liabilities and expenses referred to above shall
be deemed to include, subject to the limitations set forth in the second
paragraph of Section 8(a) hereof, any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
(d) The Company, the Guarantors and each Holder of Transfer Restricted
Securities agree that it would not be just and equitable if contribution
pursuant to this Section 8(c) were determined by pro rata allocation (even if
the Holders were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages, liabilities
or expenses referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8, no Holder or its related Indemnified Holders shall
be required to contribute, in the aggregate, any amount in excess of the amount
by which the total received by such Holder with respect to the sale of its
Transfer Restricted Securities pursuant to a Registration Statement exceeds the
sum of (A) the amount paid by such Holder for such Transfer Restricted
Securities plus (B) the amount of any damages which such Holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute pursuant to this
Section 8(c) are several in proportion to the respective principal amount of
Senior Notes held by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Company and each Guarantor hereby agrees with each Holder, for so long
as any Transfer Restricted Securities remain outstanding and during any period
in which the Company or such Guarantor is not subject to Section 13 or 15(d) of
the Exchange Act, to make available, upon request of any Holder of Transfer
Restricted Securities, to any Holder or beneficial owner of Transfer Restricted
Securities in connection with any sale thereof and any prospective purchaser of
such Transfer Restricted Securities designated by such Holder or beneficial
owner, the information required by Rule 144A(d)(4) under the Securities Act in
order to permit resales of such Transfer Restricted Securities pursuant to Rule
144A.
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SECTION 10. UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder unless
such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on
the basis provided in customary underwriting arrangements entered into in
connection therewith and (b) completes and executes all reasonable
questionnaires, powers of attorney, and other documents required under the terms
of such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
For any Underwritten Offering, the investment banker or investment bankers
and manager or managers for any Underwritten Offering that will administer such
offering will be selected by the Holders of a majority in aggregate principal
amount of the Transfer Restricted Securities included in such offering provided,
that such underwriters must be reasonably satisfactory to the Company. Such
investment bankers and managers are referred to herein as the "underwriters."
SECTION 12. MISCELLANEOUS
(a) Remedies. Each Holder, in addition to being entitled to exercise all
--------
rights provided herein, in the Indenture, the Purchase Agreement or granted by
law, including recovery of liquidated or other damages, will be entitled to
specific performance of its rights under this Agreement. The Company and the
Guarantors agree that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by them of the provisions of this
Agreement and hereby agree to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any Guarantor
--------------------------
will, on or after the date hereof, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof. Neither the Company
nor any Guarantor has previously entered into any agreement granting any
registration rights with respect to its securities to any Person. The rights
granted to the Holders hereunder do not in any way conflict with and are not
inconsistent with the rights granted to the holders of the Company's and the
Guarantors' securities under any agreement in effect on the date hereof.
(c) Adjustments Affecting the Notes. Neither the Company nor any Guarantor
-------------------------------
will take any action, or voluntarily permit any change to occur, with respect to
the Notes that would materially and adversely affect the ability of the Holders
to Consummate any Exchange Offer.
(d) Amendments and Waivers. The provisions of this Agreement may not be
----------------------
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless (i) in the case of Section 5
hereof and this Section 12(d)(i), the Company has obtained the written consent
of Holders of all outstanding Transfer Restricted Securities affected by such
amendment, modification, supplement, waiver or consent, and (ii) in the case of
all other provisions hereof, the Company has obtained the written consent of
Holders of a majority of the outstanding principal amount of Transfer Restricted
Securities. Notwithstanding the foregoing, a waiver or consent to departure from
the provisions hereof that relates exclusively to the rights of Holders whose
securities are being tendered pursuant to the Exchange Offer and that does not
affect directly or indirectly the rights of other Holders
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whose securities are not being tendered pursuant to such Exchange Offer may be
given by the Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities being sold rather than being registered in such
Exchange Offer.
(e) Notices. All notices and other communications provided for or
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permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company or the Guarantors:
Mrs. Fields' Original Cookies, Inc.
2855 E. Cottonwood Parkway
Salt Lake City, Utah 84121
Telecopier No.: (801) 736-5600
Attention: Chief Financial Officer
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telecopier No.: (212) 735-2000
Attention: Randall H. Doud, Esq.
All such notices and communications shall be deemed to have been duly
given: (i) at the time delivered by hand, if personally delivered; (ii) five
Business Days after being deposited in the mail, postage prepaid, if mailed;
(iii) when receipt acknowledged, if telecopied; and (iv) on the next business
day, if timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties,
including, without limitation, and without the need for an express assignment,
subsequent Holders of Transfer Restricted Securities; provided that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities directly from such Holder.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall
18
<PAGE>
not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Entire Agreement. This Agreement is intended by the parties as a final
----------------
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted with respect to the Transfer
Restricted Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
MRS. FIELDS' ORIGINAL COOKIES, INC.
By: _______________________________
Name: Tim Pierce
Title: Chief Financial Officer
THE MRS. FIELDS' BRAND, INC.
By: _______________________________
Name: Tim Pierce
Title: Chief Financial Officer
GREAT AMERICAN COOKIE COMPANY, INC.
By: ______________________________
Name: Tim Pierce
Title: Chief Financial Officer
JEFFERIES & COMPANY, INC.
By: _______________________________
Name:
Title:
BT ALEX. BROWN INCORPORATED
By: _______________________________
Name:
Title:
<PAGE>
[LOGO OF COCA COLA USA FOUNTAIN APPEARS HERE]
December 1, 1997
Mr. Larry Hodges
President
Mrs. Field's Original Cookies, Inc.
462 West Bearcat Drive
Salt Lake City, Utah 84115
Dear Mr. Hodges:
This letter will constitute an amendment (the "Amendment") to that certain
amended and restated marketing agreement between Mrs. Field's Original
Cookies, Inc. ("MFOC") and Coco-Cola USA Fountain ("CCF") dated January 9,
1997 (the "Restated Agreement"). The capitalized terms contained in this
Amendment will have the same meanings set forth in the Restated Agreement
unless otherwise defined herein.
Effective as of the date of execution of this Amendment, the Restated
Agreement is amended to reflect that the Term will end the Letter of
December 31, 2002 or when the MFOC System has purchased the Volume
Commitment of CCF's Fountain Syrups, unless terminated earlier pursuant to
the terms of the Restated Agreement. The Restated Agreement id further
amended to reflect the fact that CCF forgives MFOC's repayment of the
Unearned 1993 Funding which currently amounts to Five Hundred Four Thousand
Dollars ($504,000). Accordingly, the second to the last sentence of Section
4 of the Restated Agreement is deleted in its entirety and the last
sentence of such sections is replaced by the following: "Once the $600,000
advance has been earned, Company will begin to pay any additional funding
earned by the MFOC System to MFOC on a quarterly basis, after the end of
the three month period in which it is earned."
Except as specifically set forth above, the Restated Agreement and the
terms and conditions thereof will remain in full force and effect for the
remainder of the Term. From and after the date of execution of this
Amendment, all references to
<PAGE>
Mr. Larry Hodges
December 1, 1997
Page 2
the Restated Agreement shall be deemed to be references to the Restated
Agreement as amended hereby.
Sincerely,
/s/ Tom Moore
Tom Moore
Vice President, Field Sales
Accepted and agreed to this 8/th/ day
of Dec, 1997.
MRS. FIELDS ORIGINAL COOKIES, INC.
By: /s/ Larry Hodges
-------------------------------
Larry Hodges, President
Date:_____________________________
<PAGE>
[Insert LOGO Here]
September 21, 1998
Mr. Larry Hodges
President and CEO
Mrs. Field's Original Cookies, Inc.
2855 E. Cottonwood Pkwy, Suite 400
Salt Lake City, UT 84121-0750
Dear Mr. Hodges:
This letter will constitute a corollary agreement to our existing marketing
agreement between Mrs. Fields' Original Cookies, Inc. ("MFOC") and Coca-Cola
USA Fountain ("CCF") dated January 9, 1997 and amended in writing on December
1, 1997.
In return for mutually agreed upon marketing promotions beginning September 1,
1998 and completed by December 31, 1998, CCF will provide marketing funds in
the amount of Four Hundred Fifty Thousand Dollars ($450,000) to MFOC.
Sincerely,
/s/ Tom Moore
Tom Moore
Vice President, Field Sales
Accepted and agreed to this ____________ day of ____________ 1998
MRS. FIELD'S ORIGINAL COOKIES, INC.
By: /s/ Larry Hodges
------------------------------
Larry Hodges, President
Date:______________________________
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
10th day of July, 1997, by and between GARRY REMINGTON ("Employee") and MRS.
FIELDS' ORIGINAL COOKIES, INC., a Delaware corporation (the "Company").
RECITAL
-------
This Agreement is made and entered into with reference to the following
facts and objectives:
The Company desires to establish its right to the services of Employee in
the capacities described below, on the terms and conditions hereinafter set
forth, and Employee is willing to accept such employment on such terms and
conditions.
Therefore, in consideration of the mutual agreements hereinafter set forth,
Employee and the Company have agreed and do hereby agree as follows:
AGREEMENT
---------
1. DUTIES. The Company does hereby hire, engage, and employ the Employee
------
as the Senior Vice President of Real Estate of the Company and Employee does
hereby accept and agree to such hiring, engagement, and employment. Employee
shall serve the Company in such position fully, diligently, competently, and in
conformity with provisions of this Agreement and the corporate policies of the
Company as they presently exist, and as such policies may be amended, modified,
changed, or adopted during the Period of Employment, as hereinafter defined.
During the Period of Employment Employee shall also serve as the Senior
Vice President of Real Estate of each subsidiary or affiliate of the Company
that is now or that becomes a part of the Mrs. Fields Company Group. As used in
this Agreement, the term the "Mrs. Fields Company Group" shall mean and refer to
the Company and the Company's subsidiaries and affiliates from time to time.
Subject to specific elaboration by the Board of Directors of the Company as
to the duties (which shall be consistent herewith and with Employee offices
provided for hereunder) that are to be performed by Employee and the manner in
which such duties are to be performed, the duties of Employee shall entail those
duties customarily performed by a Senior Vice President of Real Estate of a
company with a sales volume and the number of employees commensurate with those
of the Company. Provided, however, that at all times during the Period of
Employment, Employee shall perform those duties and fulfill those
responsibilities and refrain from those activities that are reasonably
prescribed or proscribed by the Board of Directors of the Company to be
performed or refrained from by his consistent with his positions with the
Company.
Employee shall be responsible and report only to the Company's President
and Chief Executive Officer.
<PAGE>
Throughout the Period of Employment, Employee shall devote his full time,
energy, and skill to the performance of his duties for the Company and for the
benefit of the Company and the Mrs. Fields Company Group. The foregoing
notwithstanding, Employee shall be permitted to (i) engage in charitable and
community affairs, (ii) act as a director of any corporations or organizations
outside the Mrs. Fields Company Group not in competition with the Company or any
member of the Mrs. Fields Company Group and to manage such investments, not to
exceed three (3) in number, and receive compensation therefore, and (iii) to
make investments of any character in any business or businesses not in
competition with the Company or any member of the Mrs. Fields Company Group and
to manage such investments (but not be involved in the day to day operations of
any such business), provided, in each case and collectively, that the same does
or do not constitute or involve Employee in a conflict of interest vis-(-vis the
Company or any member of the Mrs. Fields Company Group or interfere with the
performance of Employee's duties under this Agreement.
Employee shall exercise due diligence and care in the performance of his
duties for and the fulfillment of his obligations to the Company under this
Agreement.
The Company shall furnish Employee with office, secretarial and other
facilities and services as are reasonably necessary or appropriate for the
performance of Employee's duties hereunder and consistent with his position as
the Senior Vice President of Real Estate of the Company.
2. PERIOD OF EMPLOYMENT. The Period of Employment (as defined below)
--------------------
shall, unless sooner terminated as provided herein, be the two (2) year period
commencing on the date of execution of this Agreement.
Unless the Company gives notice of termination as provided under this
Agreement, this Agreement will automatically renew on each annual anniversary
from the execution of this Agreement for a successive two-year period.
3. COMPENSATION.
------------
(a) BASE SALARY. During the Period of Employment, the Company shall pay
-----------
Employee, and Employee agrees to accept from the Company, in payment for his
services a base salary of One Hundred Seventy-Five Thousand Dollars
($175,000.00) per year ("Base Salary"), payable in equal semi-monthly
installments or at such other time or times as Employee and the Company shall
agree. Upward adjustment to the Base Salary shall be considered by the Company's
Board of Directors not less frequently than annually. The Company's Board of
Directors at any time or times may, but shall have no obligation to, supplement
Employee's salary by such bonuses and/or other special payments and benefits as
the Board of Directors of the Company in its sole and absolute discretion may
determine.
(b) INCENTIVE COMPENSATION. During the Period of Employment, Employee
----------------------
shall:
(i) participate in any incentive compensation plan adopted by
the Company; or
2
<PAGE>
(ii) if the Company, for any reason, shall not adopt and implement an
incentive compensation plan in replacement of the 1997 Incentive Plan for
eligible employees of the Company (including Employee), Company and Employee
agree that this Agreement shall provide Employee with the opportunity to earn
and be paid incentive compensation to the same extent that he was eligible to
earn and be paid incentive compensation under the incentive compensation plan
under which, pursuant to the provisions of this Section 3(b), Employee was most
recently eligible to earn and be paid incentive compensation by the Company.
4. FRINGE BENEFITS. During the Period of Employment, Employee shall be
---------------
entitled to the following fringe benefits.
(a) BENEFIT PLANS. Employee shall be entitled to participate in all
-------------
benefit plans and programs generally available to all other senior management
employees of the Company or to all employees of the Company working in Salt Lake
City, Utah, subject to any restrictions specified in such plans and to receive
such other benefits and conditions of employment as are provided to all other
senior officers or executives of the Company as of the date of this Agreement.
(b) EQUITY PLAN. Employee shall be entitled to participate in an equity
-----------
based plan or arrangement which shall consist of a minimum of .75% of the total
equity of the Company (the "Equity Plan") consistent with the letter from
Herbert S. Winokur, Jr. to Lawrence Hodges, dated August 5, 1996. In the event
that (i) the Company fails to adopt the Equity Plan, Employee may terminate this
Agreement and his employment hereunder with Good Reason, as hereinafter defined,
in accordance with the provisions of Section 9(b) ("Termination by Employee-
Termination-With Good Reason"). Employee's right to terminate this Agreement
and his employment hereunder with Good Reason in accordance with said Section
9(b) shall be Employee's sole and exclusive remedy for or resulting from the
failure, for any reason, of the Company or its Board of Directors to create or
implement the Equity Plan or to take any other action specified in this Section
4(b).
Anything in this Agreement or in such plan or arrangement to the contrary
notwithstanding, the inclusion in such plan or arrangement of any provision(s)
addressing participation by Employee in such plan or arrangement for a period of
years shall not be interpreted as a promise of continued employment by the
Company for such period of years or any other period of time.
The plan or arrangement to be proposed by Employee shall provide that any
payments made thereunder, in conjunction with any other payments that constitute
"parachute payments" (as defined in Section 280G(b)(A) of the Internal Revenue
Code) (the "Code"), shall be limited such that no such payments or portions
thereof constitute an "excess parachute payment" (as defined in Section
280G(b)(1) of the Code) or are otherwise nondeductible by the Company for tax
purposes under any other provision of the Code.
(c) VACATION AND OTHER LEAVE. Employee shall be entitled to such
------------------------
amounts of paid vacation and other leave, but not less than three (3) weeks
vacation per twelve-month period of employment, as from time to time may be
allowed to the Company's senior management personnel generally, with such
vacation to be scheduled and taken in accordance with the Company's standard
vacation policies applicable to such personnel.
3
<PAGE>
(d) VESTING ON DEATH OR DISABILITY. Upon any termination of this
------------------------------
Agreement and Employee's employment hereunder by reason of Employee's death or
Permanent Disability, as defined in Section 7(b) ("Death or Disability -
Definition of Permanently Disabled and Permanent Disability"), provided that the
terms and provisions of such plan and applicable law permit, any theretofore
deferred or unvested portion of any award made to Employee in respect of any
retirement, pension, profit sharing, long term incentive, and similar plans
automatically shall become fully vested in Employee and shall be nonforfeitable,
and shall continue in effect and be redeemable by or payable to Employee (or his
designated beneficiary or estate) at the time and on the same conditions as
would have applied had Employee's employment not been so terminated. It is
expressly provided, however, that nothing in this Section 4(d) shall obligate
the Company to provide full vesting upon death or disability in connection with
participation by Employee in the equity plan or arrangement contemplated under
Section 4(b) ("Fringe Benefits-Equity Plan"), further, the provisions governing
payment of any incentive compensation payable to Employee pursuant to the
incentive compensation plan(s) referred to in Section 3(b) ("Compensation-
Incentive Compensation") shall govern any payment of incentive compensation due
thereunder in the event of Employee's death or disability.
5. BUSINESS EXPENSES AND AUTOMOBILE ALLOWANCE.
------------------------------------------
During the Period of Employment, the Company shall pay, or in case paid by
Employee in the first instance, reimburse Employee for, any and all necessary,
customary, and usual expenses incurred by him in connection with the performance
of his duties hereunder, including, without limitation, all traveling expenses,
and entertainment expenses, upon submission of appropriate vouchers and
documentation.
To the extent provided to all other senior officers or executives of the
Company, during the Period of Employment, Employee shall be entitled to receive
an automobile allowance and reimbursement for expenses associated with the
operation and maintenance of an automobile which is comparable to Employee's
current automobile. The Company will reimburse Employee upon presentation of
vouchers and documentation for any such operational and maintenance expenses
which are consistent with the usual accounting procedures of the Company.
6. NO OTHER BENEFITS OR COMPENSATION. Employee, as a result of his
---------------------------------
employment by the Company, shall be entitled to only the compensation and
benefits provided for in this Agreement, subject to the terms thereof, and no
others.
7. DEATH OR DISABILITY.
-------------------
(a) TERMINATION OF EMPLOYMENT. If Employee dies during the
-------------------------
Period of Employment, Employee's employment shall automatically cease and
terminate as of the date of Employee's death.
If Employee becomes Permanently Disabled (as hereinafter defined)
while employed by the Company, (i) Employee's employment and the Company's
obligations hereunder, including the payment of Base Salary pursuant to Section
3(a) ("Compensation-Base Salary") shall continue for a period of ninety (90)
days from the date on which the Employee is determined to be Permanently
Disabled ("Employee s Disability Date"), and (ii) ninety (90) days after the
Employee's Disability Date, Employee's employment and all obligations of the
Company hereunder shall automatically cease and terminate.
4
<PAGE>
In the case of Employee's death or Permanent Disability (as
hereinafter defined), the Company shall be obligated to pay to Employee (or to
Employee s estate in the case of Employee's death) any Base Salary and any
incentive compensation accrued to Employee as of the date of the Employee's
death, or in the case of Employee's Permanent Disability, as of the Employee's
Disability Date. In the event Employee's employment is terminated on account of
Employee's Permanent Disability, he shall, so long as his Permanent Disability
continues, remain eligible for all benefits provided under any long-term
disability programs of the Company in effect at the time of such termination,
subject to the terms and conditions of any such programs, as the same may be
changed, modified, or terminated for or with respect to all senior management
personnel of the Company.
(b) DEFINITION OF PERMANENTLY DISABLED AND PERMANENT DISABILITY.
-----------------------------------------------------------
For purposes of this Agreement (other than Sections 4 (a) ("Fringe Benefits-
Benefit Plans"), 4 (d) ("Fringe Benefits-Vesting on Death or Disability"), and
the provisions relating to disability insurance contained in the last sentence
of Section 7(a) ("Death or Disability-Termination of Employment"), the terms
"Permanently Disabled" and "Permanent Disability" shall mean Employee's
inability, because of physical or mental illness or injury, to perform
substantially all of his customary duties pursuant to this Agreement, and the
continuation of such disabled condition for a period of ninety (90) continuous
days, or for not less than one hundred eighty (180) days during any continuous
twenty-four (24) month period. Whether Employee is Permanently Disabled shall be
certified to the Company by a Qualified Physician (as hereinafter defined), or
if requested by Employee a panel of three Qualified Physicians. If Employee
requests such a panel, Employee and the Company shall each select a Qualified
Physician who together shall then select a third Qualified Physician. The
determination of the individual Qualified Physician or the panel, as the case
may be, shall be binding and conclusive for all purposes. As used herein, the
term "Qualified Physician" shall mean any medical doctor who is licensed to
practice medicine in the State of Utah and is reasonably acceptable to each of
Employee and the Company. Employee and the Company may in any instance, and in
lieu of a determination by a Qualified Physician or panel of Qualified
Physicians, agree between themselves that Employee is Permanently Disabled. The
terms Permanent Disability and Permanently Disabled as used herein may have
meanings different from those used in any disability insurance policy or program
maintained by Employee or the Company.
8. TERMINATION BY THE COMPANY.
--------------------------
(a) TERMINATION FOR CAUSE. The Company, by action of its Board
---------------------
of Directors, may, by providing written notice to Employee, terminate the
employment of Employee under this Agreement for "cause" at any time. The term
"cause" for purpose of this Agreement shall mean:
(i) The refusal of Employee to implement or adhere to
lawful policies or directives of the Board of Directors of the Company
consistent with this Agreement; or
(ii) Employee's conviction of or entrance of a plea of
nolo contendere to (A) a felony, (B) to any other crime, which other crime is
punishable by incarceration for a period of one (1) year or longer, or (C) other
conduct of a criminal nature that may have an adverse impact on the Company s
reputation and standing in the community; or
5
<PAGE>
(iii) conduct that is in violation of Employee's common law
duty of loyalty to the Company; or
(iv) fraudulent conduct by Employee in connection with the
business affairs of the Company, regardless of whether said conduct is designed
to defraud the Company or others; or
(v) theft, embezzlement, or other criminal
misappropriation of funds by Employee, whether from the Company or any other
person; or
(vi) any breach of or Employee's failure to fulfill any of
Employee's obligations, covenants, agreements, or duties under this Agreement.
Provided, however, that "cause" pursuant to clause (i) or (vi) shall not be
deemed to exist unless the Company has given Employee written notice thereof
specifying in reasonable detail the facts and circumstances alleged to
constitute "cause", and thirty (30) days after such notice such conduct or
circumstances has not entirely ceased or been entirely remedied. If Employee's
employment is terminated for "cause," the termination shall take effect upon the
effective date (pursuant to Section 24 ("Notices")) of written notice of such
termination to Employee. In the event Employee's employment is terminated for
"cause," then except for unpaid accrued vacation, the Company shall have no
obligation to pay Employee any amounts, including, but not limited to Base
Salary, for or with respect to any period after the effective date of the
termination of Employee's employment for "cause," including any obligation under
the replacement to the 1994 Incentive Plan or the Equity Plan.
If the Company attempts to terminate Employee's employment pursuant to this
Section 8(a) and it is ultimately determined that the Company lacked "cause,"
the provisions of Section 8(b) ("Termination by the Company-Termination Without
Cause") shall apply, and Employee's sole and exclusive remedy for such breach of
this Agreement by the Company and/or any other damages that Employee shall have
suffered or incurred of any nature whatsoever, shall be to receive the payments
expressly called for by Section 8(b) ("Termination by the Company-Termination
Without Cause") with interest on any past due payments at the rate of eight
percent (8%) per year from the date on which the applicable payment would have
been made pursuant to Section 8(b) ("Termination by the Company-Termination
Without Cause") plus Employee's costs and expenses (including but not limited to
reasonable attorneys' fees) incurred in connection with such dispute.
(b) TERMINATION WITHOUT CAUSE. The Company may, with or without
-------------------------
reason, terminate Employee's employment under this Agreement without "cause" at
any time, by providing Employee thirty (30) days prior written notice of such
termination. If Employee's employment is terminated pursuant to this Section
8(b), Employee shall not be obligated to render services to the Company
following the effective date of such notice (the "Notice Date") except such
services as are requested by the Company pursuant to Section 11 ("Transition
Period Services"), and as its sole and exclusive obligation and duty to Employee
resulting directly or indirectly from the termination of Employee's employment
with the Company and in full and complete settlement of any and all claims that
Employee may have or claim to have arising directly or indirectly out of the
termination of his employment with the Company, the Company shall, subject to
Section 12 ("Non Competition") pay Employee, as severance pay, an amount (the
"Severance Amount") equal to the product of multiplying the then current semi-
monthly base salary
6
<PAGE>
by thirty-six (36) semi-monthly periods (the "Severance Period"). The Severance
Amount shall be payable by the Company to Employee in an amount equal to the
Base Salary payable in twelve (12) equally monthly installments commencing on
the Notice Date. The Company shall also pay to the Employee a portion of any
discretionary bonus (the "Bonus Portion"), as determined by the Company's Board
of Directors, referred to in Section 3(a) ("Compensation-Base Salary"), that,
but for the termination of Employee's employment, would have been paid to
Employee for or with respect to the calendar year in which Employee's employment
is terminated. The Bonus Portion shall consist of that percentage of the said
discretionary bonus determined by dividing the number of full or partial
calendar months during the calendar year in which Employee's employment is
terminated that Employee was in the employ of the Company by twelve (12). Until
the end of the Severance Period or until Employee is gainfully employed by
another employer, which ever time period is less, the Company shall allow
Employee to continue participation in the Company s group health insurance plan
at the Company's expense. In accordance with all applicable laws, Employee shall
be extended all COBRA rights and benefits at the end of the Severance Period.
9. TERMINATION BY EMPLOYEE.
-----------------------
(a) TERMINATION-WITHOUT GOOD REASON. Employee shall have the right to
-------------------------------
terminate this Agreement and his employment hereunder at any time upon thirty
(30) days prior written notice of such termination to the Company. Except as
expressly set forth in Section 11 ("Transition Period Services"), upon the
effective date of any such termination all obligations and rights of Employee
and the Company hereunder shall terminate and cease.
(b) TERMINATION-WITH GOOD REASON. If the Company:
----------------------------
(i) requires Employee to relocate his home, without Employee's
consent, to a location which is more than 75 miles from 462 West Bearcat Drive,
Salt Lake City, Utah 84115; or
(ii) fails to provide Employee with the compensation and
benefits called for by this Agreement; or
(iii) assigns Employee to a lower organizational level than the
level at which he is on the date of this Agreement assigned, or substantially
diminishes Employee's assignment, duties, responsibilities, or operating
authority from those specified in Section 1 ("Duties"); or
(iv) fails to implement an incentive compensation plan required
by Section 3(b) ("Compensation-Incentive Compensation"); or
(v) fails to implement an equity plan or arrangement required
by Section 4(b) ("Fringe Benefits-Equity Plan"); or
(vi) is divested, by sale, closure, liquidation, foreclosure,
or other means, of any substantial part of its assets or business as now held or
conducted; or
7
<PAGE>
(vii) breaches this Agreement and such breach continues for a
period of thirty (30) days after written notice thereof given by Employee to the
Company, then any one or more of such circumstances shall constitute "Good
Reason", and, subject to the provisions of Section 10 ("Means and Effect of
Termination"), Employee shall have the right to terminate this Agreement and his
employment hereunder for Good Reason, if, thirty (30) days after the effective
date of Employee's notice to the Company of such circumstances constituting Good
Reason, such circumstances continue to exist, and for all purposes of this
Agreement any such termination of this Agreement by Employee shall have the same
effects under this Agreement as the termination of the Employee's employment
under this Agreement by Company without "cause."
10. MEANS AND EFFECT OF TERMINATION. Any termination of Employee's
-------------------------------
employment under this Agreement shall be communicated by written notice of
termination from the terminating party to the other party. The notice of
termination shall indicate the specific provision(s) of this Agreement relied
upon in effecting the termination and shall set forth in reasonable detail the
facts and circumstances alleged to provide a basis for termination, if any such
basis is required by the applicable provision(s) of this Agreement. Any notice
of termination by the Company shall be approved by a resolution duly adopted by
a majority of the directors of the Company then in office. The burden of
establishing the existence of "cause" or Good Reason shall be upon the
terminating party. If Employee's employment is terminated by either party, then
promptly after the effective date of such termination or in the manner and at
the time or times provided in the relevant Section of this Agreement, the
Company promptly shall provide and pay to Employee, or in case of his death his
estate or heirs, all compensation, benefits, and reimbursements due or payable
to Employee for the period to the effective date of the termination. To the
extent permitted by applicable law, the calendar month in which Employee's
employment is terminated shall be counted as a full month in determining amount
and vesting of any benefits under benefit plans of the Company.
11. TRANSITION PERIOD SERVICES. In the event Employee's employment is
--------------------------
terminated by the Company pursuant to section 8(b) ("Termination by the Company-
Termination Without Cause") or by Employee pursuant to Section 9(a)
("Termination by Employee-Without Good Reason"), if requested by the Company in
writing, Employee shall render such services, on a part-time basis for a period
not to exceed sixty (60) days after the effective date of the notice of
termination (whether given by the Company or by Employee), as the Company's
Board of Directors reasonably requests for transition purposes. Employee shall
receive no compensation for such services, other than the payment of Base Salary
as provided in Section 8(b) ("Termination by the Company-Termination Without
Cause") and reimbursement for expenses incurred by Employee in providing such
services as provided in, and subject to the provisions of, Section 5 ("Business
Expenses and Automobile Allowance")
12. NON COMPETITION. For a period of one year from the date of the
---------------
termination of Employee's employment hereunder, Employee shall not become an
employee, owner (except for passive investments of not more than three percent
(3%) of the outing shares of, or any other equity interest in, any company or
entity listed or traded on a national securities exchange or in an
8
<PAGE>
over-the-counter securities market), officer, agent or director of any firm or
person which either directly competes with a line or lines of business (which
shall be defined as cookies or pretzels only) of the Company accounting for ten
percent (10%) or more of the Company's gross sales, revenues or earnings before
taxes. If, in any judicial proceeding, a court shall refuse to enforce all of
the separate covenants deemed included in this paragraph, the parties intend
that those of such covenants which, if eliminated, would permit the remaining
separate covenants to be enforced in such proceedings shall, for the purpose of
such proceedings, be deemed eliminated from the provisions of this Section 12.
In addition to any other remedies that may otherwise be available for a
breach of Section 12 hereof by Employee, Employee agrees that in the event of
such breach he shall irrevocably forfeit any right he may have to any remaining
severance payment to be made under Section 8(b) ("Termination by the Company-
Termination Without Cause") subsequent to such breach.
13. ASSIGNMENT. This Agreement is personal in its nature and neither of
----------
the parties hereto shall, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; provided, however, that,
in the event of the merger, consolidation, or transfer or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
14. GOVERNING LAW. This Agreement and the legal relations hereby created
-------------
between the parties hereto shall be governed by and construed under and in
accordance with the internal laws of the State of Utah, which internal laws
exclude any law or rule of the State of Utah, or any interpretation thereof,
that would require or call for the application of the laws of any other state or
jurisdiction hereto.
15. ENTIRE AGREEMENT. Except with respect to final agreement regarding
----------------
those open incentive compensation matters described in Section 3(b)
("Compensation-Incentive Compensation") and the equity plan or arrangement
contemplated under Section 4(b) ("Fringe Benefits-Equity Plan"), this Agreement
embodies the entire agreement of the parties hereto respecting the matters
within its scope. This Agreement supersedes all prior agreements of the parties
hereto on the subject matter hereof. Any prior negotiations, correspondence,
agreements, proposals, or understandings relating to the subject matter hereof
shall he deemed to be merged into this Agreement and to the extent inconsistent
herewith, such negotiations, correspondence, agreements, proposals, or
understandings shall be deemed to be of no force or effect. There are no
representations, warranties, or agreements, whether express or implied, or oral
or written, with respect to the subject matter hereof, except as set forth
herein.
This Agreement shall not be modified by any oral agreement, either express
or implied, and all modifications hereof shall be in writing and be signed by
the parties hereto. The provisions of this and the immediately preceding
sentence themselves may not be modified, either orally or by conduct, either
express or implied, and it is the declared intention of the parties hereto that
no
9
<PAGE>
provision of this Agreement, including said two sentences, shall be modifiable
in any way or manner whatsoever other than through a written document signed by
the parties hereto.
16. WAIVER. Failure to insist upon strict compliance with any of the
------
terms, covenants, or conditions hereof shall not be deemed a waiver of such
term, covenant, or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder at
any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times.
17. NUMBER AND GENDER. Where the context requires, the singular shall
-----------------
include the plural, the plural shall include the singular, and any gender shall
include all other genders.
18. SECTION HEADINGS. The section headings in this Agreement are for the
----------------
purpose of convenience only and shall not limit or otherwise affect any of the
terms hereof.
19. DISPUTE RESOLUTION.
------------------
(a) NEGOTIATION AND MEDIATION. In the event any dispute arises
-------------------------
hereunder, the parties shall first attempt to resolve the dispute by negotiation
in good faith. If the dispute cannot be timely resolved through negotiation, the
parties will, before resorting to any of their remedies at law or in equity, try
to settle the dispute in good faith by mediation in Salt Lake City, Utah or such
other location as the parties may agree, under the then operative mediation
rules of the American Arbitration Association or such other mediation tribunal
or private mediator or medication services provider as the parties agree. The
mediator shall be such person as the parties mutually agree, but if the parties
have failed to agree on a mediator within seven (7) days after the date on which
any party demands that the parties proceed to mediation, the mediator shall be
selected by the American Arbitration Association or such other mediation
services provider as the parties agree.
(b) OTHER REMEDIES. Failing settlement of the dispute by negotiation
--------------
or mediation, the parties shall, unless they mutually agree to resolve the
dispute finally by arbitration, be entitled to pursue their legal and equitable
remedies (subject to the provisions of Section 20 ("Liquidated Damages-Breach by
the Company") in any court having jurisdiction.
20. LIQUIDATED DAMAGES-BREACH BY THE COMPANY. Because the damages
----------------------------------------
suffered by Employee in such an event would be difficult or impossible to
estimate, establish, ascertain, or prove, and in order to provide Employee with
a remedy in such an event without the necessity and associated cost of Employee
having to establish or prove the damages suffered by Employee as a result
thereof (which remedy the parties hereto have and do agree would be appropriate
and adequate compensation to Employee in such event), in the event that this
Agreement and Employee's employment hereunder shall be terminated (whether by
the Company or Employee) and thereafter Employee shall prevail in any dispute
between Employee and the Company relative to, involving, or concerning the
legality of or justification for the termination of this Agreement and
Employee's employment hereunder and any other issues or matters directly or
indirectly arising out of or in connection with such termination and Employee's
employment by the Company, subject to Section 12 ("Non Competition") Employee
shall be entitled to the continued payment of the Base Salary as provided in
Section 8(b) ("Termination by the Company-Termination Without Cause") as
liquidated and exclusive damages and not as a penalty, and in such case this
10
<PAGE>
Agreement and Employee's employment hereunder, shall for all purposes be treated
as having been terminated by the Company without "cause" pursuant to Section
8(b) ("Termination by the Company-Termination Without Cause").
In the event Employee files any claim, complaint, charge, action, or
lawsuit against the Company or its employees, agents, officers, directors, or
any other person affiliated or associated with the Company, with any
governmental agency, any state or federal court, or any mediation or arbitration
body or group, for or with respect to a matter, claim, or incident, known or
unknown, which has occurred or arisen or which shall hereafter occur or arise
relative to, involving, or concerning the termination of this Agreement and
Employee's employment hereunder (whether as a result of action of Employee or
the Company) and any other issues or matters directly or indirectly arising out
of or in connection with such termination and Employee's employment by the
Company, and in such claim, complaint, action, charge, or lawsuit, Employee
alleges or asserts the right to recover, receive, or be awarded damages from the
Company or its employees, agents, officers, directors, or any other person
affiliated or associated with the Company in addition to or in lieu of the
liquidated damages expressly provided for in this Section 20, Employee hereby
stipulates, agrees, and consents to the dismissal or withdrawal, with prejudice,
of any such claim, complaint, action, charge, or lawsuit (collectively, a
"Dismissable Claim"). In the event that Employee files any Dismissable Claim,
Employee shall be liable to the party or parties against whom the Dismissable
Claim is filed (the "Nonfiling Party") and shall indemnify and save the
Nonfiling Party harmless from all costs and expenses, including, but not limited
to, attorneys fees, incurred by the Nonfiling Party and/or the Nonfiling Party s
officers, agents, employees, directors, and/or any other person affiliated or
associated with the Nonfiling Party, if any, in defending or responding to any
such Dismissable Claim, regardless of whether such defense or response is before
a state or federal court or administrative agency or a mediation or arbitration
body and regardless of who might ultimately be deemed to be the prevailing party
as to any such Dismissable Claim.
21. ATTORNEY'S FEES. Employee and the Company agree that in any dispute
---------------
resolution proceedings arising out of this Agreement, the prevailing party shall
be entitled to its or his reasonable attorney's fees and costs incurred by it or
his in connection with resolution of the dispute in addition to any other relief
granted.
22. INDEMNIFICATION. If Employee is made a party to, is threatened to be
---------------
made a party to, or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding") by
reason of the fact that he is or was a director, officer, or employee of the
Company or is or was serving at the request of the Company as a director,
officer, employee, or agent of another corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to employee
benefit plans, whether before, during or after expiration or termination of this
Agreement, the Company shall indemnify and hold Employee harmless to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than such law permitted the Company to provide prior to
such amendment), against all expense, liability, and loss (including attorneys
fees, judgment fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by Employee in connection therewith,
and such indemnification shall continue after Employee ceases to be a director,
officer, employee, or agent of the Company and shall inure to the benefit of
Employee's heirs, executors, and administrators. The right to indemnification
conferred hereby shall include the right to be paid by the Company the
11
<PAGE>
reasonable expenses incurred in defending any Proceeding in advance of its final
disposition as such expenses are incurred. The indemnification provided herein
shall not be deemed exclusive of any other rights to which Employee may be
entitled under the Certificate of Incorporation, Bylaws, any agreement, or vote
of stockholders or disinterested directors of the Company, or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office or position, and shall continue with respect to action in
such capacities even if Employee has thereafter ceased to be a director,
officer, employee, or agent of the Company, and shall inure to the benefit of
Employee's heirs, executors and administrators. Except in the case of
fraudulent conduct or theft, embezzlement, or other criminal misappropriation of
funds by Employee, then nothing in this Agreement waives the Company's
obligations under this paragraph, even if Employee is terminated.
23. SEVERABILITY. In the event that a court of competent jurisdiction
------------
determines that any portion of this Agreement is in violation of any statute or
public policy, then only the portions of this Agreement which violate such
statute or public policy shall be stricken, All portions of this Agreement which
do not violate any statute or public policy shall continue in full force and
effect. Furthermore, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
24. NOTICES. All notices under this Agreement shall be in writing and
-------
shall be either personally delivered or mailed postage prepaid, by certified
mail, return receipt requested, (a) if to the Company, to it at 462 West Bearcat
Drive, Salt Lake City, Utah 84115 Attention: President or (b) if to Employee to
him at 462 West Bearcat Drive, Salt Lake City, Utah 84115 by the same means, or
in either party's case to such other address or to the attention of such person
as the party has specified by prior written notice to the other party. Notice
shall be effective when personally delivered, or five (5) business days after
being so mailed.
25. COUNTERPARTS. This Agreement may be executed in counter
------------
parts collectively containing the signatures of each of the parties.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer, and Employee has hereunto signed this Agreement, on
the date first written above.
MRS. FIELDS' ORIGINAL COOKIES, INC.,
a Delaware Corporation (the "Company")
By:__________________________________
Its:__________________________________
______________________________________
GARRY REMINGTON ("Employee")
12
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC.
DIRECTOR STOCK OPTION PLAN
1 Purpose.
-------
The purpose of the MRS. FIELDS' HOLDING COMPANY, INC. Director Stock
Option Plan (the "Plan") is to align the interests of outside directors of MRS.
FIELDS' HOLDING COMPANY, INC., a Delaware corporation (the "Company"), and its
subsidiaries, with those of the stockholders of the Company; and to attract,
motivate and retain as directors the best available individuals.
2 Definitions.
-----------
The following terms, as used herein, shall have the following
meanings:
(a) "Award" shall mean any Option granted pursuant to the Plan.
(b) "Award Agreement" shall mean any written agreement, contract or other
instrument or document between the Company and a Participant
evidencing an Award.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Capricorn" shall mean Capricorn Investors II,L.P. together with any
affiliated persons.
(e) "Change of Control" shall mean the earliest to occur of (i) a
transaction in which Capricorn's equity investment in the Company is
reduced(including through the operation of a merger in which the
Company is not the surviving corporation and the Common Stock is
converted into the right to receive cash or other property) such that
Capricorn is no longer the largest equity investor in the Company or
(ii) a sale by the Company or MFOC of all or substantially all of its
assets.
<PAGE>
(f) "Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Company.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(h) "Committee" shall mean a committee of the Board which administers the
Plan as provided herein.
(i) "Company" shall mean MRS. FIELDS' HOLDING COMPANY, INC.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
(k) "Initial Public Offering" shall mean a public offering of Common Stock
pursuant to a registration statement under the Securities Act.
(l) "MFOC" shall mean Mrs. Fields' Original Cookies, Inc., the Company's
subsidiary.
(m) "Option" shall mean the right, granted pursuant to the Plan, of a
holder to purchase shares of Common Stock. Options granted hereunder
shall not qualify as "incentive stock options" within the meaning of
Section 422 of the Code.
(n) "Participant" shall mean a director of the Company who is, pursuant to
Section 4 of the Plan, selected to participate in the Plan.
(o) "Plan" shall have the meaning set forth in Section 1 hereof.
(p) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time, and as now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
(q) "Time Vested Option" shall mean an Option that will vest 25% per year
on the anniversaries of the date as of which it was awarded and will
vest in full upon the occurrence of a Change of Control.
3 Administration.
--------------
<PAGE>
The Plan shall be administered by the Committee. The Committee shall
have the authority, in its sole discretion, subject to and not inconsistent with
the express provisions of the Plan, to administer the Plan and to exercise all
the powers and authorities either specifically granted to it under the Plan or
necessary or advisable in connection with the administration of the Plan,
including, without limitation, the authority to take the following actions: to
grant Awards; to determine the persons to whom and the time or times at which
Awards shall be granted; to determine the type and number of Awards to be
granted, the number of shares of Common Stock to which an Award may relate and
the terms, conditions, restrictions and performance criteria relating to any
Award; to determine whether, to what extent, and under what circumstances an
Award may be settled, cancelled, adjusted, forfeited, exchanged, or surrendered
or accelerated or an Option or Options may be repriced to a lower exercise
price; to make adjustments to performance goals in recognition of unusual or
non-recurring events affecting the Company or its financial statements, or in
response to changes in applicable laws, regulations or accounting principles; to
construe and interpret the Plan and any Award; to prescribe, amend and rescind
rules and regulations relating to the Plan; to determine the terms and
provisions of Award Agreements, consistent with the terms and provisions of the
Plan; and to make all other determinations deemed necessary or advisable for the
administration of the Plan, consistent with the terms and provisions of the
Plan. From and after the Initial Public Offering, the Committee shall consist
of two or more persons who are intended to be "disinterested persons" within the
meaning of Rule 16b-3 under the Exchange Act.
4 Eligibility.
-----------
Awards may be granted to officers or other employees of the Company
and its subsidiaries in the sole discretion of the Committee. In determining
the persons to whom Awards shall be granted and the type of Award, the Committee
shall take into account such factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Plan.
5 Stock Subject to the Plan.
-------------------------
(a) Number of Shares. The maximum number of shares of Common Stock
----------------
reserved for issuance pursuant to the Plan shall be 50,000. All such shares of
Common Stock shall be subject to equitable adjustment as provided herein. Such
shares may, in whole or in part, be authorized but unissued shares or shares
that shall have been or may be reacquired by the Company in the open market, in
private transactions or otherwise. If any shares subject to an Award are
forfeited, cancelled, ex-
3
<PAGE>
changed or surrendered or if an Award otherwise terminates or expires without a
distribution of shares to the Participant, the shares of Common Stock with
respect to such Award shall, to the extent of any such forfeiture, cancellation,
exchange, surrender, termination or expiration, again be available for Awards
under the Plan.
(b) Equitable Adjustment. In the event that an extraordinary
--------------------
transaction or other event or circumstance affecting the Common Stock shall
occur, including, but not limited to, any dividend or other distribution
(whether in the form of cash, stock or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, sale of assets or other similar
transaction or event, and the Committee determines that a change or adjustment
in the terms of any Award is appropriate, then the Committee may, in its sole
discretion, make such equitable changes or adjustments or take any other actions
that it deems necessary or appropriate (which shall be effective at such time as
the Committee in its sole discretion determines), including, but not limited to
causing changes or adjustments to any or all of (i) the number and kind of
shares of stock or other securities or property which may thereafter be issued
in connection with Awards, (ii) the number and kind of shares of stock or other
securities or property issued or issuable in respect of outstanding Awards,
(iii) the exercise price relating to any Award, and (iv) any performance
criteria relating to any Award.
6 Stock Options.
-------------
Each Option granted pursuant to this Section 6 shall be evidenced by
an Award Agreement, in such form and containing such terms and conditions as the
Committee shall from time to time approve, which Award Agreement shall comply
with and be subject to the following terms and conditions, as applicable. Each
Option shall be a Time-Vested Option.
(a) Stock Options
-------------
(1) Number of Shares. Each Award Agreement shall state the
----------------
number of shares of Common Stock to which the Option relates.
(2) Option Exercise Price. Each Award Agreement shall state the
---------------------
Option exercise price. The Option exercise price shall be subject to adjustment
as provided in Section 5 hereof. Unless otherwise expressly stated in the
Committee resolution expressly granting an Option, the date as of which the
Com-
4
<PAGE>
mittee adopts the resolution expressly granting an Option shall be considered
the day on which such Option is granted.
(3) Method and Time of Payment. The Option exercise price shall
--------------------------
be paid in full, at the time of exercise, in cash, in shares of Common Stock
having a fair market value (determined by the Committee) equal to such Option
exercise price, in a combination of cash and Common Stock (or other
consideration deemed acceptable by the Committee) or, in the sole discretion of
the Committee, through a cashless exercise procedure.
(4) Term and Exercisability of Options. Each Award Agreement
----------------------------------
shall provide that each Option shall become exercisable in accordance with its
characterization as a Time-Vested Option ; provided, that the Committee shall
--------
have the authority to accelerate the exercisability of any outstanding Option at
such time and under such circumstances as it, in its sole discretion, deems
appropriate. The exercise period shall be not more than ten (10) years from the
date of the grant of the Option, or such shorter period as is determined by the
Committee. The exercise period shall be subject to earlier termination as
provided in Section 6(a)(5) hereof. An Option may be exercised, as to any or
all full shares of Common Stock as to which the Option has become exercisable,
by written notice delivered in person or by mail to the Secretary of the
Company, specifying the number of shares of Common Stock with respect to which
the Option is being exercised, together with payment in full of the Option
exercise price. For purposes of the preceding sentence, the date of exercise
will be deemed to be the date upon which the Secretary of the Company receives
both the notification and such payment.
(5) Termination. If a Participant's status as a director of the
-----------
Company or a subsidiary terminates, the Committee will have the exclusive
authority to determine if and for how long, and under what conditions, such
Option may be exercised after such termination; provided, however, that the
-------- -------
Committee may not shorten any exercise period set forth in an Award Agreement,
and provided, further, that in no event will an Option continue to be
-------- -------
exercisable beyond the expiration date of such Option.
(6) Nontransferability of Common Stock. Each Award Agreement
----------------------------------
shall provide that prior to an Initial Public Offering, the Participant shall
execute a stockholders agreement prior to being granted any Option hereunder
with respect to the shares of Common Stock to which such Option relates, in such
form and containing such terms and conditions as the Committee shall from time
to time
5
<PAGE>
approve, including without limitation, any restrictions on the transferability
of such shares.
7 General Provisions.
------------------
(a) Compliance with Legal Requirements. The Plan and the granting and
----------------------------------
exercising of Awards, and the other obligations of the Company under the Plan
and any Award Agreement or other agreement shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
regulatory or governmental authority or agency as may be required. The Company,
in its discretion, may postpone the issuance or delivery of Common Stock under
any Award as the Company may consider appropriate and may require any
Participant to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of Common Stock
in compliance with applicable laws, rules and regulations.
(b) Nontransferability. Awards shall not be transferable by a
------------------
Participant other than by will or the laws of descent and distribution or, if
then permitted by Rule 16b-3 under the Exchange Act, pursuant to a qualified
domestic relations order as defined under the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
shall be exercisable during the lifetime of a Participant only by such
Participant or his guardian or legal representative.
(c) No Right To Continued Service. Nothing in the Plan or in any
-----------------------------
Award granted or any Award Agreement or other agreement entered into pursuant
hereto shall confer upon any Participant the right to continue as a director of
the Company or any of its subsidiaries or to be entitled to any remuneration or
benefits not set forth in the Plan or such Award Agreement or other agreement or
to interfere with or limit in any way the right of the Company or its
shareholders to terminate such Participant's status as a director
(d) Withholding Taxes. Where a Participant or other person is
-----------------
entitled to receive shares of Common Stock pursuant to the exercise of an
Option, the Company shall have the right to require the Participant or such
other person to pay to the Company the amount of any taxes which the Company may
be required to withhold before delivery to such Participant or other person of a
certificate or certificates representing such shares.
6
<PAGE>
Unless otherwise prohibited by the Committee or by applicable law, a
Participant may satisfy any such withholding tax obligation by any of the
following methods, or by a combination of such methods: (a) tendering a cash
payment or (b) delivering to the Company previously acquired shares of Common
Stock (none of which shares may be subject to any claim, lien, security
interest, community property right or other right of spouses or present or
former family members, pledge, option, voting agreement or other restriction or
encumbrance of any nature whatsoever) having an aggregate fair market value,
determined by the Committee as of the date the withholding tax obligation
arises, equal to the amount of the total withholding tax obligation.
(e) Amendment and Termination of the Plan. The Board or the
-------------------------------------
Committee may at any time and from time to time alter, amend, suspend, or
terminate the Plan in whole or in part; provided that, no amendment which
-------- ----
requires stockholder approval under applicable law or in order for the Plan to
continue to comply with Rule 16b-3 under the Exchange Act shall be effective
unless the same shall be approved by the requisite vote of the stockholders of
the Company. Notwithstanding the foregoing, subject to the other provisions of
the Plan, no amendment shall affect adversely any of the rights of any
Participant, without such Participant's consent, under any Award theretofore
granted under the Plan. The power to grant Options under the Plan will
automatically terminate on September 18, 2006. If the Plan is terminated,
any unexercised Option shall continue to be exercisable in accordance with its
terms and the terms of the Plan in effect immediately prior to such termination.
(f) Participant Rights. No Participant shall have any claim to be
------------------
granted any Award under the Plan, and there is no obligation for uniformity of
treatment for Participants. Except as provided specifically herein, a
Participant or a transferee of an Award shall have no rights as a stockholder
with respect to any shares of stock covered by any Award until the date of the
issuance of a certificate to him for such shares.
(g) Unfunded Status of Awards. The Plan is intended to constitute an
-------------------------
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Company.
(h) Fractional Shares. Fractional shares of Common Stock may be
-----------------
issued or delivered pursuant to the Plan or any Award. The Committee shall
7
<PAGE>
determine whether cash, other Awards or other property shall be issued or paid
in lieu of such fractional shares.
(i) Governing Law. The Plan and all determinations made and actions
-------------
taken pursuant hereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
(j) Effective Date. The Plan shall become effective on September 18,
--------------
1996.
(k) Beneficiary. A Participant may file with the Committee a written
-----------
designation of a beneficiary on such form as may be prescribed by the Committee
and may, from time to time, amend or revoke such designation. If no designated
beneficiary survives the Participant, the executor or administrator of the
Participant's estate shall be deemed to be the grantee's beneficiary.
(l) Interpretation. The Plan is designed and intended to comply with
--------------
Rule 16b-3 promulgated under the Exchange Act.
8
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC.
EMPLOYEE STOCK OPTION PLAN
1 Purpose.
-------
The purpose of the MRS. FIELDS' HOLDING COMPANY, INC. Employee Stock
Option Plan (the "Plan") is to align the interests of officers and other
employees of MRS. FIELDS' HOLDING COMPANY, INC., a Delaware corporation (the
"Company"), and its subsidiaries, with those of the stockholders of the Company;
to attract, motivate and retain the best available executive personnel and key
employees of the Company and its subsidiaries by permitting them to acquire or
increase their proprietary interest in the Company; and to reward the
performance of individual officers and other employees in fulfilling their
personal responsibilities for long-range achievements.
2 Definitions.
-----------
The following terms, as used herein, shall have the following
meanings:
(a) "Adjusted EBITDA" shall mean, for any fiscal year of MFOC, MFOC's
consolidated earnings before depreciation, amortization, interest,
income taxes and other income (expense) for such fiscal year after
making pro forma adjustment from the beginning of such fiscal year for
any acquisitions, divestitures or discontinued operations during such
fiscal year.
(b) "Award" shall mean any Option granted pursuant to the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or other
instrument or document between the Company and a Participant
evidencing an Award.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Capricorn" shall mean Capricorn Investors II, L.P. together with any
affiliated persons.
<PAGE>
(f) "Change of Control" shall mean the earliest to occur of (i) a
transaction in which Capricorn's equity investment in the Company is
reduced (including through the operation of a merger in which the
Company is not the surviving corporation and the Common Stock is
converted into the right to receive cash or other property) such that
Capricorn is no longer the single largest equity investor in the
Company or (ii) a sale by the Company or MFOC of all or substantially
all of its assets.
(g) "Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Company.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(i) "Committee" shall mean a committee of the Board which administers the
Plan as provided herein.
(j) "Company" shall mean MRS. FIELDS' HOLDING COMPANY, INC.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
(l) "Implied Valuation" shall mean, for any fiscal year or other period of
four consecutive fiscal quarters of MFOC, the excess of 5.5x Adjusted
EBITDA for such fiscal year or other period over the Net Debt as of
the end of such fiscal year or other period; provided, that the
--------
Implied Valuation for fiscal year 1997 shall be deemed to be
$41,354,000.
(m) "Initial Public Offering" shall mean a public offering of Common Stock
pursuant to a registration statement under the Securities Act.
(n) "IRR" shall mean, as of any date, the internal rate of return,
determined in accordance with generally accepted practice, on one
share of Common Stock calculated from September 18, 1996 through the
date as of which the determination is being made, using (i)$10.00 as
the value of one share at September 18, 1996 (subject to equitable
adjustment in the event of a transaction of the nature contemplated by
Section 5(b)), (ii) if the relevant date of determination is a Change
of
2
<PAGE>
Control, the value per share of Common Stock paid pursuant to or
implicit in such Change of Control as determined in good faith by the
Committee, and (iii) if the relevant date of determination is the
expiration of such Option, the value per share of Common Stock as
determined in good faith based on the Implied Valuation determined by
using the four most recently completed fiscal quarters of MFOC for
which financial statements are vaailable as of the date of
determination as the relevant fiscal period.
(o) "MFOC" shall mean Mrs. Fields' Original Cookies, Inc., the Company's
subsidiary.
(p) "Net Debt" shall mean, for any fiscal year or other fiscal period of
MFOC, MFOC's consolidated debt net of cash and short term investments
at the end of such fiscal year.
(q) "Option" shall mean the right, granted pursuant to the Plan, of a
holder to purchase shares of Common Stock. Options granted hereunder
shall not qualify as "incentive stock options" within the meaning of
Section 422 of the Code.
(r) "Participant" shall mean an officer or other employee of the Company
or a subsidiary who is, pursuant to Section 4 of the Plan, selected to
participate in the Plan.
(s) "Performance-Vested Option" shall mean an Option that will be deemed
to be vested 20% for fiscal year 1997 and shall vest an additional 20%
per year for each fiscal year during the term of such Option beginning
with fiscal year 1998 in which the Implied Valuation for such fiscal
year shall equal or exceed 110% of the Implied Valuation for the
previous fiscal year.
(t) "Plan" shall have the meaning set forth in Section 1 hereof.
(u) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time, and as now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
3
<PAGE>
(v) "Time Vested Option" shall mean an Option that will vest 25% per year
on the anniversaries of the date as of which it was awarded and will
vest in full upon the occurrence of a Change of Control.
(w) "Upside Option" shall mean an Option that will vest upon the earlier
to occur of the expiration of such Option and a Change of Control in
accordance with the following: (i) IRR through such date less than
20%, no vesting; (ii) IRR through such date in the range of 20%-
24.99%, 1/3 vesting; (iii) IRR through such date in the range of 25%-
29.99%, 2/3 vesting; and (iii) IRR through such date of 30% or more,
full vesting.
3 Administration.
--------------
The Plan shall be administered by the Committee. The Committee shall
have the authority, in its sole discretion, subject to and not inconsistent with
the express provisions of the Plan, to administer the Plan and to exercise all
the powers and authorities either specifically granted to it under the Plan or
necessary or advisable in connection with the administration of the Plan,
including, without limitation, the authority to take the following actions: to
grant Awards; to determine the persons to whom and the time or times at which
Awards shall be granted; to determine the type and number of Awards to be
granted, the number of shares of Common Stock to which an Award may relate and
the terms, conditions, restrictions and performance criteria relating to any
Award; to determine whether, to what extent, and under what circumstances an
Award may be settled, cancelled, adjusted, forfeited, exchanged, or surrendered
or accelerated or an Option or Options may be repriced to a lower exercise
price; to make adjustments to performance goals in recognition of unusual or
non-recurring events affecting the Company or its financial statements, or in
response to changes in applicable laws, regulations or accounting principles; to
construe and interpret the Plan and any Award; to prescribe, amend and rescind
rules and regulations relating to the Plan; to determine the terms and
provisions of Award Agreements, consistent with the terms and provisions of the
Plan; and to make all other determinations deemed necessary or advisable for the
administration of the Plan, consistent with the terms and provisions of the
Plan. From and after the Initial Public Offering, the Committee shall consist
of two or more persons who are intended to be "disinterested persons" within the
meaning of Rule 16b-3 under the Exchange Act.
4 Eligibility.
-----------
4
<PAGE>
Awards may be granted to officers or other employees of the Company
and its subsidiaries in the sole discretion of the Committee. In determining
the persons to whom Awards shall be granted and the type of Award, the Committee
shall take into account such factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Plan.
5 Stock Subject to the Plan.
-------------------------
(a) Number of Shares. The maximum number of shares of Common Stock
----------------
reserved for issuance pursuant to the Plan shall be 492,840 allocated evenly
among Time-Vested Options, Performance-Vested Options and Upside Options. All
such shares of Common Stock shall be subject to equitable adjustment as provided
herein. Such shares may, in whole or in part, be authorized but unissued shares
or shares that shall have been or may be reacquired by the Company in the open
market, in private transactions or otherwise. If any shares subject to an Award
are forfeited, cancelled, exchanged or surrendered or if an Award otherwise
terminates or expires without a distribution of shares to the Participant, the
shares of Common Stock with respect to such Award shall, to the extent of any
such forfeiture, cancellation, exchange, surrender, termination or expiration,
again be available for Awards under the Plan.
(b) Equitable Adjustment. In the event that an extraordinary
--------------------
transaction or other event or circumstance affecting the Common Stock shall
occur, including, but not limited to, any dividend or other distribution
(whether in the form of cash, stock or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, sale of assets or other similar
transaction or event, and the Committee determines that a change or adjustment
in the terms of any Award is appropriate, then the Committee may, in its sole
discretion, make such equitable changes or adjustments or take any other actions
that it deems necessary or appropriate (which shall be effective at such time as
the Committee in its sole discretion determines), including, but not limited to
causing changes or adjustments to any or all of (i) the number and kind of
shares of stock or other securities or property which may thereafter be issued
in connection with Awards, (ii) the number and kind of shares of stock or other
securities or property issued or issuable in respect of outstanding Awards,
(iii) the exercise price relating to any Award, and (iv) any performance
criteria relating to any Award.
6 Stock Options.
-------------
5
<PAGE>
Each Option granted pursuant to this Section 6 shall be evidenced by
an Award Agreement, in such form and containing such terms and conditions as the
Committee shall from time to time approve, which Award Agreement shall comply
with and be subject to the following terms and conditions, as applicable. Each
Option shall be a Performance-Vested Option, a Time-Vested Option or an Upside-
Vested Option as determined by the Committee at the time of the grant of the
Award and specified in the related Award Agreement.
(a) Stock Options
-------------
(1) Number of Shares. Each Award Agreement shall state the
----------------
type or types of Options covered by such Award and the number of shares of
Common Stock to which the Option relates.
(2) Option Exercise Price. Each Award Agreement shall state the
---------------------
Option exercise price. The Option exercise price shall be subject to adjustment
as provided in Section 5 hereof. Unless otherwise expressly stated in the
Committee resolution expressly granting an Option, the date as of which the
Committee adopts the resolution expressly granting an Option shall be considered
the day on which such Option is granted.
(3) Method and Time of Payment. The Option exercise price
--------------------------
shall be paid in full, at the time of exercise, in cash, in shares of Common
Stock having a fair market value (determined by the Committee) equal to such
Option exercise price, in a combination of cash and Common Stock (or other
consideration deemed acceptable by the Committee) or, in the sole discretion of
the Committee, through a cashless exercise procedure.
(4) Term and Exercisability of Options. Each Award Agreement
----------------------------------
shall provide that each Option shall become exercisable in accordance with its
characterization as a Performance-Vested Option, a Time-Vested Option or an
Upside Option; provided, that the Committee shall have the authority to
--------
accelerate the exercisability of any outstanding Option at such time and under
such circumstances as it, in its sole discretion, deems appropriate. The
exercise period shall be not more than ten (10) years from the date of the grant
of the Option, or such shorter period as is determined by the Committee. The
exercise period shall be subject to earlier termination as provided in Section
6(a)(5) hereof. An Option may be exercised, as to any or all full shares of
Common Stock as to which the Option has become exercisable, by written notice
delivered in person or by mail to the Secretary of the Company, specifying the
number of shares of Common Stock with respect to
6
<PAGE>
which the Option is being exercised, together with payment in full of the Option
exercise price. For purposes of the preceding sentence, the date of exercise
will be deemed to be the date upon which the Secretary of the Company receives
both the notification and such payment.
(5) Termination. If a Participant's employment by the Company
-----------
or a subsidiary terminates, the Committee will have the exclusive authority to
determine if and for how long, and under what conditions, such Option may be
exercised after such termination; provided, however, that the Committee may not
-------- -------
shorten any exercise period set forth in an Award Agreement, and provided,
--------
further, that in no event will an Option continue to be exercisable beyond the
- -------
expiration date of such Option.
(6) Nontransferability of Common Stock. Each Award Agreement
----------------------------------
shall provide that prior to an Initial Public Offering, the Participant shall
execute a stockholders agreement prior to being granted any Option hereunder
with respect to the shares of Common Stock to which such Option relates, in such
form and containing such terms and conditions as the Committee shall from time
to time approve, including without limitation, any restrictions on the
transferability of such shares.
7 General Provisions.
------------------
(a) Compliance with Legal Requirements. The Plan and the granting and
----------------------------------
exercising of Awards, and the other obligations of the Company under the Plan
and any Award Agreement or other agreement shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
regulatory or governmental authority or agency as may be required. The Company,
in its discretion, may postpone the issuance or delivery of Common Stock under
any Award as the Company may consider appropriate and may require any
Participant to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of Common Stock
in compliance with applicable laws, rules and regulations.
(b) Nontransferability. Awards shall not be transferable by a
------------------
Participant other than by will or the laws of descent and distribution or, if
then permitted by Rule 16b-3 under the Exchange Act, pursuant to a qualified
domestic relations order as defined under the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
shall be exer
7
<PAGE>
cisable during the lifetime of a Participant only by such Participant or his
guardian or legal representative.
(c) No Right To Continued Employment. Nothing in the Plan or in any
--------------------------------
Award granted or any Award Agreement or other agreement entered into pursuant
hereto shall confer upon any Participant the right to continue in the employ of
the Company or a subsidiary or to be entitled to any remuneration or benefits
not set forth in the Plan or such Award Agreement or other agreement or to
interfere with or limit in any way the right of the Company to terminate such
Participant's employment.
(d) Withholding Taxes. Where a Participant or other person is
-----------------
entitled to receive shares of Common Stock pursuant to the exercise of an
Option, the Company shall have the right to require the Participant or such
other person to pay to the Company the amount of any taxes which the Company may
be required to withhold before delivery to such Participant or other person of a
certificate or certificates representing such shares.
Unless otherwise prohibited by the Committee or by applicable law, a
Participant may satisfy any such withholding tax obligation by any of the
following methods, or by a combination of such methods: (a) tendering a cash
payment or (b) delivering to the Company previously acquired shares of Common
Stock (none of which shares may be subject to any claim, lien, security
interest, community property right or other right of spouses or present or
former family members, pledge, option, voting agreement or other restriction or
encumbrance of any nature whatsoever) having an aggregate fair market value,
determined by the Committee as of the date the withholding tax obligation
arises, equal to the amount of the total withholding tax obligation.
(e) Amendment and Termination of the Plan. The Board or the
-------------------------------------
Committee may at any time and from time to time alter, amend, suspend, or
terminate the Plan in whole or in part; provided that, no amendment which
-------- ----
requires stockholder approval under applicable law or in order for the Plan to
continue to comply with Rule 16b-3 under the Exchange Act shall be effective
unless the same shall be approved by the requisite vote of the stockholders of
the Company. Notwithstanding the foregoing, subject to the other provisions of
the Plan, no amendment shall affect adversely any of the rights of any
Participant, without such Participant's consent, under any Award theretofore
granted under the Plan. The power to grant Options under the Plan will
automatically terminate on September 18, 2006. If the Plan is terminated,
any unexercised Option shall continue to be exer
8
<PAGE>
cisable in accordance with its terms and the terms of the Plan in effect
immediately prior to such termination.
(f) Participant Rights. No Participant shall have any claim to be
------------------
granted any Award under the Plan, and there is no obligation for uniformity of
treatment for Participants. Except as provided specifically herein, a
Participant or a transferee of an Award shall have no rights as a stockholder
with respect to any shares of stock covered by any Award until the date of the
issuance of a certificate to him for such shares.
(g) Unfunded Status of Awards. The Plan is intended to constitute an
-------------------------
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Company.
(h) Fractional Shares. Fractional shares of Common Stock may be
-----------------
issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards or other property shall be issued or paid
in lieu of such fractional shares.
(i) Governing Law. The Plan and all determinations made and actions
-------------
taken pursuant hereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
(j) Effective Date. The Plan shall become effective on September 18,
--------------
1996.
(k) Beneficiary. A Participant may file with the Committee a written
-----------
designation of a beneficiary on such form as may be prescribed by the Committee
and may, from time to time, amend or revoke such designation. If no designated
beneficiary survives the Participant, the executor or administrator of the
Participant's estate shall be deemed to be the grantee's beneficiary.
(l) Interpretation. The Plan is designed and intended to comply with
--------------
Rule 16b-3 promulgated under the Exchange Act.
9
<PAGE>
MRS. FIELDS' HOLDING COMPANY, INC.
DIRECTOR STOCK PURCHASE PLAN
1 Purpose.
-------
The purpose of the MRS. FIELDS' HOLDING COMPANY, INC. Director Stock
Purchase Plan (the "Plan") is to align the interests of outside directors of
MRS. FIELDS' HOLDING COMPANY, INC., a Delaware corporation (the "Company"), and
its subsidiaries, with those of the stockholders of the Company; and to attract,
motivate and retain as directors the best available individuals.
2 Definitions.
-----------
The following terms, as used herein, shall have the following
meanings:
(a) "Capricorn" shall mean Capricorn Investors II, L.P. together with any
affiliated persons.
(b) "Change of Control" shall mean the earliest to occur of (i) a
transaction in which Capricorn's equity investment in the Company is
reduced (including through the operation of a merger in which the
Company is not the surviving corporation and the Common Stock is
converted into the right to receive cash or other property) such that
Capricorn is no longer the largest equity investor in the Company or
(ii) a sale by the Company or MFOC of all or substantially all of its
assets.
(c) "Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Company.
(d) "Company" shall mean MRS. FIELDS' HOLDING COMPANY, INC.
(e) "MFOC" shall mean Mrs. Fields' Original Cookies, Inc., the Company's
subsidiary.
<PAGE>
(f) "Participant" shall mean Capricorn and each of the directors of the
Company indicated on Annex A hereto.
(g) "Plan" shall have the meaning set forth in Section 1 hereof.
(h) "Restricted Shares" shall mean the shares of Common Stock granted to
each Participant as indicated on Annex A hereto, which are subject to
vesting as to each Participant, with 50% of the shares vesting on
January 1, 1999 and the other 50% of the shares vesting on January 1,
2000, subject to early vesting of all shares upon the occurrence of a
Change of Control.
(i) "Vested Shares" shall mean the shares of Common Stock purchased by
each Participant as indicated on Annex A hereto.
3 Issuance of Shares of Common Stock.
-----------------------------------
Shares of Common Stock being issued under the Plan include Vested
Shares, as to which each Participant is paying (or in the case of Capricorn is
deemed to have paid) the amount in cash indicated on Annex A, and Restricted
Shares, which each Participant is being granted in consideration of such
Participant's cash investment in Vested Shares. The number of Vested Shares and
Restricted Shares for each Participant is set forth on Annex A hereto.
4 General Provisions.
------------------
(a) Compliance with Legal Requirements. The Plan and the other
----------------------------------
obligations of the Company under the Plan shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
regulatory or governmental authority or agency as may be required. The Company,
in its discretion, may require any Participant to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of Common Stock in compliance with applicable laws, rules
and regulations.
(b) No Right To Continued Service. Nothing in the Plan shall confer
-----------------------------
upon any Participant the right to continue as a director of the Company or any
of its subsidiaries or to be entitled to any remuneration or benefits not set
forth in the Plan or to interfere with or limit in any way the right of the
Company or its shareholders to terminate such Participant's status as a
director.
<PAGE>
(c) Withholding Taxes. Where a Participant or other person is
-----------------
entitled to receive shares of Common Stock pursuant to the vesting of Restricted
Shares, the Company shall have the right to require the Participant or such
other person to pay to the Company the amount of any taxes which the Company may
be required to withhold before delivery to such Participant or other person of a
certificate or certificates representing such shares.
A Participant may satisfy any such withholding tax obligation by any
of the following methods, or by a combination of such methods: (a) tendering a
cash payment or (b) delivering to the Company previously acquired shares of
Common Stock (none of which shares may be subject to any claim, lien, security
interest, community property right or other right of spouses or present or
former family members, pledge, option, voting agreement or other restriction or
encumbrance of any nature whatsoever) having an aggregate fair market value,
determined by the Committee as of the date the withholding tax obligation
arises, equal to the amount of the total withholding tax obligation.
(d) Amendment and Termination of the Plan. The Board may at any time
-------------------------------------
and from time to time alter, amend, suspend, or terminate the Plan in whole or
in part. Notwithstanding the foregoing, subject to the other provisions of the
Plan, no amendment shall affect adversely any of the rights of any Participant,
without such Participant's consent.
(e) Unfunded Status of Awards. The Plan is intended to constitute an
-------------------------
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to the Plan, nothing contained
in the Plan shall give any such Participant any rights that are greater than
those of a general creditor of the Company.
(f) Governing Law. The Plan and all determinations made and actions
-------------
taken pursuant hereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
(g) Beneficiary. A Participant may file with the Board a written
-----------
designation of a beneficiary on such form as may be prescribed by the Board and
may, from time to time, amend or revoke such designation. If no designated
beneficiary survives the Participant, the executor or administrator of the
Participant's estate shall be deemed to be the grantee's beneficiary.
3
<PAGE>
ANNEX A
- -------------------------------------------------------------------------------
Name Amount Paid Vested Restricted
- -------------------------------------------------------------------------------
Larry Hodges $250,000 25,000 5,000
- -------------------------------------------------------------------------------
Peter Mullin $100,000 10,000 5,000
- -------------------------------------------------------------------------------
Richard Ferry $ 66,667 6,667 3,333
- -------------------------------------------------------------------------------
Walker Lewis $ 50,000 5,000 2,500
- -------------------------------------------------------------------------------
Gilbert Osnos $ 50,000 5,000 2,500
- -------------------------------------------------------------------------------
Herbert Winokur, Jr.* 5,000
- -------------------------------------------------------------------------------
Nat Gregory* 5,000
- -------------------------------------------------------------------------------
* Issued to Capricorn Investors II, L.P.
4
<PAGE>
INTELLECTUAL PROPERTY SECURITY AGREEMENT
----------------------------------------
THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT (this "Agreement"), dated as
of the 28th day of February, 1998, by MRS. FIELDS' ORIGINAL COOKIES, INC., a
Delaware corporation ("Borrower") and LASALLE NATIONAL BANK, a national banking
association, ("Lender").
W I T N E S S E T H:
WHEREAS, on the date hereof, Borrower has entered into that certain Amended
and Restated Loan Agreement of even date herewith (the same, as it may be
amended, restated, modified or supplemented and in effect from time to time,
being herein referred to as the "Loan Agreement") by and between Borrower and
Lender, providing for Lender to make available to Borrower certain revolving
credit facilities (collectively, the "Loans") on the terms and conditions set
forth therein; and
WHEREAS, Borrower has or may hereafter acquire trademarks and service
marks, patents, patent applications and inventions, copyrights and related or
similar rights and interests; and
WHEREAS, as of the date hereof, Borrower and Lender have entered into a
Security Agreement (the "Security Agreement") pursuant to which Borrower has
pledged certain collateral to Lender as security for the Obligations (as defined
in the Loan Agreement); and
WHEREAS, to induce Lender to enter into the Loan Agreement and make the
Loans thereunder, Borrower has agreed to pledge and grant a security interest in
the Collateral (as hereinafter defined) as additional security for the
Obligations.
NOW, THEREFORE, for and in consideration of the premises set forth above,
the terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
Section 1. Definitions. Capitalized terms used herein without definition
-----------
and defined in the Loan Agreement are used herein as defined therein.
Section 2. Grant of Security Interest. As collateral security for the
--------------------------
prompt payment in full when due (whether at stated maturity, by acceleration or
otherwise) of the Obligations, Borrower hereby pledges and grants to Lender a
Lien on and security interest in and to all of Borrower's right, title and
interest in and to the following property and interests in property, whether now
owned by Borrower or hereafter acquired and whether now existing or hereafter
coming into existence (collectively referred to herein as "Collateral"):
----------
<PAGE>
(a) all of Borrower's right, title and interest in and to trademarks,
trade names, trade styles, service marks, logos, emblems, prints and
labels, all elements of package or trade dress of goods, and all general
intangibles of like nature, now existing or hereafter adopted or acquired
by Borrower, together with the goodwill of Borrower's business connected
with the use thereof and symbolized thereby, and all applications,
registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Patent and
Trademark Office or in any similar office or agency of the United States or
in any office of the Secretary of State (or equivalent) of any state
thereof, or in any similar office or agency of any country or political
subdivision thereof throughout the world, whether now owned or hereafter
acquired by Borrower, together with all extensions, renewals and
corrections thereof and all licenses thereof or pertaining thereto (all of
the foregoing assets encompassed by this clause (a) being hereinafter
collectively referred to as the "Trademarks");
----------
(b) all of Borrower's right, title and interest in and to all
inventions and letters patent and applications therefor, and all
registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Patent and
Trademark Office or in any similar office or agency of the United States or
any state thereof, or in any similar office or agency of any country or
political subdivision thereof throughout the world, whether now owned or
hereafter acquired by Borrower, together with all re-examinations,
reissues, continuations, continuations-in-part, divisions, improvements and
extensions thereof and all licenses thereof or pertaining thereto and all
licenses of patent rights to Borrower now in effect or entered during the
term of this Agreement, and the rights to make, use and sell, and all other
rights with respect to, the inventions disclosed or claimed therein, all
inventions, designs, proprietary or technical information, know-how, other
data or information, software, databases, all embodiments or fixations
thereof and related documentation, and all other trade secret rights not
described above (all of the foregoing assets encompassed by this clause (b)
being hereinafter collectively referred to as the "Patents");
-------
(c) all of Borrower's right, title and interest in and to copyrights
in works of authorship of any kind, and all applications, registrations and
recordings thereof in the Office of the United States Register of
Copyrights, Library of Congress, or in any similar office or agency of any
country or political subdivision thereof throughout the world, whether now
owned or hereafter acquired by Borrower, together with all extensions,
renewals, reversionary rights, and corrections thereof and all licenses
thereof or pertaining thereto (all of the foregoing assets encompassed by
this clause (c) being hereinafter collectively referred to as the
"Copyrights");
----------
(d) all of Borrower's customer lists and other records of Borrower
relating to the distribution of products bearing, constituting or
incorporating any of the Trademarks, Patents and/or Copyrights; and
(e) any and all proceeds of the foregoing, including, without
limitation, the
-2-
<PAGE>
proceeds from any claims by Borrower against third parties for past,
present or future infringement of the Trademarks, Patents or Copyrights and
any royalties from licenses to third parties of the Trademarks, Patents or
Copyrights.
Section 3. Representations, Warranties and Covenants. Borrower hereby
-----------------------------------------
represents and warrants to, and covenants and agrees with, Lender as follows:
(a) Borrower has the sole, full and clear title to the Trademarks,
including any Trademarks shown on Schedule A hereto, for the goods and
----------
services with which the Trademarks are used, and any registrations thereof
are valid and subsisting and in full force and effect. Borrower has used
and will continue to use for the duration of this Agreement standards of
quality in the manufacture of products sold under the Trademarks that are
at least equal to those standards in effect as of the date of this
Agreement.
(b) Borrower (either itself or through its licensees) will continue
to use the Trademarks on each and every trademark class of goods applicable
to its current lines of goods as reflected in its current catalogs,
brochures and price lists in order to maintain the Trademarks in full force
and effect, in the ordinary course of business, free from any claim of
abandonment for nonuse and Borrower will not (and will not permit any
licensee thereof to) do any act or knowingly omit to do any act whereby any
Trademark may become invalidated provided, however, that Borrower may
-------- -------
abandon any Trademark if Borrower believes in its reasonable business
judgment that such abandonment is in the best interest of Borrower's
business, provided, further, that (i) Borrower gives Lender written notice
-------- -------
of Borrower's intent to abandon any Trademark at least thirty (30) days
prior to abandonment, and (ii) such abandonment will not, itself or in
conjunction with any other event, materially decrease the value of the
Collateral.
(c) Borrower has the sole, full and clear title to any Patents shown
on Schedule B hereto and such Patents are valid and subsisting and in full
----------
force and effect and have not been claimed or adjudged invalid or
unenforceable in whole or in part (except as otherwise permitted by this
Agreement and the other Loan Documents). Borrower shall mark products made
and sold under the Patents in accordance with the U.S. Patent Act and other
applicable laws. Borrower shall diligently prosecute any patent application
now pending or acquired or made by it during the term of this Agreement,
shall make applications on unpatented but patentable inventions, and shall
preserve and maintain all rights of any kind in the Patents, which, in each
case, Borrower believes in its reasonable business judgment are in the best
business interests of Borrower. Borrower believes that none of the Patents
has been abandoned or dedicated and Borrower will not do any act, or omit
to do any act, nor permit any licensee thereof to do any act, whereby any
Patent may become abandoned or dedicated and shall notify Lender
immediately if it knows of any reason or has reason to know that any
material Patent may become abandoned or dedicated, provided, however, that
-------- -------
Borrower may abandon any Patent if Borrower believes in its reasonable
business judgment that such abandonment is in the best interest of
Borrower's business, provided, further, that (i) Borrower gives Lender
-------- -------
written notice of Borrower's intent to abandon any
-3-
<PAGE>
Patent at least thirty (30) days prior to abandonment, and (ii) such
abandonment will not, itself or in conjunction with any other event,
materially decrease the value of the Collateral.
(d) Borrower has the sole, full and clear title to any copyrights
shown on Schedule C hereto and such copyrights are valid and subsisting and
----------
in full force and effect and have not been claimed or adjudged invalid or
unenforceable in whole or in part (except as otherwise permitted by this
Agreement and the other Loan Documents). Borrower (either itself or through
its licensees) will place appropriate notice of copyright on all copies
embodying copyrighted works which are publicly distributed and Borrower
will not (and will not permit any licensee thereof to) do any act or
knowingly omit to do any act whereby any Copyright may become invalidated
or dedicated to the public domain.
(e) Borrower will promptly perform all acts and execute all
documents, including, without limitation, grants of security in forms
acceptable to Lender and suitable for recording with the United States
Patent and Trademark Office and the United States Register of Copyrights,
and the appropriate offices and agencies of foreign jurisdictions
reasonably requested by Lender at any time to evidence, perfect, maintain,
record or enforce Lender's interest in the Collateral or otherwise in
furtherance of the provisions of this Agreement. Borrower hereby authorizes
Lender to execute and file one or more financing or continuation statements
(and any similar documents) or copies thereof or of this Agreement with
respect to the Collateral without the signature of Borrower to the extent
permitted by law.
(f) In the event that Borrower, either itself or through any
subsidiary, affiliate, agent, employee, licensee or designee, shall file an
application for the issuance of any Patent or registration of any Trademark
with the United States Patent and Trademark Office, or any similar office
of the United States or in any office of the Secretary of State (or
equivalent) of any state thereof, or for the registration of any Copyright
with the United States Register of Copyrights, or for the registration of
any Patent, Trademark or Copyright in any similar office or agency of any
country or political subdivision thereof throughout the world, or shall
obtain issuance of any Patent or registration of any Trademark or Copyright
previously applied for, or shall adopt, acquire or obtain rights to any new
trademark, patent application or work for which a copyright application has
been or is expected to be filed, or become entitled to the benefit of any
patent application or any patent or any part thereof for reissue, re-
examination, continuation, continuation-in-part, division, improvement or
extension, Borrower shall:
(i) promptly inform Lender of any such event or action; and
(ii) execute and deliver any and all assignments, agreements,
instruments, documents and papers as are necessary or appropriate or
as Lender may request to evidence Lender's interest in such Trademark,
Patent or Copyright and the goodwill and general intangibles of
Borrower relating thereto or represented thereby.
-4-
<PAGE>
Borrower hereby constitutes Lender, or its agent, as Borrower's
attorney-in-fact to execute and file all such writings for the foregoing
purposes, all acts of such attorney being hereby ratified and confirmed;
such power being coupled with an interest is irrevocable until the
Obligations are indefeasibly paid and satisfied in full. Borrower
authorizes the amendment of the schedules hereto to include any future
Trademark, Patent or Copyright registrations or applications which may be
acquired or made by Borrower.
(g) Borrower has the authority, right and power to enter into this
Agreement and to perform its terms and to grant the security interest
herein granted, and has not entered and will not enter into any oral or
written agreements which would prevent Borrower from complying with the
terms hereof; provided, however, Borrower may enter into or maintain in
--------
effect such license agreements (including, without limitation, any referred
to in Schedules A, B and C hereto) with respect to the Collateral as
--------------------
Borrower believes in its reasonable business judgment are in the best
interest of Borrower's business, so long as any such license agreement
permits the assignment thereof to Lender.
(h) The Collateral is not now, to Borrower's knowledge, and at all
times will not be, subject to any Liens, licenses, claims, shop rights,
covenants not to sue third persons, or encumbrances of any nature
whatsoever, except Permitted Liens; provided, however, Borrower may enter
--------
into such license agreements with respect to the Collateral as Borrower
believes in its reasonable business judgment are in the best interest of
Borrower's business, so long as any such license agreement permits the
assignment thereof to Lender. To the best knowledge of Borrower, none of
the Collateral is subject to any claims of any other party, except as may
be indicated on Schedules A, B and C to this Agreement.
--------------------
(i) As of the date hereof neither Borrower nor any affiliate or
subsidiary thereof has any Trademarks, Patents or Copyrights registered, or
the subject of any pending application, in the United States Patent and
Trademark Office, or any similar office of the United States or in any
office of the Secretary of State (or equivalent) of any state thereof, or
the United States Register of Copyrights, or in any similar office or
agency of any country or political subdivision thereof throughout the
world, other than those identified in Schedules A, B and C hereto.
--------------------
(j) Borrower will take all commercially reasonable steps in any
proceeding before the United States Patent and Trademark Office, United
States Register of Copyrights or similar office or agency of the United
States or any office of the Secretary of State (or equivalent) of any state
thereof, or in any similar office or agency of any country or political
subdivision thereof throughout the world, to maintain each application and
registration of any Collateral, including, without limitation, filing of
renewals, extensions, affidavits of use and incontestability, and
opposition, interference and cancellation proceedings (except to the extent
that dedication, abandonment or invalidation is permitted under Sections
3(b) and 3(c) hereof). Borrower shall notify Lender promptly in writing if
any application or registration relating to any Collateral may become
abandoned or dedicated or subject to an adverse final determination in any
proceeding in the United States Patent and Trademark
-5-
<PAGE>
Office or United States Register of Copyrights or in any similar office or
agency of any country or political subdivision thereof throughout the world
or in any court regarding Borrower's ownership of such Patent, Trademark or
Copyright, its right to register same, or to keep or maintain the validity
of same.
(k) In the event that Borrower acquires knowledge that any Trademark,
Patent or Copyright is infringed, misappropriated or diluted by a third
party, Borrower shall promptly sue for infringement, misappropriation
and/or dilution and obtain injunctive relief and recover damages therefor,
and Borrower shall take such other actions reasonably required to protect
such Trademark, Patent or Copyright under the circumstances, unless
Borrower shall determine in its reasonable business judgment that such suit
or action is not in the best interest of Borrower's business. Upon the
occurrence and during the continuation of an Event of Default, Lender shall
have the right, but in no way shall be obligated, to bring suit in its or
Borrower's name to enforce the Trademarks, Patents and Copyrights and any
licenses thereunder, in which event Borrower shall, at the request of
Lender, do any and all lawful acts requested by Lender and execute any and
all documents required by Lender to aid such enforcement, and Borrower
shall, upon demand, promptly reimburse and indemnify Lender for all costs
and expenses incurred in such enforcement.
Section 4. Remedies. Upon the occurrence of an Event of Default which is
--------
continuing, in addition to all other rights and remedies provided for in the
Loan Documents, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively or concurrently, without (except as
provided herein) notice to, or consent by, Borrower, Lender shall have the
following rights and remedies:
(a) Lender may (without assuming any obligations or liability
thereunder), at any time, enforce (and shall have the exclusive right to
enforce) against any licensee or sublicensee all rights and remedies of
Borrower in, to and under any one or more license agreements with respect
to the Collateral, and take or refrain from taking any action under any
thereof, and Borrower hereby releases Lender from, and agrees to indemnify
and hold Lender and its agents and their respective officers, directors,
employees and agents, free and harmless from and against any claims arising
out of any action taken or omitted to be taken with respect to any such
license agreement, except for acts constituting gross negligence or willful
misconduct;
(b) Lender may, at any time and from time to time, upon ten (10)
days' prior written notice to Borrower, assign, sell, or otherwise dispose
of the Collateral or any of it, either with or without special or other
conditions or stipulations, with power to buy the Collateral or any part of
it at any such sale, and do all other acts and things for completing the
assignment, sale or disposition which Lender shall, in its sole discretion,
deem appropriate or proper;
(c) in addition to the foregoing, in order to implement any
assignment, sale, license or other disposal of any of the Collateral
pursuant to this Agreement, Lender may, at
-6-
<PAGE>
any time, pursuant to the authority granted in the power of attorney
described in Section 3(f) hereof (such authority becoming effective upon
occurrence of an Event of Default), execute and deliver on behalf of
Borrower one or more instruments of assignment, sale, license or other
disposition of the Collateral. Borrower agrees to pay when due all
reasonable costs incurred in any such transfer of the Collateral, including
any taxes, fees and reasonable attorneys' fees, and all such costs shall be
added to the Obligations. Lender may apply the proceeds actually received
from any such license, assignment, sale or other disposition in accordance
with clause (d) of this Section 4, and Borrower shall remain liable and
will pay Lender on demand any deficiency remaining, together with interest
thereon at a rate equal to the rate then payable on the Obligations and the
balance of any expenses unpaid.
Nothing herein contained shall be construed as requiring Lender to take any such
action at any time.
(d) The proceeds of any collection, sale or other realization of all
or any part of the Collateral, and any other cash at the time held by
Lender under this Agreement, shall be applied:
first, to payment of all the costs and expenses of disposition of
-----
and/or realization upon the Collateral and any other expenses payable
or reimbursable by Borrower under this Agreement;
second, to payment of all expenses payable or reimbursable by
------
Borrower under the Loan Agreement;
third, to payment of all accrued unpaid interest on the
-----
Obligations;
fourth, to payment of principal of the Obligations;
------
fifth, to payment of any other amounts owing constituting
-----
Obligations; and
last, any remainder shall be for the account of and paid to
----
Borrower or as otherwise directed by a court of competent
jurisdiction.
The application of proceeds of Collateral hereunder to the Obligations shall be
made pro-rata to the holders of such Obligations based on the aggregate
outstanding principal amount of such Obligations held by such holders.
Section 5. Powers of Attorney. Concurrently with the execution and
------------------
delivery hereof, Borrower is executing and delivering to Lender three (3)
original powers of attorney for the implementation of any assignment, sale or
other disposition of the Trademarks, Patents or Copyrights pursuant to this
Agreement and Borrower will, upon request of Lender, execute and deliver such
additional copies thereof as Lender may require for purposes hereof.
Section 6. Termination. This Agreement and the Liens and security
-----------
interests granted hereunder shall not terminate until the full and complete
performance and indefeasible satisfaction
-7-
<PAGE>
of all the Obligations (regardless of whether the Loan Agreement shall have
earlier terminated), whereupon Lender shall forthwith cause to be assigned,
transferred and delivered, against receipt but without any recourse, warranty or
representation whatsoever, any remaining Collateral to or on the order of
Borrower. Lender shall also execute and deliver to Borrower upon such
termination, such termination statements, certificates for terminating the Liens
and such other documentation as shall be reasonably requested by Borrower to
effect the termination and release of the Liens and security interests in favor
of Lender affecting the Collateral.
Section 7. Further Assurances. At any time and from time to time, upon the
------------------
written request of Lender or its agent, and at the sole expense of Borrower,
Borrower will promptly and duly execute and deliver any and all such further
instruments, documents and agreements and take such further actions as Lender or
its agent may reasonably require in order for Lender to obtain the full benefits
of this Agreement and of the rights and powers herein granted in favor of
Lender, including, without limitation, using Borrower's best efforts to secure
all consents and approvals necessary or appropriate for the assignment to Lender
of any Collateral not heretofore assigned and the filing of any financing or
continuation statements under the Uniform Commercial Code with respect to the
Liens and security interests granted hereby.
Section 8. Limitation on Duty of Lender. The powers conferred on Lender
----------------------------
under this Agreement are solely to protect Lender's interest in the Collateral
and shall not impose any duty upon it to exercise any such powers. Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers and neither Lender nor its agent, nor any of their
respective officers, directors, employees or agents shall be responsible to
Borrower for any act or failure to act, except for gross negligence or willful
misconduct. Without limiting the generality of the foregoing, neither Lender
nor any of its agents shall have any obligation or liability under any license
by reason of or arising out of this Agreement or the granting to Lender of a
security interest therein or assignment thereof or the receipt by Lender or any
such agent of any payment relating thereto pursuant hereto, nor shall Lender or
any such agent be required or obligated in any manner to perform or fulfill any
of the obligations of Borrower under or pursuant to any license, or to make any
payment, or to make any inquiry as to the nature or the sufficiency of any
payment received by it or the sufficiency of any performance by any party under
any license, or to present or file any claim, or to take any action to collect
or enforce any performance or the payment of any amounts which may have been
assigned to Lender or to which Lender may be entitled at any time or times.
Section 9. Miscellaneous.
-------------
(a) No Waiver. No failure on the part of Lender or any of its agents to
---------
exercise, and no course of dealing with respect to, and no delay in exercising,
any right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise by Lender or any of its agents of any
right, power or remedy hereunder preclude any other or further exercise thereof
or the exercise of any other right, power or remedy. The rights and remedies
hereunder provided are cumulative and may be exercised singly or concurrently,
and are not exclusive of any rights and remedies provided by law.
-8-
<PAGE>
(b) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (as opposed to conflicts of law) and decisions
of the State of Illinois.
(c) Notices. All notices, demands and requests that any party is required
-------
or elects to give to any other party shall be given in accordance with the
provisions of the Loan Agreement.
(d) Amendments, Etc. The terms of this Agreement may be waived, altered or
---------------
amended only by an instrument in writing duly executed by Borrower and Lender.
Any such amendment or waiver shall be binding upon Lender and Borrower and their
respective successors and assigns.
(e) Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the respective successors and assigns of each of the parties
hereto, provided, that Borrower shall not assign or transfer its rights or
--------
obligations hereunder without the prior written consent of Lender.
(f) Counterparts; Headings. This Agreement may be executed in any number
----------------------
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart. The headings in this Agreement are for convenience of
reference only and shall not alter or otherwise affect the meaning hereof.
(g) Severability. If any provision hereof is invalid and unenforceable in
------------
any jurisdiction, then, to the fullest extent permitted by law, (i) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of Lender and its agent in order to carry
out the intentions of the parties hereto as nearly as may be possible and (ii)
the invalidity or unenforceability of any provision hereof in any jurisdiction
shall not affect the validity or enforceability of such provision in any other
jurisdiction.
(h) Other Loan Documents. This Agreement supplements the other Loan
--------------------
Documents and nothing in this Agreement shall be deemed to limit or supersede
the rights granted to Lender in any of the other Loan Documents. In the event
of any conflict between this Agreement and the Loan Agreement, for purposes of
the obligations of Borrower or Lender, as applicable, the provisions of the Loan
Agreement shall govern.
(I) SUBMISSION TO JURISDICTION; WAIVER OF VENUE. EACH OF THE PARTIES
-------------------------------------------
HERETO CONSENTS AND AGREES TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT
SITTING IN THE COUNTY OF COOK, STATE OF ILLINOIS, AND WAIVES ANY OBJECTION BASED
ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN,
----- --- ----------
AND AGREES THAT ANY DISPUTE CONCERNING THE INTERPRETATION OR ENFORCEMENT OF ANY
PROVISION OF THIS AGREEMENT OR THE RELATIONSHIP BETWEEN ANY OF SUCH PERSONS WITH
RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE HEARD ONLY IN THE
COURTS DESCRIBED ABOVE.
-9-
<PAGE>
(J) WAIVER OF RIGHT TO TRIAL BY JURY. EACH OF THE PARTIES HERETO HEREBY
--------------------------------
WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (I) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR (II) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR
ANY OF THEM IN RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. EACH OF SUCH PERSONS HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
THE PROVISIONS OF THIS SUBSECTION (J) SHALL SURVIVE THE TERMINATION OF THIS
AGREEMENT.
[Balance of page intentionally left blank; signature page follows.]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this INTELLECTUAL
PROPERTY SECURITY AGREEMENT to be executed by their respective officers
thereunto duly authorized as of the day and year first above written.
Borrower:
--------
MRS. FIELDS' ORIGINAL COOKIES, INC.,
a Delaware corporation
By:_____________________________
Title:__________________________
Lender:
------
LASALLE NATIONAL BANK,
a national banking association
By:_____________________________
Title:__________________________
-11-
<PAGE>
STATE OF ____________ )
) SS
COUNTY OF ___________ )
On this ____ day of February, 1998, before me personally appeared the
above-named ________________________, to me known, who being by me duly sworn
according to law, on his oath stated that he is the _______________________ of
MRS. FIELDS' ORIGINAL COOKIES, INC. and acknowledged that he signed, sealed and
delivered the foregoing instrument as the free and voluntary act and deed of
said corporation.
______________________________________
Notary Public
My Commission Expires:
_____________________
<PAGE>
STATE OF ____________ )
) SS
COUNTY OF ___________ )
On this ______ day of February 1998, before me personally appeared the
above-named Kristen P. Freund, to me known, who being by me duly sworn according
to law, on her oath stated that she is a Vice President of LASALLE NATIONAL BANK
and acknowledged that she signed, sealed and delivered the foregoing instrument
as the free and voluntary act and deed of the corporation, by virtue of her
authority.
______________________________________
Notary Public
My Commission Expires:
_____________________
<PAGE>
Schedule A
Trademarks
----------
<PAGE>
Schedule B
Patents
-------
<PAGE>
Schedule C
Copyrights
----------
<PAGE>
PLEDGE AND SECURITY AGREEMENT
PLEDGE AND SECURITY AGREEMENT (this .Agreement.) dated as of February 28,
1998 between MRS. FIELDS ORIGINAL COOKIES, INC., a Delaware corporation
("Debtor"), and LASALLE NATIONAL BANK, a national banking association (the
"Secured Party").
W I T N E S S E T H:
WHEREAS, on the date hereof, Debtor has entered into that certain Amended
and Restated Loan Agreement of even date herewith (the same, as it may be
amended, restated, modified or supplemented and in effect from time to time,
being herein referred to as the "Loan Agreement") between Debtor and Secured
Party, as lender, providing for the Secured Party to make available to the
Debtor certain revolving credit facilities (collectively, the "Loans") on the
terms and conditions set forth therein (the Loans, together with all other
"Obligations" as defined in the Loan Agreement, are collectively referred to
herein as the "Obligations"); and
WHEREAS, to induce the Secured Party to enter into the Loan Agreement and
make the Loans thereunder, Debtor has agreed to pledge and grant a security
interest in the Collateral (as hereinafter defined) as security for the
Obligations;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used herein without definition
-----------
and defined in the Loan Agreement are used herein as defined therein. In
addition, as used herein:
"Accounts" means any "account," as such term is defined in the Uniform
--------
Commercial Code.
"Chattel Paper" means any "chattel paper," as such term is defined in
-------------
the Uniform Commercial Code.
"Collateral" has the meaning ascribed thereto in Section 3 hereof.
----------
"Contracts" means all contracts, undertakings, or other agreements
---------
(other than rights evidenced by Chattel Paper, Documents or Instruments) in
or under which Debtor may now or hereafter have any right, title or
interest, including, without limitation, with respect to an Account, any
agreement relating to the terms of payment or the terms of performance
thereof.
<PAGE>
"Documents" means any "documents," as such term is defined in the
---------
Uniform Commercial Code, and shall include, without limitation, all
documents of title (as defined in the Uniform Commercial Code) or other
receipts evidencing or representing Inventory or Equipment.
"Equipment" means any "equipment," as such term is defined in the
---------
Uniform Commercial Code.
"Financial Asset" means any "financial asset," as such term is
---------------
defined in the Uniform Commercial Code.
"Fixtures" means any "fixtures," as such term is defined in the
--------
Uniform Commercial Code.
"General Intangibles" means any "general intangibles," as such term
-------------------
is defined in the Uniform Commercial Code, and, in any event, shall
include, without limitation, all right, title and interest in or under any
Contracts, models, drawings, materials and records, claims, goodwill and
rights of indemnification.
"Goods" means any "goods," as such term is defined in the Uniform
-----
Commercial Code.
. Indebtedness. means Indebtedness as defined in the Loan Agreement.
------------
"Instruments" means any "instrument," as such term is defined in the
-----------
Uniform Commercial Code, and shall include, without limitation, promissory
notes, drafts, bills of exchange, trade acceptances, letters of credit, and
Chattel Paper.
"Inventory" means any "inventory," as such term is defined in the
---------
Uniform Commercial Code.
"Investment Property" means any "investment property," as such term
-------------------
is defined in the Uniform Commercial Code.
"Liabilities" means, collectively, the Obligations and all
-----------
obligations, liabilities and Indebtedness of Debtor under or in respect of
this Agreement.
"Motor Vehicles" means motor vehicles, tractors, trailers and other
--------------
like property, whether or not the title thereto is governed by a
certificate of title or ownership.
"Permitted Liens" means Permitted Liens as defined in the Loan
---------------
Agreement.
"Person" means and includes an individual, a partnership, a joint
------
venture,
-2-
<PAGE>
a corporation, a limited liability company, a trust, an unincorporated
organization or a government or any department or agency thereof.
"Pledged Instruments" has the meaning ascribed thereto in Section
-------------------
3(b) hereof.
"Pledged Stock" has the meaning ascribed thereto in Section 3(a)
-------------
hereof.
"Proceeds" means "proceeds," as such term is defined in the Uniform
--------
Commercial Code and, in any event, includes, without limitation, (a) any
and all proceeds of any insurance, indemnity, warranty or guaranty payable
with respect to any of the Collateral, (b) any and all payments (in any
form whatsoever) made or due and payable from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of
all or any part of the Collateral by any governmental body, authority,
bureau or agency (or any person acting under color of governmental
authority), and (c) any and all other amounts from time to time paid or
payable under, in respect of or in connection with any of the Collateral.
"Security" means any "security," as such term is defined in the
--------
Uniform Commercial Code.
"Stock Collateral" has the meaning ascribed thereto in Section 3(a)
----------------
hereof.
"Uniform Commercial Code" means the Uniform Commercial Code as in
-----------------------
effect from time to time in the State of Illinois.
Section 2. Representations, Warranties and Covenants of Debtor. Debtor
---------------------------------------------------
represents and warrants to, and covenants with, the Secured Party as follows:
(a) Debtor is the owner of the Collateral in which it purports to
grant a security interest pursuant to Section 3 hereof (subject, with
respect to after-acquired Collateral, to Debtor's acquiring the same) and
no Lien other than Permitted Liens exists or will exist upon such
Collateral at any time;
(b) the pledge and security interest granted hereunder in favor of
the Secured Party is a first priority (subject to Permitted Liens)
perfected pledge and security interest in and to all of the Collateral
(subject, with respect to after-acquired Collateral, to Debtor's acquiring
the same);
(c) the Pledged Stock evidenced by the certificates identified in
Exhibit I hereto is, and all other Pledged Stock in which Debtor shall
---------
hereafter grant a security interest pursuant to Section 3 hereof will be,
duly authorized, validly existing, fully paid and non-assessable and none
of such Pledged Stock is or will be subject to any contractual restriction,
or any restriction under the charter or by-laws of the issuer of such
Pledged Stock, upon the transfer of such Pledged Stock (except for any such
restriction
-3-
<PAGE>
contained herein or in the other Loan Documents);
(d) the Pledged Instruments identified in Exhibit I hereto
---------
constitute all of the Instruments owned by Debtor on the date hereof
(whether or not registered in the name of Debtor) and Exhibit I correctly
---------
identifies, as of the date hereof, the issuer of each Pledged Instrument,
the date of issuance thereof, the original amount thereof, the due date
thereof and the outstanding balance thereof;
(e) all existing collateral is located at the addresses set forth in
Schedule 1 hereto, and this Agreement is effective to create in favor of
----------
Secured Party a valid security interest in and Lien upon all of the
Debtor's right, title and interest in and to the Collateral, and, upon the
filing of appropriate Uniform Commercial Code financing statements in the
jurisdictions listed on Schedule 2 attached hereto, and upon delivery of
----------
the Pledged Stock and the Pledged Instruments to the Secured Party, duly
endorsed by Debtor or accompanied by stock powers or other appropriate
instruments of transfer duly executed by Borrower, such security interest
will be duly perfected in all the Collateral; and
(f) Debtor agrees to deliver to the Secured Party all certificates
evidencing any shares of capital stock and all Instruments which Debtor
acquires after the date of this Agreement, duly endorsed in blank or
accompanied by appropriate stock powers or other instruments of transfer
executed in blank by the Debtor, promptly (and in any event within five (5)
days) upon the Debtor's receipt thereof, and, upon request from the Secured
Party, to also promptly deliver to Secured Party an updated Exhibit I to
---------
this Agreement reflecting such additional Pledged Stock and/or Pledged
Instruments.
Section 3. Grant of Security Interest. As collateral security for the
--------------------------
prompt payment in full when due (whether at stated maturity, by acceleration or
otherwise) of the Liabilities, Debtor hereby pledges and grants to the Secured
Party a Lien on and security interest in and to all of Debtor's right, title and
interest in the following property and interests in property, whether now owned
by Debtor or hereafter acquired and whether now existing or hereafter coming
into existence (all being collectively referred to as the "Collateral"):
----------
(a) the shares of capital stock evidenced by the certificates
identified in Exhibit I hereto under the name of Debtor and all other
---------
shares of capital stock of whatever class now or hereafter owned or
acquired by Debtor, together with the certificates evidencing the same and
all other Financial Assets and Investment Property now or hereafter owned
by Debtor, including all Securities, together with any certificates
evidencing the same (collectively, the "Pledged Stock"), and:
-------------
(i) all rights and privileges of Debtor with respect to the
Pledged Stock, all shares, securities, moneys or property representing
a dividend on or proceeds of any of the Pledged Stock, or representing
a distribution or return of capital upon or in respect of any of the
Pledged Stock, or resulting from a split-up, revision,
reclassification or other like change of any of the Pledged Stock or
otherwise
-4-
<PAGE>
received in exchange therefor, and any subscription warrants, rights
or options issued to the holders of, or otherwise in respect of, any
of the Pledged Stock;
(ii) without affecting the obligations of Debtor under any
provision prohibiting such action hereunder or in the other Loan
Documents, in the event of any consolidation or merger in which the
issuer of any of the Pledged Stock is not the surviving corporation,
all shares of each class of capital stock of the successor corporation
formed by or resulting from such consolidation or merger;
(the Pledged Stock, together with all other certificates, shares,
securities, properties or moneys as may from time to time be pledged
hereunder pursuant to clause (i) or (ii) above or any other provision of
this Agreement are herein collectively called the "Stock Collateral");
----------------
(b) the Instruments identified in Exhibit I hereto and all other
---------
Instruments now or hereafter owned or acquired by Debtor
(collectively, the "Pledged Instruments"), together with all
-------------------
payments thereon or thereunder:
(c) all Accounts of Debtor;
(d) all Inventory of Debtor;
(e) all General Intangibles of Debtor, including, without limitation,
all warranties, rights under insurance policies (including any policy for
key man term life insurance as to which Debtor is the beneficiary) and
indemnification rights arising out of any Contract to which Debtor is a
party;
(f) all Equipment of Debtor;
(g) all Documents of Debtor, including, without limitation, all
negotiable and non-negotiable bills of lading;
(h) all Contracts of Debtor, including without limitation any
agreement relating to the sale, use or management of any real property now
or hereafter owned or leased by Debtor;
(i) all Goods of Debtor;
(j) all Fixtures of Debtor;
(k) all cash of Debtor and all balances from time to time in any bank
or depositary account now or hereafter maintained by Debtor; and
(l) all other tangible and intangible property of Debtor, including,
without
-5-
<PAGE>
limitation, all Proceeds, products, accessions, rents, profits, income,
benefits, substitutions, additions and replacements of and to any of the
property of Debtor described in the preceding clauses of this Section 3
(including, without limitation, any proceeds of insurance thereon and all
rights, claims and benefits against any Person relating thereto) and, to
the extent related to any property described in said clauses or such
Proceeds, products and accessions, all books, correspondence, credit files,
records, invoices and other papers, including without limitation all tapes,
cards, computer runs, computer programs, computer files and other papers,
documents and records in the possession or under the control of Debtor or
any computer bureau or service company from time to time acting for Debtor.
Section 4. Covenants; Remedies. In furtherance of the grant of the pledge
-------------------
and security interest pursuant to Section 3 hereof, Debtor hereby agrees with
the Secured Party as follows:
4.1. Delivery and Other Perfection; Maintenance, Etc.
-----------------------------------------------
(a) Delivery of Securities. Debtor shall, if any of the
----------------------
above-described shares, securities, moneys or property required to be
pledged by Debtor under clause (a) of Section 3 hereof are received by or
issued in the name of Debtor, subject to the provisions of Section 4.4(b)
hereof, forthwith:
(i) transfer and deliver to the Secured Party such shares or
securities so received by Debtor (together with the certificates for
any such shares and securities, duly endorsed in blank or accompanied
by undated stock powers duly executed in blank), all of which
thereafter shall be held by the Secured Party pursuant to the terms of
this Agreement, as part of the Collateral; and
(ii) take such other action, at Debtor's expense, as may be
necessary or as the Secured Party shall deem appropriate to duly
perfect the Lien created hereunder in such shares, securities, moneys
or property, including, without limitation, executing and delivering
to the issuers of any uncertificated securities, registration of
pledge documents in form sufficient to perfect the Secured Party's
security interest in such uncertificated securities.
(b) Delivery of Instruments. Debtor shall deliver and pledge to the
-----------------------
Secured Party any and all Instruments, duly endorsed and/or accompanied by
such instruments of assignment and transfer executed by Debtor in such form
and substance as the Secured Party may request; provided, that so long as
--------
no Event of Default shall have occurred and be continuing, Debtor may
retain for collection in the ordinary course any Instruments received by
Debtor in the ordinary course of business, and the Secured Party shall,
promptly upon request of Debtor, make appropriate arrangements for making
any other Instrument pledged by Debtor available to Debtor for purposes of
presentation, collection or renewal (any such arrangement to be effected,
to the extent deemed appropriate by the Secured Party, against trust
receipt or like document).
-6-
<PAGE>
(c) Other Documents and Actions. Debtor shall give Secured Party not
---------------------------
less than thirty (30) days prior written notice of any change in the
location of any Collateral from the locations specified on Schedule 1
----------
hereto, which notice shall specify each new location of any Collateral and
the Collateral to be located at such new location. Debtor shall give,
execute, deliver, file and/or record any financing statement, notice,
instrument, document, agreement or other papers that may be necessary or
desirable (in the reasonable judgment of the Secured Party) to create,
preserve, perfect or validate the pledged security interest granted
pursuant hereto or to enable the Secured Party to exercise and enforce the
rights of the Secured Party hereunder with respect to such pledge and
security interest, including, without limitation, causing any or all of the
Stock Collateral to be transferred of record into the name of the Secured
Party or nominee following the occurrence and during the continuance of an
Event of Default, provided that notices to account debtors in respect of
--------
any Accounts or Instruments shall be subject to the provisions of clause
(f) below.
(d) Books and Records. Debtor shall maintain at its own cost and
-----------------
expense complete and accurate records of the Collateral, including, without
limitation, a record of all payments received and all credits granted with
respect to the Collateral and all other dealings with the Collateral. The
Secured Party shall have a special property interest in all of Debtor's
books and records pertaining to the Collateral and, upon the occurrence and
during the continuation of any Event of Default, Debtor shall deliver and
turn over any such books and records (or true and correct copies thereof)
to the Secured Party at any time on demand. Debtor shall permit any
representative of the Secured Party to inspect such books and records at
any time during reasonable business hours and will provide photocopies
thereof at Debtor's expense to the Secured Party upon request of the
Secured Party.
(e) Motor Vehicles. Debtor shall, promptly upon the request of the
--------------
Secured Party, cause the Secured Party to be listed as the Lienholder on
each certificate of title or ownership covering any Motor Vehicles.
(f) Notice to Account Debtors; Verification. Upon the occurrence
---------------------------------------
and during the continuance of any Event of Default, (i) upon request of the
Secured Party, Debtor shall promptly notify (and Debtor hereby authorizes
the Secured Party so to notify) each account debtor in respect of any
Accounts or Instruments that such Collateral has been assigned to the
Secured Party hereunder, and that any payments due or to become due in
respect of such Collateral are to be made directly to the Secured Party,
and (ii) the Secured Party shall have the right at any time or times to
make direct verification with the account debtors of any and all of the
Accounts.
(g) Further Identification of Collateral. Debtor will, when and as
------------------------------------
often as requested by the Secured Party, furnish to the Secured Party,
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Secured
Party may reasonably request, all in reasonable detail.
-7-
<PAGE>
(h) Compliance with Loan Agreements. With respect to the
-------------------------------
Collateral, shall comply with the provisions of the Loan Agreement
applicable thereto, including, without limitation, maintenance of
insurance, restrictions on dispositions, and providing Secured Party and
its representatives the right to inspections with respect to the
Collateral.
4.2 Other Liens. Debtor will not create, permit or suffer to exist, and
-----------
will defend the Collateral against and take such other action as is necessary to
remove, any Lien on the Collateral except Permitted Liens, and will defend the
right, title and interest of the Secured Party in and to the Collateral and in
and to all Proceeds thereof against the claims and demands of all Persons
whatsoever.
4.3 Preservation of Rights. At any time when the Debtor is obligated to
----------------------
do so and has failed to do so after notice to the Debtor from the Secured Party,
and whether or not any Event of Default has occurred or is continuing, the
Secured Party may, but shall not be required to, take any steps the Secured
Party deems necessary or appropriate to preserve any Collateral or any rights
against third parties to any of the Collateral, including obtaining insurance of
Collateral required by the Loan Agreement or any of the other Loan Documents, at
any time when Debtor has failed to do so, and Debtor shall promptly pay, or
reimburse the Secured Party for, all expenses incurred in connection therewith.
4.4 Special Provisions Relating to Stock Collateral.
-----------------------------------------------
(a) So long as no Event of Default shall have occurred and be
continuing, Debtor shall have the right to (i) exercise all voting,
consensual and other powers of ownership pertaining to the Stock Collateral
for all purposes not inconsistent with the terms of this Agreement, the
other Loan Documents or any other instrument or agreement referred to
herein or therein, and Debtor agrees that it will not vote the Stock
Collateral in any manner that is inconsistent with the terms of this
Agreement, the other Loan Documents or any such other instrument or
agreement; and (ii) receive cash dividends or other distributions in the
ordinary course made in respect of the Stock Collateral.
(b) Debtor hereby grants to the Secured Party an irrevocable proxy to
vote the Stock Collateral, which proxy shall be effective immediately upon
the occurrence of, and during the continuance of, an Event of Default.
(c) If any Event of Default shall have occurred, then so long as such
Event of Default shall continue, and whether or not the Secured Party
exercises any available right to declare any Liabilities due and payable or
seeks or pursues any other relief or remedy available to it under
applicable law or under this Agreement or any other agreement relating to
such Liabilities, all dividends and other distributions on the Stock
Collateral shall be paid directly to the Secured Party and retained by it
as part of the Stock Collateral, subject to the terms of this Agreement,
and, if the Secured Party shall so request in writing, Debtor agrees to
execute and deliver to the Secured Party appropriate additional dividend,
distribution and other orders and documents to that end.
-8-
<PAGE>
4.5 Events of Default, Etc. During the period during which an Event of
----------------------
Default shall have occurred and be continuing:
(a) Debtor shall, at the request of the Secured Party, assemble the
Collateral at such place or places as may be reasonably designated by the
Secured Party;
(b) the Secured Party may make any reasonable compromise or
settlement deemed desirable with respect to any of the Collateral and may
extend the time of payment, arrange for payment in installments, or
otherwise modify the terms of, any of the Collateral;
(c) the Secured Party shall have all of the rights and remedies with
respect to the Collateral of a secured party under the Uniform Commercial
Code (whether or not said Code is in effect in the jurisdiction where the
rights and remedies are asserted) and such additional rights and remedies
to which a secured party is entitled under the laws in effect in any
jurisdiction where any rights and remedies hereunder may be asserted,
including, without limitation, the right, to the maximum extent permitted
by law, to exercise all voting, consensual and other powers of ownership
pertaining to the Collateral as if the Secured Party were the sole and
absolute owner thereof (and Debtor agrees to take all such action as may be
appropriate to give effect to such right);
(d) the Secured Party in its discretion may, in the name of the
Secured Party or in the name of Debtor or otherwise, demand, sue for,
collect or receive any money or property at any time payable or receivable
on account of or in exchange for any of the Collateral, but shall be under
no obligation to do so;
(e) the Secured Party in its discretion may take immediate possession
and occupancy of any premises owned, used or leased by Debtor and exercise
all other rights and remedies of an assignee which may be available to the
Secured Party;
(f) the Secured Party may, without demand or notice of any kind,
appropriate and apply toward the payment of such of the Obligations,
whether matured or unmatured, including costs of collection and attorneys'
and paralegals' fees, and in such order of application as the Secured Party
may, from time to time, elect, any Indebtedness of the Secured Party to the
Debtor, however created or arising, including, but not limited to,
balances, credits, deposits, accounts or moneys of the Debtor in the
possession, control or custody of, or in transit to the Secured Party, and
the Debtor hereby waives the benefit of any law that would otherwise
restrict or limit the Secured Party in the exercise of its right, which is
hereby acknowledged, to appropriate at any time hereafter any such
Indebtedness owing from the Secured Party to the Debtor; and
(g) the Secured Party may, upon ten (10) Business Days' prior written
notice to Debtor of the time and place (which notice Debtor hereby agrees
is commercially reasonable notification for purposes hereof), with respect
to the Collateral or any part
-9-
<PAGE>
thereof which shall then be or shall thereafter come into the possession,
custody or control of the Secured Party, sell, lease, assign or otherwise
dispose of all or any part of such Collateral, at such place or places as
the Secured Party deems suitable, and for cash or for credit or for future
delivery (without thereby assuming any credit risk), at public or private
sale, without demand of performance or notice of intention to effect any
such disposition or of the time or place thereof (except such notice as is
required above or by applicable statute and cannot be waived), and the
Secured Party or anyone else may be the purchaser, lessee, assignee or
recipient of any or all of the Collateral so disposed of at any public sale
(or, to the extent permitted by law, at any private sale) and thereafter
hold the same absolutely, free from any claim or right of whatsoever kind,
including any right or equity of redemption (statutory or otherwise), of
Debtor, any such demand, notice and right or equity being hereby expressly
waived and released. The Secured Party may, without notice or publication,
adjourn any public or private sale or cause the same to be adjourned from
time to time by announcement at the time and place fixed for the sale, and
such sale may be made at any time or place to which the sale may be so
adjourned.
The proceeds of each collection, sale or other disposition under this Section
4.5 shall be applied in accordance with Section 4.8 hereof.
4.6 Deficiency. If the proceeds of sale, collection or other
----------
realization of or upon the Collateral are insufficient to cover the costs and
expenses of such realization and the payment in full of the Liabilities, Debtor
shall remain liable for any deficiency.
4.7 Private Sale. Debtor recognizes that the Secured Party may be
------------
unable to effect a public sale of any or all of the Collateral consisting of
securities by reason of certain prohibitions contained in the Securities Act of
1933, as amended (the "Act"), and applicable state securities laws, but may be
compelled to resort to one or more private sales thereof to a restricted group
of purchasers who will be obliged to agree, among other things, to acquire such
Collateral for their own account for investment and not with a view to the
distribution or resale thereof. Debtor acknowledges and agrees that any such
private sale may result in prices and other terms less favorable to the seller
than if such sale were a public sale and, notwithstanding such circumstances,
agrees that any such sale shall not be deemed to have been made in a
commercially unreasonable manner by reason of its being conducted as a private
sale. The Secured Party shall be under no obligation to delay a sale of any of
the Collateral to permit Debtor to register such Collateral for public sale
under the Act, or under applicable state securities laws, even if Debtor would
agree to do so. The Secured Party shall not incur any liability as a result of
the sale of any such Collateral, or any part thereof, at any private sale
provided for in this Agreement conducted in a commercially reasonable manner,
and Debtor hereby waives any claims against the Secured Party arising by reason
of the fact that the price at which the Collateral may have been sold at such a
private sale was less than the price which might have been obtained at a public
sale or was less than the aggregate amount of the Liabilities, even if the
Secured Party accepts the first offer received and does not offer the Collateral
to more than one offeree.
Debtor further agrees to do or cause to be done all such other acts and things
as may be
-10-
<PAGE>
necessary to make such sale or sales of any portion or all of any such
Collateral valid and binding and in compliance with any and all applicable laws,
regulations, orders, writs, injunctions, decrees or awards of any and all
courts, arbitrators or governmental instrumentalities, domestic or foreign,
having jurisdiction over any such sale or sales, all at Debtor's expense,
provided that Debtor shall be under no obligation to take any action to enable
- --------
any or all of such Collateral to be registered under the provisions of the Act.
Debtor further agrees that a breach of any of the covenants contained in this
Section 4.7 will cause irreparable injury to the Secured Party, that the Secured
Party has no adequate remedy at law in respect of such breach and, as a
consequence, agrees that each and every covenant contained in this Section 4.7
shall be specifically enforceable against Debtor, and Debtor hereby waives and
agrees not to assert any defenses against an action for specific performance of
such covenants, except for a defense that no Event of Default has occurred and
is continuing.
4.8 Application of Proceeds. The proceeds of any collection, sale or
-----------------------
other realization of all or any part of the Collateral, and any other cash at
the time held by the Secured Party under this Agreement, shall be applied:
first, to payment of all the costs and expenses of disposition of
-----
and/or realization upon the Collateral and any other expenses payable
or reimbursable by Debtor under this Agreement;
second, to payment of all expenses payable or reimbursable by Debtor
------
under the Loan Agreement;
third, to payment of all accrued unpaid interest on the Obligations;
-----
fourth, to payment of principal of the Obligations;
------
fifth, to payment of any other amounts owing constituting
-----
Liabilities; and
last, any remainder shall be for the account of and paid to Debtor,
----
or as may be directed by a court having jurisdiction.
The application of proceeds of Collateral hereunder to the Obligations shall be
made pro-rata to the holders of such Obligations based on the aggregate
outstanding principal amount of such Obligations held by such holders.
4.9 Attorney-in-Fact. Debtor hereby irrevocably constitutes and appoints
----------------
the Secured Party, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of Debtor and in the name of Debtor or in its own name, from time to time
in the discretion of the Secured Party, for the purpose of carrying out the
terms of this Agreement, at any time when an Event of Default exists to take any
and all appropriate action and to execute and deliver any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Agreement and, without limiting the generality of the foregoing, hereby
gives the Secured Party the power and right, on behalf of Debtor, without notice
-11-
<PAGE>
to or assent by Debtor, to do the following:
(a) to ask, demand, collect, receive and give acquittance and
receipts for any and all moneys due and to become due under any Collateral
and, in the name of Debtor or its own name or otherwise, to take possession
of and endorse and collect any checks, drafts, notes, acceptances or other
Instruments for the payment of moneys due under any Collateral and to file
any claim or to take any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Secured Party for the purpose
of collecting any and all such moneys due under any Collateral whenever
payable and to file any claim or to take any other action or proceeding in
any court of law or equity or otherwise deemed appropriate by the Secured
Party for the purpose of collecting any and all such moneys due under any
Collateral whenever payable;
(b) to pay or discharge charges or Liens levied or placed on or
threatened against the Collateral (other than the Permitted Liens), to
effect any insurance called for by the terms of this Agreement and to pay
all or any part of the premiums therefor;
(c) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due, and to become due
thereunder, directly to the Secured Party or as the Secured Party shall
direct, and to receive payment of and receipt for any and all moneys,
claims and other amounts due, and to become due at any time, in respect of
or arising out of any Collateral;
(d) to sign and indorse any invoices, freight or express bills, bills
of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with accounts and
other Documents constituting or relating to the Collateral;
(e) to commence and prosecute any suits, actions or proceedings at law
or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of
any Collateral;
(f) to defend any suit, action or proceeding brought against Debtor
with respect to any Collateral;
(g) to settle, compromise or adjust any suit, action or proceeding
described above and, in connection therewith, to give such discharges or
releases as the Secured Party may deem appropriate; and
(h) generally to sell, transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and
completely as though the Secured Party was the absolute owner thereof for
all purposes, and to do, at the Secured Party's option and at Debtor's
expense, at any time, or from time to time, all acts and things which the
Secured Party reasonably deems necessary to protect, preserve or realize
upon the Collateral and the Secured Party's Lien therein, in order to
effect the intent of this
-12-
<PAGE>
Agreement, all as fully and effectively as Debtor might do.
Debtor hereby ratifies, to the extent permitted by law, all that such attorney
lawfully does or causes to be done by virtue hereof. The power of attorney
granted hereunder is a power coupled with an interest and shall be irrevocable
until the Liabilities are indefeasibly paid in full.
Debtor also authorizes the Secured Party, at any time from and after the
occurrence and during the continuation of any Event of Default, (x) to
communicate in its own name with any party to any Contract with regard to the
assignment of the right, title and interest of Debtor in and under the Contracts
hereunder and other matters relating thereto and (y) to execute, in connection
with any sale of Collateral provided for in Section 4.5 or Section 4.7 hereof,
any endorsements, assignments or other instruments of conveyance or transfer
with respect to the Collateral.
4.10 Perfection. Prior to or concurrently with the execution and
----------
delivery of this Agreement (or, if required after the date of this Agreement,
promptly upon request therefor by Secured Party), Debtor shall:
(a) execute and file such financing statements, assignments for
security, registrations of pledge agreements and other documents in such
offices as may be necessary or as the Secured Party may request to perfect
the security interests granted by Section 3 of this Agreement;
(b) enter into tri-party agreements, in form and substance acceptable
to Secured Party, with Secured Party and other financial institutions with
which Debtor may from time to time invest any funds or otherwise open
investment accounts (as permitted by the Loan Agreement), which create a
lien on and security interest in such funds or accounts in favor of Secured
Party;
(c) deliver to the Secured Party the originals of all certificates
evidencing any Pledged Stock, accompanied by undated stock powers or other
instruments of transfer duly executed by Debtor in blank;
(d) deliver to the Secured Party the originals of all Pledged
Instruments together with, in the case of Instruments constituting
promissory notes, allonges attached thereto showing such promissory notes
to be payable to the order of a blank payee; and
(e) deliver to the Secured Party, upon request at any time, the
originals of all Motor Vehicle titles, duly endorsed indicating the Secured
Party's interest therein as Lienholder.
4.11 Termination. This Agreement and the Liens and security interests
-----------
granted hereunder shall not terminate until the full and complete performance
and indefeasible satisfaction of all the Liabilities (regardless of whether the
Loan Agreement shall have earlier terminated), whereupon the Secured Party shall
forthwith cause to be assigned, transferred and delivered, against receipt but
without any recourse, warranty or representation whatsoever, any remaining
Collateral to or on the
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<PAGE>
order of Debtor. The Secured Party shall also execute and deliver to Debtor upon
such termination such Uniform Commercial Code termination statements,
certificates for terminating the Liens on the Motor Vehicles (if any) and such
other documentation as shall be reasonably requested by Debtor to effect the
termination and release of the Liens and security interests in favor of the
Secured Party affecting the Collateral.
4.12 Further Assurances; Continuous Perfection. (a) At any time and from
-----------------------------------------
time to time, upon the written request of the Secured Party, and at the sole
expense of Debtor, Debtor will promptly and duly execute and deliver any and all
such further instruments, documents and agreements and take such further actions
as the Secured Party may reasonably require in order for the Secured Party to
obtain the full benefits of this Agreement and of the rights and powers herein
granted in favor of the Secured Party, including, without limitation, using
Debtor's best efforts to secure all consents and approvals necessary or
appropriate for the assignment to the Secured Party of any Collateral held by
Debtor or in which Debtor has any rights not heretofore assigned, the filing of
any financing or continuation statements under the Uniform Commercial Code with
respect to the Liens and security interests granted hereby, transferring
Collateral to the Secured Party's possession (if a security interest in such
Collateral can be perfected by possession), placing the interest of the Secured
Party as Lienholder on the certificate of title of any Motor Vehicle (subject to
Section 4.1(e) hereof) and using reasonable efforts to obtain waivers of Liens
from landlords and mortgagees. Debtor also hereby authorizes the Secured Party
to file any such financing or continuation statement without the signature of
Debtor to the extent permitted by applicable law.
(b) Upon the request of the Secured Party, Debtor shall use its best
efforts to procure insurers' acknowledgments of any assignments of key man life
insurance policies (if any) which may be assigned to the Secured Party as
additional security for the Liabilities and will take all such further action as
required by any insurer or the Secured Party in connection with any such
assignment.
4.13 Limitation on Duty of Secured Party. The powers conferred on the
-----------------------------------
Secured Party under this Agreement are solely to protect the Secured Party's
interest in the Collateral and shall not impose any duty upon it to exercise any
such powers. The Secured Party shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and neither the
Secured Party nor any of its officers, directors, employees or agents shall be
responsible to Debtor for any act or failure to act, except for willful
misconduct. Without limiting the foregoing, the Secured Party shall be deemed
to have exercised reasonable care in the custody and preservation of the
Collateral in their possession if such Collateral is accorded treatment
substantially equivalent to that which the Secured Party, in its individual
capacity, accords its own property consisting of the type of Collateral
involved, it being understood and agreed that the Secured Party shall not have
any responsibility for taking any necessary steps (other than steps taken in
accordance with the standard of care set forth above) to preserve rights against
any person with respect to any Collateral.
Also without limiting the generality of the foregoing, the Secured Party
shall not have any obligation or liability under any Contract or license by
reason of or arising out of this Agreement or
-14-
<PAGE>
the granting to the Secured Party of a security interest therein or assignment
thereof or the receipt by the Secured Party of any payment relating to any
Contract or license pursuant hereto, nor shall the Secured Party be required or
obligated in any manner to perform or fulfill any of the obligations of Debtor
under or pursuant to any Contract or license, or to make any payment, or to make
any inquiry as to the nature or the sufficiency of any payment received by it or
the sufficiency of any performance by any party under any Contract or license,
or to present or file any claim, or to take any action to collect or enforce any
performance or the payment of any amounts which may have been assigned to it or
to which it may be entitled at any time or times.
Section 5. Miscellaneous.
-------------
5.1 No Waiver. No failure on the part of the Secured Party to exercise,
---------
and no course of dealing with respect to, and no delay in exercising, any right,
power or remedy hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise by the Secured Party of any right, power or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The rights and remedies hereunder provided are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights and remedies provided by law.
5.2 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Illinois, without giving effect to the
choice of law principles thereof.
5.3 Notices. All notices, demands and requests that any party is
-------
required or elects to give to any other party shall be given in accordance with
the provisions of the Loan Agreement.
5.4 Amendments, Etc. The terms of this Agreement may be waived, altered
---------------
or amended only by an instrument in writing duly executed by Debtor and the
Secured Party. Any such amendment or waiver shall be binding upon the Secured
Party and Debtor and their respective successors and assigns.
5.5 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the respective successors and assigns of each of the
parties hereto, provided, that Debtor shall not assign or transfer its rights
--------
hereunder without the prior written consent of the Secured Party.
5.6 Counterparts; Headings. This Agreement may be executed in any number
----------------------
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart. The headings in this Agreement are for convenience of
reference only and shall not alter or otherwise affect the meaning hereof.
5.7 Severability. If any provision hereof is invalid and unenforceable in
------------
any jurisdiction, then, to the fullest extent permitted by law, (a) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of the Secured Party in order to carry out
the intentions of the parties hereto as nearly as may be possible and (b) the
invalidity or
-15-
<PAGE>
unenforceability of any provision hereof in any jurisdiction shall not affect
the validity or enforceability of such provision in any other jurisdiction.
5.8 Other Loan Documents. This Agreement supplements the other Loan
--------------------
Documents and nothing in this Agreement shall be deemed to limit or supersede
the rights granted to the Secured Party in any other Loan Document. In the
event of any conflict between this Agreement and the Loan Agreement, the
provisions of the Loan Agreement shall govern.
5.9 SUBMISSION TO JURISDICTION; WAIVER OF VENUE. EACH OF THE PARTIES HERETO
-------------------------------------------
CONSENTS AND AGREES TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN
THE COUNTY OF COOK, STATE OF ILLINOIS, AND WAIVES ANY OBJECTION BASED ON VENUE
OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND
----- --- ----------
AGREES THAT ANY DISPUTE CONCERNING THE INTERPRETATION OR ENFORCEMENT OF ANY
PROVISION OF THIS AGREEMENT OR THE RELATIONSHIP BETWEEN ANY OF SUCH PERSONS WITH
RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE HEARD ONLY IN THE
COURTS DESCRIBED ABOVE.
5.10 WAIVER OF RIGHT TO TRIAL BY JURY. EACH OF THE PARTIES HERETO HEREBY
--------------------------------
WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR (B) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR
ANY OF THEM IN RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. EACH OF SUCH PERSONS HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
THE PROVISIONS OF THIS SUBSECTION 5.10 SHALL SURVIVE THE TERMINATION OF THIS
AGREEMENT.
[Balance of page intentionally left blank. Signature page follows.]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Pledge and Security
Agreement to be duly executed and delivered as of the day and year first above
written.
DEBTOR:
------
MRS. FIELDS. ORIGINAL COOKIES, INC., a Delaware
corporation
By:_____________________________
Title:___________________________
SECURED PARTY:
-------------
LASALLE NATIONAL BANK, a national banking
association
By:_____________________________
Title:___________________________
<PAGE>
EXHIBIT I
Description of Pledged Stock
----------------------------
Certificate Number of
No. Issuer Class Par Value Shares
----------- ------ ----- --------- ------------
Description of Pledged Instruments
----------------------------------
Original Outstanding
Principal Due Principal
Issuer Date Issued Amount Date Balance
- ------ ----------- --------- ---- -------------
<PAGE>
Schedule 1
Locations of Collateral
-----------------------
<PAGE>
Schedule 2
Jurisdictions
-------------
<PAGE>
_______________________________________________________________________________
_______________________________
MRS. FIELDS' HOLDING COMPANY, INC.
_______________________________
STOCKHOLDERS' AGREEMENT
among
MRS. FIELDS' HOLDING COMPANY, INC.
and
ITS STOCKHOLDERS
________________________________
Dated as of June , 1998
________________________________
________________________________________________________________________________
<PAGE>
STOCKHOLDERS' AGREEMENT
-----------------------
STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of March , 1998,
among Mrs. Fields' Holding Company, Inc., a Delaware corporation (the
"Company"), Capricorn Investors II, L.P., a Delaware limited partnership
("Capricorn"), Harvard Private Capital Holdings, Inc., a Massachusetts
corporation ("Harvard"), the individuals identified on the signature pages
hereto as "Management Investors", the individuals identified on the signature
pages hereto as the "Director Investors", the individuals identified on the
signature pages hereto as the "Other Investors" and such other persons to become
parties to this Agreement as described herein.
W I T N E S S E T H:
-------------------
WHEREAS, the parties hereto deem it in their best interests and in the best
interests of the Company to provide consistent and uniform management for the
Company and desire to enter into this Agreement in order to effectuate that
purpose and to set forth their respective rights and obligations in connection
with their investment in the Company; and
WHEREAS, the parties hereto also desire to restrict the sale, assignment,
transfer, encumbrance or other disposition of the shares of Common Stock, and to
provide for certain rights and obligations in respect thereto as hereinafter
provided;
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein, the parties hereto hereby agree as follows:
Section 1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Affiliate" means as to any Person (a) any Person which directly or
indirectly controls, is controlled by, or is under common control with such
Person, (b) any Person who is a director, officer, partner or principal of such
Person or of any Person which directly or indirectly controls, is controlled by,
or is under common control with such Person, and (c) any individual who is a
member of the immediate family of any Person described in clause (a) or clause
(b) above. For purposes of this definition, "control" of a Person shall mean
the power, direct or indirect, (i) to vote or direct the voting of 5% or more of
the Voting Stock of such Person or (ii) to direct or cause the direction of the
<PAGE>
management and policies of such Person whether by ownership of Capital Stock, by
contract or otherwise.
"Agreement" means this Agreement as in effect on the date hereof and as
hereafter from time to time amended, modified or supplemented in accordance with
the terms hereof.
"Board of Directors" means the Board of Directors of the Company as from
time to time hereafter constituted.
"By-Laws" means the By-Laws of the Company in effect on the date hereof and
as hereafter further amended in accordance with the terms hereof and pursuant to
applicable law.
"Call Notice" has the meaning specified in Section 6.1.
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock of any Person, including, without limitation, shares of
preferred or preference stock, (ii) all partnership interests (whether general
or limited) in any Person which is a partnership, (iii) all membership interests
or limited liability company interests in any limited liability company, and
(iv) all equity or ownership interests in any Person of any other type.
"Cause" means, when used in connection with the termination of a Management
Investor's employment with the Company or any of its Subsidiaries, (i) the
refusal of such Management Investor to implement or adhere to lawful policies or
directives of the Board of Directors consistent with such Management Investor's
employment agreement with the Company; (ii) such Management Investor's
conviction of or entrance of a plea of nolo contendere to (A) a felony, (B) to
any other crime, which other crime is punishable by incarceration for a period
of one year or longer, or (C) other conduct of a criminal nature that may have
an adverse impact on the Company's reputation and standing in the community;
(iii) conduct that is in violation of such Management Investor's common law duty
of loyalty to the Company; (iv) fraudulent conduct by such Management Investor
in connection with the business affairs of the Company, regardless of whether
said conduct is designed to defraud the Company or others; (v) theft,
embezzlement, or other criminal misappropriation of funds by such Management
Investor, whether from the Company or any other person; or (vi) any breach of or
such Management Investor's failure to fulfill any of such Management Investor's
obligations, covenants, agreements, or duties under his employment agreement
with the Company; provided, however, that "Cause" pursuant
-------- -------
2
<PAGE>
to clause (i) or (vi) shall not be deemed to exist unless the Company has given
such Management Investor written notice thereof specifying in reasonable detail
the facts and circumstances alleged to constitute "cause", and 30 days after
such notice such conduct or circumstances has not entirely ceased or been
entirely remedied. Any determination of Cause shall be made by the Board of
Directors, which determination shall be final and binding on a Management
Investor.
"Certificate of Incorporation" means the Certificate of Incorporation of
the Company as in effect on the date hereof and as hereafter from time to time
amended, modified, supplemented or restated in accordance with the terms hereof
and pursuant to applicable law.
"Commission" means the Securities and Exchange Commission and any successor
commission or agency having similar powers.
"Date of Termination" means, with respect to any Management Investor, the
date such Management Investor ceases to be an employee of the Company or any of
its Subsidiaries or, with respect to any Director Investor, the date such
Director Investor ceases to be a director of the Company.
"Director Investor" means any director of the Company who is not a
Management Investor who purchases Common Stock, or receives options to purchase
Common Stock, from the Company, and each Permitted Transferee of any such
Person.
"Exchange Act" means, as of any date, the Securities Exchange Act of 1934,
as amended, or any similar Federal statute then in effect and superseding such
act, and any reference to a particular section thereof shall include a reference
to the comparable section, if any, of such similar Federal statute, and the
rules and regulations thereunder.
"Fair Market Value" means the fair market value of shares of Common Stock
as determined from time to time by the Board of Directors as evidenced by a
resolution thereof.
"Management Investor" means any employee of the Company or any Subsidiary
thereof who purchases Common Stock, or receives options to purchase Common
Stock, from the Company, and each Permitted Transferee of any such Person.
"NASD" means the National Association of Securities Dealers, Inc. and its
successors and assigns.
3
<PAGE>
"Offered Securities" has the meaning specified in Section 4.l(a).
"Other Investor" means any person other than Capricorn, Harvard, the
Management Investors and the Director Investors who purchases Common Stock from
the Company and each Permitted Transferee of any such Person.
"Permitted Transferee" has the meaning specified in Section 3.2.
"Person" means an individual or a corporation, association, partnership,
limited liability company, joint venture, organization, business, trust or any
other entity or organization, including a government or any subdivision or
agency thereof.
"Pro Rata Portion" means, with reference to any Shareholder at any time, a
fraction, the numerator of which is the number of shares of Common Stock then
issued and outstanding and held by such Shareholder or issuable to such
Shareholder pursuant to options that are vested at such time and which such
Shareholder commits to exercise in connection with the transaction giving rise
to the determination of "Pro Rata Portion", and the denominator of which is the
aggregate number of shares of Common Stock then issued and outstanding held by
the Shareholders taken together or issuable pursuant to options that are vested
at such time and which the Shareholders commit to exercise in connection with
the transaction giving rise to the determination of "Pro Rata Portion" taken
together; provided, that options shall be deemed to be vested for such purpose
--------
if they will vest by reason of the transaction giving rise to the determination
of "Pro Rata Portion".
"Put Notice" has the meaning specified in Section 6.3.
"Registrable Securities" means(i) all shares of Common Stock outstanding on
the date hereof and now or hereafter owned of record or beneficially by the
Shareholders, (ii) any shares of Common Stock issued or issuable upon the
exercise of options and (iii) any shares of Capital Stock issued by the Company
in respect of any shares of Common Stock referred to in (i) or (ii) by way of a
stock dividend or stock split or in connection with a combination or subdivision
of shares, reclassification, recapitalization, merger, consolidation or other
reorganization of the Company.
As to any particular Registrable Securities that have been issued, such
securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of under such registration statement, (ii) they shall have been distributed to
the public pursuant to Rule 144 under the Securities Act, (iii) they shall
4
<PAGE>
have been otherwise transferred or disposed of, and new certificates therefor
not bearing a legend restricting further transfer shall have been delivered by
the Company, and subsequent transfer or disposition of them shall not require
their registration or qualification under the Securities Act or any similar
state law then in force, (iv) they shall have ceased to be outstanding, or (v)
with respect to the Registrable Securities held by any Person, when such
Registrable Securities, when aggregated with the Registrable Securities held by
such Person's Affiliates, constitute 1% or less of the shares of Common Stock at
the time outstanding.
"Registration Expenses" shall mean any and all out-of-pocket expenses
incident to the Company's performance of or compliance with Section 5 hereof,
including, without limitation, all Commission, stock exchange and NASD
registration and filing fees, all fees and expenses of complying with securities
and blue sky laws (including the reasonable fees and disbursements of
underwriters' counsel in connection with blue sky qualifications and NASD
filings), all fees and expenses of the transfer agent and registrar for the
Registrable Securities, all printing expenses, the fees and disbursements of
counsel for the Company and of its independent public accountants, including the
expenses of any special audits or "cold comfort" letters required by or incident
to such performance and compliance, and one firm of counsel retained by each
Shareholder exercising its rights under Section 5 hereof, but excluding
underwriting discounts and commissions and applicable transfer and documentary
stamp taxes, if any, which shall be borne by the seller of the Registrable
Securities in all cases.
"Securities Act" means, as of any date, the Securities Act of 1933, as
amended, or any similar Federal statute then in effect and superseding such act,
and any reference to a particular section thereof shall include a reference to
the comparable section, if any, of any such similar Federal statute, and the
rules and regulations thereunder.
"Shareholder" means (i) Capricorn, (ii) Harvard, (iii) any Management
Investor who becomes a party hereto, (iv) any Director Investor who becomes a
party hereto, (v) any Other Investor who becomes a party hereto and (vi) each
Permitted Transferee who becomes a party to or bound by the provisions of this
Agreement in accordance with the terms hereof, in each case for so long as such
person continues to hold shares of Common Stock.
"Subsidiary" means, as to any Person, another Person of which outstanding
Voting Stock having the power to elect a majority of the members of the board of
directors (or comparable body or authority performing similar functions) of such
other Person are at
5
<PAGE>
the time owned, directly or indirectly through one or more intermediaries, or
both, by such first Person.
"Underwritten Offering" means a firm commitment underwriting through a
nationally recognized underwriter.
"Voting Stock" means Capital Stock of any class or classes, the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for the
election of corporate directors (or Persons performing similar functions).
Section 20 Management.
----------
Section 2.1. Board of Directors. Subject to the terms of this Agreement
------------------
and the Certificate of Incorporation and the By-Laws, the business and affairs
of the Company shall be managed by the Board of Directors, the members of which
will be elected annually by majority vote of the Shareholders and with any
vacancies to be filled by action of the remaining members of the Board of
Directors.
Section 2.2. No Conflict with Agreement. Each Shareholder shall vote its
--------------------------
shares of Voting Stock of the Company, and shall take all actions necessary, to
ensure that the Certificate of Incorporation and By-Laws do not, at any time,
conflict with the provisions of this Agreement.
Section 30 Transfers of Shares of Common Stock and Preferred Stock.
-------------------------------------------------------
Section 3.1. Confirmation of Ownership. The Company hereby confirms that
-------------------------
the number of shares of Common Stock set forth opposite each Shareholder's name
on Annex A hereto has been validly issued to such Shareholder and is fully paid
and nonassessable. Each Shareholder hereby confirms and agrees that as of the
date of this Agreement the number of shares of Common Stock and options to
purchase Common Stock set forth opposite such Shareholder's name on Annex A
hereto is such Shareholder's entire equity interest in the Company and that any
and all agreements heretofore entereed into by such Shareholder with the Company
contemplating the issuance of Common Stock or other equity interest in the
Company to such Shareholder are no longer in effect.
Section 3.2. Restrictions on Transfer. Each Shareholder agrees that such
------------------------
Shareholder will not, directly or indirectly, offer, sell, transfer, assign or
otherwise dispose of (or make any exchange, gift, assignment or pledge of)
(collectively, for purposes of Sections 3 and 4 only, a "transfer") any of its
shares of Common Stock, or op-
6
<PAGE>
tions, warrants or rights to subscribe for or purchase shares of Common Stock
that may be issued hereafter to such Shareholder, except as provided in Section
3.3 or other than an exercise of options, warrants or rights to subscribe for or
purchase shares of Common Stock. In addition to the other restrictions contained
in this Section 3, each Shareholder agrees that it will not, directly or
indirectly, transfer any of its shares of Common Stock (or options, warrants or
rights that may be hereafter issued to such Shareholder) except as permitted
under the Securities Act and other applicable securities laws.
Section 3.3. Exceptions to Restrictions. The provisions of Section 3.2
--------------------------
shall not apply to any of the following transfers:
(a) Any transfer from Capricorn to any Affiliate of Capricorn.
(b) Any transfer from Harvard to any Affiliate of Harvard.
(c) Any transfer from a Management Investor to members of such Management
Investor's immediate family or trusts for their benefit and, upon such
Management Investor's death, such Management Investor's executors,
administrators, testamentary trustees, legatees and beneficiaries.
(d) Any transfer from a Director Investor to members of such Director
Investor's immediate family or trusts for their benefit and, upon such Director
Investor's death, such Director Investor's executors, administrators,
testamentary trustees, legatees and beneficiaries.
(e) Any transfer from an Other Investor to members of such Other Investor's
immediate family or trusts for their benefit and, upon such Other Investor's
death, such Other Investor's executors, administrators, testamentary trustees,
legatees and beneficiaries.
(f) Any transfer approved by the Board of Directors (which approval shall
not be unreasonably withheld, it being understood that the Board of Directors
must provide reasons in writing to the proposed transferor in the event that it
withholds such consent).
(g) Any transfer of shares of Common Stock in accordance with Section 4,
Section 5 or Section 6 hereof.
The exceptions in clauses (a), (b), (c), (d) and (e) above are subject to the
condition that each such Affiliate or other transferee referred to therein (each
a "Permitted Transferee") shall execute the agreement referred to in Section
3.4(b) hereof. The provisions of this
7
<PAGE>
Agreement shall be applied to the shares of Common Stock acquired by any
Permitted Transferee of a Shareholder in the same manner and to the same extent
as such provisions were applicable to such shares of Common Stock in the hands
of such Shareholder. Any reference in this Agreement to Capricorn shall be
deemed to include Capricorn and its Permitted Transferees, any reference in this
Agreement to Harvard shall be deemed to include Harvard and its Permitted
Transferees, any reference to a Management Investor shall be deemed to include
such Management Investor and his Permitted Transferees, any reference to a
Director Investor shall be deemed to include such Director Investor and his
Permitted Transferees and any reference to an Other Investor shall be deemed to
include such Other Investor and its Permitted Transferees.
No transfer of any shares of Common Stock to a Permitted Transferee shall be
effective unless such transfer is made (i) pursuant to an effective registration
statement under the Securities Act and is qualified under applicable state
securities or blue sky laws or (ii) without registration under the Securities
Act and qualification under applicable state securities or blue sky laws, as a
result of the availability of an exemption from registration and qualification
under such laws, and such Shareholder shall have furnished to the Company a
certificate or, if reasonably requested by the Company, an opinion of counsel,
in either case reasonably satisfactory in form and substance to the Company and
its counsel, to that effect; provided, however, that no such certificate or
-------- -------
opinion of counsel shall be required in connection with a transfer of shares of
Common Stock pursuant to Sections 4.1, 4.4 or 4.5 hereof.
Section 3.4. Endorsement of Certificates.
---------------------------
(a) Upon the execution of this Agreement, in addition to any other legend
that the Company may deem advisable under the Securities Act and certain state
securities laws, all certificates representing shares of issued and outstanding
shares of Common Stock that are subject to any of the provisions of this
Agreement shall be endorsed at all times as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO,
AND ARE TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF
A STOCKHOLDERS' AGREEMENT DATED AS OF JUNE __, 1998, AMONG THE
COMPANY AND ITS STOCKHOLDERS. A COPY OF THE ABOVE-REFERENCED
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
8
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN
EXEMPTION FROM REGISTRATION, UNDER SAID ACT.
(b) Except as otherwise expressly provided in this Agreement, all
certificates representing shares of Common Stock hereafter issued to or acquired
by any of the Shareholders or their successors or assigns shall bear the legends
set forth above, and the shares of Common Stock represented by such certificates
shall be subject to the applicable provisions of this Agreement. The
obligations of a party hereto shall be binding upon any transferee to whom
shares of Common Stock are transferred by such party, whether or not such
transfer is permitted under the terms of this Agreement. Prior to consummation
of any such transfer, such party shall cause the transferee to execute an
agreement in form and substance reasonably satisfactory to the other parties
hereto, providing that such transferee shall be bound by and shall fully comply
with the terms of this Agreement. Prompt notice shall be given to the Company
and each Shareholder by the transferor of any transfer (whether or not to a
Permitted Transferee) of any shares of Common Stock.
Section 3.5. Improper Transfer. Any attempt to transfer or encumber any
-----------------
shares of Common Stock other than in accordance with the terms of this Agreement
shall be null and void and neither the Company nor any transfer agent of such
securities shall give any effect to such attempted transfer or encumbrance in
its stock records.
Section 40 Rights of First Refusal; Drag-Along Rights; Tag-Along Rights.
------------------------------------------------------------
Section 4.1. Transfers by Shareholders.
-------------------------
(a) Except for (i) transfers to a Permitted Transferee and (ii) the sale
of securities contemplated by Sections 5 and 6 hereof, if, at any time following
the seventh anniversary of the date hereof, a Shareholder other than Capricorn
(the "Selling Shareholder") receives a bona fide offer, which it desires to
accept (a "Transfer Offer"), to purchase any shares of Common Stock (or options,
warrants or rights to subscribe for or purchase shares of Common Stock) owned by
it, then the Selling Shareholder shall cause the Transfer Offer to be reduced to
writing and shall deliver written notice of such Transfer Offer (a "Transfer
Notice"), accompanied by a copy of such Transfer Offer, to the other
Shareholders (individually and collectively referred to as the "Other
Shareholders") and the Company, setting forth the identity of the offeror, the
number of shares of Common
9
<PAGE>
Stock (or options, warrants, or rights to subscribe for or purchase shares of
Common Stock) proposed to be transferred (the "Offered Securities"), the price
per security contained in the Transfer Offer (the "Transfer Offer Price Per
Security"), and all other terms applicable thereto. The Transfer Notice shall
also contain an irrevocable offer by the Selling Shareholder to sell the Offered
Securities to the Other Shareholders and the Company at a price equal to the
Transfer Offer Price Per Security and upon substantially the same terms as
contained in the Transfer Offer. In the event that the form of consideration
specified in the Transfer Offer is other than cash, the Other Shareholders and
the Company shall have the option of paying the Transfer Offer Price Per
Security in cash in an amount equal to the fair market value of such
consideration unless it is reasonably practicable to deliver substantially
identical consideration, in which case the purchaser may so deliver. Fair market
value shall be determined by a nationally recognized investment banking firm
mutually acceptable to the parties, unless they agree otherwise.
(b) Upon receipt of the Transfer Notice, the Company shall then have the
irrevocable right to accept such offer at the Transfer Offer Price Per Security
and on the other terms specified in the Transfer Offer with respect to all or
any portion of the Offered Securities; provided, however, that in the event the
-------- -------
Company does not purchase any or all of the Offered Securities, the Other
Shareholders shall have the irrevocable right to purchase such unpurchased
Offered Securities (including any such Offered Securities not purchased by such
Other Shareholders hereunder) in proportion to each of such Other Shareholder's
Pro Rata Portion until all of such Offered Securities are purchased or until no
Other Shareholder desires to purchase any more Offered Securities. The rights
of each of the Other Shareholders and the Company pursuant to this Section
4.1(b) shall be exercisable by the delivery of notice to the Selling Shareholder
(the "Notice of Exercise"), within 30 calendar days from the date of delivery of
the Transfer Notice. The Notice of Exercise shall state the total number of
shares of the Offered Securities as to which each of the Other Shareholders or
the Company, as the case may be, is accepting under the offer, without regard to
whether or not the Company purchases any Offered Securities. A copy of such
Notice of Exercise shall also be delivered by the Other Shareholders to the
Company. The rights of the Other Shareholders and the Company pursuant to this
Section 4.1(b) shall terminate if unexercised 30 calendar days after the date of
delivery of the Transfer Notice.
(c) In the event that the Other Shareholders or the Company exercise their
rights to purchase all of the Offered Securities in accordance with Section
4.1(b) hereof, then the Selling Shareholder must sell such Offered Securities to
the Other Shareholders or the Company, as the case may be, at the Transfer Offer
Price Per Security and on the other terms specified in the Transfer Offer.
10
<PAGE>
(d) For purposes of this Section 4, any Person who has failed to give
notice of the election of an option hereunder within the specified time period
will be deemed to have waived its rights with respect thereto on the day
immediately following the last day of such period.
Section 4.2. Transfer of Offered Securities to Third Parties. If all
-----------------------------------------------
notices required to be given pursuant to Section 4.1 hereof have been duly given
and the Other Shareholders and the Company offer to purchase fewer than all of
the Offered Securities pursuant to the provisions hereof, then the Selling
Shareholder shall have the right, subject to compliance by the Selling
Shareholder with the provisions of Section 3.4(b) hereof for a period of 120
calendar days from the earlier of (i) the expiration of the option period
pursuant to Section 4.1 hereof with respect to such Transfer Offer or (ii) the
date on which the Selling Shareholder receives notice from the Other
Shareholders and the Company that they will not exercise the option granted
pursuant to Section 4.1 hereof, to sell to any third party that is not an
Affiliate of the Selling Shareholder the Offered Securities at a price per
Offered Security of not less than 100% of the Transfer Offer Price Per Security
and on substantially the other terms specified in the Transfer Offer.
Section 4.3. Purchase of Offered Securities. The consummation of any
------------------------------
purchase and sale pursuant to Section 4.1 hereof shall take place on such date,
not later than 30 calendar days after the expiration of the option period
pursuant to Section 4.1 hereof with respect to such option, as the Other
Shareholders or the Company, as the case may be, shall select. Prior to the
consummation of any sale pursuant to Section 4.1 hereof, the Selling Shareholder
shall comply with Section 3.4(b) hereof. Upon the consummation of any such
purchase and sale, the Selling Shareholder shall deliver certificates
representing the Offered Securities sold duly endorsed, free and clear of any
liens, against delivery of the Transfer Offer Price Per Security for each of the
Offered Securities purchased by certified or bank check, wire transfer or, in
the case of non-cash consideration, such other manner reasonably acceptable to
the parties.
Section 4.4. Drag-Along Rights.
-----------------
(a) If Capricorn approves or authorizes a sale or exchange, whether
directly or pursuant to a merger, consolidation or otherwise (the "Company
Sale"), of at least a majority of the then outstanding Common Stock in a bona
fide arm's-length transaction to a third party that is not an Affiliate of
Capricorn or of the Company (an "Independent Third Party"), then Capricorn shall
have the right, subject to all the provisions of this Section 4.4 (the "Drag-
Along Right"), to require each of the other Shareholders to (i) if
11
<PAGE>
such Company Sale is structured as a sale of stock, sell, transfer and deliver
or cause to be sold, transferred and delivered to such Independent Third Party
all shares of Common Stock, and other options, warrants or rights to subscribe
for or purchase Common Stock (the "Other Rights"), owned by them; provided,
--------
however, that if Capricorn agrees to sell less than all (the "Amount") of its
- -------
shares of Common Stock to such Independent Third Party, each of the other
Shareholders shall only be required to sell, transfer and deliver to such
Independent Third Party an amount of shares of Common Stock and Other Interests
equal to the shares of Common Stock, and Other Interests, owned by it multiplied
by a fraction the numerator of which is the Amount and the denominator of which
is the total amount of shares of Common Stock, and Other Interests, owned by
Capricorn or (ii) if such Company Sale is structured as a merger, consolidation
or other transaction requiring the consent or approval of the Company's
shareholders, vote such Shareholder's shares of Voting Stock in favor thereof,
and otherwise consent to and raise no objection to such transaction, and waive
any dissenters' rights, appraisal rights or similar rights that such Shareholder
may have in connection therewith; and, in any such event, except to the extent
otherwise provided in subsection (c) of this Section 4.4, each such other
Shareholder shall agree to and shall be bound by the same terms, provisions and
conditions (including, without limitation, provisions in respect of
indemnification) in respect of the Company Sale as are applicable to Capricorn.
The provisions of Sections 4.1 through 4.3 hereof, inclusive, shall not apply to
any transactions to which this Section 4.4 applies.
(b) If Capricorn desires to exercise Drag-Along Rights, it shall give
written notice to the other Shareholders (the "Drag-Along Notice") of the
Company Sale, setting forth the name and address of the transferee, the date on
which such transaction is proposed to be consummated (which shall be not less
than 30 days after the date such Drag-Along Notice is given), and the proposed
amount and form of consideration and terms and conditions of payment offered by
such transferee, including, without limitation, the material terms of any debt
or equity securities proposed to be included as part of such consideration,
identifying the issuer or issuers thereof. If such consideration includes any
non-cash consideration, such notice shall also state the fair market value of
such non-cash consideration and shall describe in reasonable detail the method
by which such value shall have been determined.
(c) The obligations of the Shareholders in respect of a Company Sale under
this Section 4.4 are subject to the satisfaction of the following conditions:
(i) upon the consummation of the Company Sale, the same form of consideration
and the same portion of the aggregate consideration realized upon such Company
Sale shall be paid or distributed in respect of each share of Common Stock then
issued and outstanding (except as contemplated by the proviso to Section 4.4 (a)
hereof); (ii) if any Shareholder is given
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<PAGE>
an option as to the form and amount of consideration to be received, each
Shareholder will be given the same option; (iii) each holder of then currently
vested rights to acquire shares of Common Stock will be given a reasonable
opportunity to exercise such rights prior to the consummation of the Company
Sale and thereby to participate in such sale as a holder of such Common Stock;
(iv) the maximum liability of any Shareholder for indemnification in respect of
all matters arising pursuant to or in connection with the Company Sale shall not
exceed the net proceeds received by such Shareholder from such Company Sale; and
(v) no Shareholders shall be required to make general representations or
warranties regarding the financial condition, business, assets or affairs of the
Company and its Subsidiaries.
Section 4.5. Tag-Along Rights.
----------------
(a) Notwithstanding anything in this Agreement to the contrary, except in
the case of (i) transfers by Capricorn to a Permitted Transferee referred to in
Section 3.3(a) hereof, (ii) transactions where Drag-Along Rights are exercised
pursuant to Section 4.4 hereof and (iii) sales pursuant to Section 5 hereof,
Capricorn shall refrain from effecting any transfer of the Common Stock unless,
prior to the consummation thereof, the other Shareholders shall have been
afforded the opportunity to join in such sale on the basis provided for in this
Section 4.5.
(b) Prior to consummation of such proposed transfer, Capricorn shall cause
the person or group that proposes to acquire such shares (the "Proposed
Purchaser") to offer in writing (the "Purchase Offer") to purchase shares of
Common Stock owned by the other Shareholders, such that the number of shares of
such Common Stock so offered to be purchased from the other Shareholders shall
be equal to the product obtained by multiplying the aggregate number of shares
of Common Stock proposed to be purchased by the Proposed Purchaser by such other
Shareholder's Pro Rata Portion. If the Purchase Offer is accepted by any other
Shareholder, then the number of shares of Common Stock to be sold to the
Proposed Purchaser by Capricorn, shall be reduced by the aggregate number of
shares of Common Stock to be purchased by the Proposed Purchaser from such other
Shareholder pursuant thereto. Such purchase shall be made on the same terms and
conditions as the Proposed Purchaser shall have offered to purchase shares of
Common Stock to be sold by Capricorn (net, in the case of any options, warrants
or rights, of any amounts required to be paid by the holder upon exercise
thereof). The other Shareholders shall have 20 days from the date of receipt of
the Purchase Offer during which to accept such Purchase Offer, and the closing
of such purchase shall occur within 30 days after such acceptance or at such
other time as the other Shareholders and the Proposed Purchaser may agree.
13
<PAGE>
Section 50 Registration Rights.
-------------------
Section 5.1. Demand Registration.
-------------------
(a) Subject to the conditions and limitations hereinafter set forth in
this Section 5.1, following the one year anniversary of the effectuation of an
initial public offering by the Company of the Common Stock, Harvard may request
in writing that the Company effect the registration under the Securities Act of
all or part of Harvard's Registrable Securities specifying in the request the
number and type of Registrable Securities to be registered by Harvard and the
intended method of disposition thereof (such notice is hereinafter referred to
as a "Harvard Request"). A registration requested pursuant to this Section
5.1(a) is referred to herein as a "Demand Registration." Upon receipt of such
Harvard Request, the Company will promptly give written notice of such requested
Demand Registration to all other holders of Registrable Securities, which other
holders shall have the right (subject to the limitations set forth in Section
5.1(f) hereof) to include the Registrable Securities held by them in such
registration and thereupon the Company will, as expeditiously as possible, use
its best efforts to effect the registration under the Securities Act of the
following:
(i) the Registrable Securities that the Company has been so
requested to register by Harvard; and
(ii) all other Registrable Securities that the Company has been
requested to register by any other holder thereof by written request given
to the Company within 10 calendar days after the giving of such written
notice by the Company (which request shall specify the intended method of
disposition of such Registrable Securities), all to the extent necessary to
permit the disposition (in accordance with the intended methods thereof as
aforesaid) of the Registrable Securities so to be registered.
(b) Subject to the proviso set forth in Section 5.1(e) hereof, (i) the
Company shall not be obligated to effect more than (A) one Demand Registration
pursuant to this Section 5.1 at the request of Harvard and (ii) the Company
shall not be obligated to file a registration statement under Section 5.1(a)
hereof unless the Company shall have received requests for such registration
with respect to at least 5% of the outstanding shares of Common Stock.
14
<PAGE>
(c) The Company shall not be obligated to file a registration statement
relating to any Harvard Request under Section 5.1(a) hereof within a period of
12 months after the effective date of any other registration statement filed by
the Company with the Commission.
(d) In connection with any offering pursuant to this Section 5.1, the only
shares that may be included in such offering are (i) Registrable Securities and
(ii) shares of authorized but unissued Common Stock that the Company elects to
include in such offering ("Company Securities").
(e) If the Board of Directors of the Company makes a good faith
determination, certified by the Chief Executive Officer of the Company, that (i)
the filing of a registration statement or the compliance by the Company with its
disclosure obligations in connection with a registration statement would require
the disclosure of material information that the Company has a bona fide business
---- ----
purpose for preserving as confidential or (ii) such registration would be likely
to have an adverse affect on any proposal or plan by the Company to engage in
any financing transaction, acquisition of assets (other than in the ordinary
course of business) or any merger, consolidation, tender offer or similar
transaction, the Company may delay the filing of a registration statement and
shall not be required to maintain the effectiveness thereof or amend or
supplement a registration statement for a period expiring upon the earlier to
occur of (A) the date on which such material information is disclosed to the
public or ceases to be material, in the case of clause (i), (B) the date on
which such transaction is completed or abandoned, in the case of clause (ii), or
(C) 120 days after the Company makes such good faith determination, in the case
of either clauses (i) or (ii); provided that in such event, the holders of
--------
Registrable Securities initiating the request for such registration will be
entitled to withdraw such request, and if such request is withdrawn such
registration will not count as the permitted registration under this Section 5.1
in such event or in any other event, if in the case of any other event, such
holder reimburses the Company for all Registration Expenses relating to such
withdrawn registration.
(f) If, in connection with any Underwritten Offering, the managing
underwriter shall advise the Company and any holder of Registrable Securities
that has requested registration that, in its judgment, the number of securities
proposed to be included in such offering should be limited due to market
conditions, the Company will so advise each holder of Registrable Securities
that has requested registration, and shares shall be excluded from such offering
in the following order until such limitation has been met: First, the
-----
Registrable Securities requested to be included by the Company shall be excluded
until all such Registrable Securities shall have been so excluded; and
thereafter,
- ----------
15
<PAGE>
the Registrable Securities requested to be included in such offering pursuant to
Section 5.1(a)(i) hereof by Harvard or pursuant to Section 5.1(a)(ii) hereof by
other Shareholders shall be excluded pro rata, based on the respective number of
Registrable Securities as to which registration has been so requested by such
Shareholders.
(g) A registration requested pursuant to Section 5.1(a) hereof will not be
deemed to have been effected unless it has become effective; provided, that if
--------
after it has become effective, the offering of Registrable Securities pursuant
to such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court,
such registration will be deemed not to have been effected.
(h) If Harvard specifies in the Harvard Request an Underwritten Offering,
Harvard shall have the right, with the approval of the Company, which approval
shall not be unreasonably withheld, to select the managing underwriter;
provided, however, in the event that the Company has elected to include Company
- -------- -------
Securities in such offering, the Company shall have the right, with the approval
of a majority of the holders of Registrable Securities that have requested to be
included in such offering, which approval shall not be unreasonably withheld, to
select the managing underwriter.
(i) The Company will pay all Registration Expenses incurred in connection
with any Demand Registration effected by it pursuant to this Section 5.1.
Section 5.2. Piggyback Registrations.
-----------------------
(a) If at any time the Company proposes to register any of its equity
securities under the Securities Act (other than a registration on Form S-4 or S-
8 or any successor forms thereto) for the account of another Person or, at any
time following the effectuation of an initial public offering by the Company of
the Common Stock, for its own account, on a form and in a manner that would
permit registration of Registrable Securities for sale to the public under the
Securities Act, it will give written notice to all the holders of Registrable
Securities promptly of its intention to do so, describing such securities and
specifying the form and manner and the other relevant facts involved in such
proposed registration, including, without limitation, (x) the intended method of
disposition of the securities offered, including whether or not such
registration will be effected through an underwriter in an Underwritten Offering
or on a "best efforts" basis, and, in any case, the identity of the managing
underwriter, if any, and (y) the price at which the Registrable Securities are
reasonably expected to be sold. Upon the written request of any holder of
Registrable Securities delivered to the Company within 30 calendar days after
the receipt
16
<PAGE>
of any such notice (which request shall specify the Registrable Securities
intended to be disposed of by such holder), the Company will effect the
registration under the Securities Act of all the Registrable Securities that the
Company has been so requested to register; provided, however, that:
-------- -------
(i) if, at any time after giving such written notice of its intention
to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such securities, the
Company may, at its election, give written notice of such determination to
each holder of Registrable Securities who shall have made a request for
registration as hereinabove provided and thereupon the Company shall be
relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith); and
(ii) if such registration involves an Underwritten Offering, all
holders of Registrable Securities requesting to be included in the
Company's registration must sell their Registrable Securities to the
underwriters selected by the Company on the same terms and conditions as
apply to the Company.
(b) The Company shall not be obligated to effect any registration of
Registrable Securities under this Section 5.2 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange offers,
dividend reinvestment plans or stock option or other employee benefit plans.
(c) If a registration pursuant to this Section 5.2 involves an
Underwritten Offering and the managing underwriter advises the issuer that, in
its opinion, the number of securities proposed to be included in such
registration should be limited due to market conditions, the Company will so
advise each holder of Registrable Securities that has requested registration
pursuant to Section 5.2(a) hereof, and shares shall be excluded from such
offering pro rata, based on the respective number of Registrable Securities as
--- ----
to which registration has been so requested by such Shareholders, until all such
Registrable Securities shall have been so excluded; and thereafter, the
securities requested to be registered by the Company shall be excluded.
(d) In connection with any Underwritten Offering with respect to which
holders of Registrable Securities shall have requested registration pursuant to
this Section 5.2, the Company shall have the right to select the managing
underwriter with respect to the offering; provided that such managing
--------
underwriter shall be a nationally recognized investment banking firm.
17
<PAGE>
(e) The Company will pay all Registration Expenses incurred in connection
with each of the registrations of Registrable Securities effected by it pursuant
to this Section 5.2.
Section 5.3. Registration Procedures.
-----------------------
(a) If and whenever the Company is required to use its best efforts to
effect or cause the registration of any Registrable Securities under the
Securities Act as provided in Section 5.1 or 5.2 hereof, the Company will, as
expeditiously as possible:
(i) prepare and, in any event within 90 calendar days after the end
of the period within which requests for registration may be given to the
Company, file with the Commission a registration statement with respect to
such Registrable Securities and use its best efforts to cause such
registration statement to become and remain effective; provided, that the
--------
Company may discontinue any registration of its securities that is being
effected pursuant to Section 5.2 hereof at any time prior to the effective
date of the registration statement relating thereto;
(ii) prepare and file with the Commission such amendments (including
post-effective amendments) and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep
such registration statement effective for such period as may be requested
by the Shareholders not exceeding nine months and to comply with the
provisions of the Securities Act with respect to the disposition of all the
shares of Common Stock covered by such registration statement during such
period in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such registration statement;
(iii) furnish to each holder of Registrable Securities covered by the
registration statement and to each underwriter, if any, of such Registrable
Securities, such number of copies of a prospectus and preliminary
prospectus for delivery in conformity with the requirements of the
Securities Act, and such other documents, as such Person may reasonably
request, in order to facilitate the public sale or other disposition of the
Registrable Securities;
(iv) use its best efforts to register or qualify such Registrable
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each seller shall
reasonably request, and do any and all
18
<PAGE>
other acts and things which may be reasonably necessary or advisable to
enable such seller to consummate the disposition of the Registrable
Securities owned by such seller in such jurisdictions, except that the
Company shall not for any such purpose be required (A) to qualify to do
business as a foreign corporation in any jurisdiction where, but for the
requirements of this Section 5.3(a)(iv), it is not then so qualified, (B)
to subject itself to taxation in any such jurisdiction, or (C) to take any
action which would subject it to general or unlimited service of process in
any such jurisdiction where it is then so subject;
(v) use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to
enable the seller or sellers thereof to consummate the disposition of such
Registrable Securities;
(vi) immediately notify each seller of Registrable Securities
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act
within the appropriate period mentioned in Section 5.3(a)(ii) hereof, if
the Company becomes aware that the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, and, at the request of any such seller,
deliver a reasonable number of copies of an amended or supplemental
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
(vii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make generally available to its
security holders, in each case as soon as practicable, but not later than
45 calendar days after the close of the period covered thereby (90 calendar
days in case the period covered corresponds to a fiscal year of the
Company), an earnings statement of the Company which will satisfy the
provisions of Section 11(a) of the Securities Act;
(viii) use its best efforts in cooperation with the underwriters to
list such Registrable Securities on each securities exchange on which the
shares of Common Stock are then
19
<PAGE>
listed or, if the shares of Common Stock are not then listed on a
securities exchange, on each securities exchange as the underwriters may
reasonably designate;
(ix) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(x) in the event such registration is effected through an
Underwritten Offering, use its best efforts to obtain a "cold comfort"
letter from the independent public accountants for the Company in customary
form and covering such matters of the type customarily covered by such
letters as the holders of Registrable Securities requesting registration
may reasonably request in order to effect an underwritten public offering
of such Registrable Securities; and
(xi) execute and deliver all instruments and documents (including in
an Underwritten Offering an underwriting agreement in customary form) and
take such other actions and obtain such certificates and opinions as the
holders of Registrable Securities requesting registration may reasonably
request in order to effect an underwritten public offering of such
Registrable Securities.
(b) It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Section 5 in respect of Registrable Securities
that each holder requesting registration thereof shall furnish to the Company
such information regarding the Registrable Securities held by such holder and
the intended method of disposition thereof as the Company shall reasonably
request and as shall be required in connection with the action taken by the
Company; provided, however, that the failure of any holder of Registrable
-------- -------
Securities to furnish such information shall not affect the obligations of the
Company pursuant to this Section 5 with respect to any holder of Registrable
Securities who furnishes such information to the Company. Notwithstanding any
provision to the contrary contained herein, no holder of Registrable Securities
(other than any such holder who holds of record or beneficially owns more than
10% of the outstanding Voting Stock of the Company or who is a director, nominee
for director or executive officer of the Company) shall be required (i) to
furnish any information to the Company or the underwriters in connection with
such registration, other than in a writing furnished by such holder expressly
for use in such registration statement which shall be limited to matters
concerning such holder's identity, its beneficial ownership of securities of the
Company, the class and number of such securities it intends to include in such
registration and its intended method of distribution, or (ii) to make any
representations or warranties to the Company, the underwriters or any other
Person (whether in the underwriting agreement or otherwise), except with respect
to the information so furnished.
20
<PAGE>
(c) Each holder of Registrable Securities will, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
5.3(a)(vi) hereof, forthwith discontinue disposition of the Registrable
Securities pursuant to the registration statement covering such Registrable
Securities until such holder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 5.3(a)(vi) hereof.
(d) If a registration pursuant to Section 5.1 or 5.2 hereof involves an
Underwritten Offering, each holder of Registrable Securities agrees, whether or
not such holder's Registrable Securities are included in such registration, not
to effect any sale or distribution, including any sale pursuant to Rule 144
under the Securities Act, of any Registrable Securities, or of any security
convertible into or exchangeable or exercisable for any Registrable Securities
(other than as part of such Underwritten Offering), without the consent of the
managing underwriter, during a period commencing seven calendar days before and
ending 180 calendar days (or such lesser number as the managing underwriter
shall designate) after the effective date of such registration; provided, that
--------
such period shall not extend beyond the period during which the Company is
subject to such a restriction.
(e) If a registration pursuant to Section 5.1 or 5.2 hereof involves an
Underwritten Offering, the Company agrees, if so required by the managing
underwriter, not to effect any sale or distribution of any of its equity or debt
securities, as the case may be, or securities convertible into or exchangeable
or exercisable for any of such equity or debt securities, as the case may be,
during a period commencing seven calendar days before and ending 180 calendar
days after the effective date of such registration, except for such Underwritten
Offering or except in connection with a stock option plan, stock purchase plan,
savings or similar plan, or an acquisition, merger or exchange offer.
(f) If a registration pursuant to Section 5.1 or 5.2 hereof involves an
Underwritten Offering, any holder of Registrable Securities requesting to be
included in such registration may elect, in writing, not less than five days
prior to the effective date of the registration statement filed in connection
with such registration, not to register such securities in connection with such
registration, unless such holder has agreed with the Company or the managing
underwriter to limit its rights under this Section 5.3.
(g) It is understood that in any Underwritten Offering in addition to any
shares of Common Stock (the "initial shares") the underwriters have committed to
purchase, the underwriting agreement may grant the underwriters an option to
purchase up to a number of additional authorized but unissued shares of Common
Stock (the "option shares")
21
<PAGE>
equal to 15% of the initial shares (or such other maximum amount as the NASD may
then permit), solely to cover over-allotments. Shares of Common Stock proposed
to be sold by the Company and the other sellers shall be allocated between
initial shares and option shares as agreed or, in the absence of agreement,
pursuant to Section 5.1(f) or 5.2(c) hereof, as the case may be. The number of
initial shares and option shares to be sold by requesting holders shall be
allocated pro rata among all such holders on the basis of the relative
--- ----
number of shares of Registrable Securities each such holder has requested to be
included in such registration.
Section 5.4. Indemnification.
---------------
(a) In the event of any registration of any securities under the Securities
Act pursuant to Section 5.1 or 5.2 hereof, the Company will, and it hereby
agrees to, indemnify and hold harmless, to the extent permitted by law, each
seller of any Registrable Securities covered by such registration statement, its
directors, officers, employees and agents, each Person who participates as an
underwriter in the offering or sale of such securities and each other Person, if
any, who controls such seller or underwriter within the meaning of the
Securities Act, as follows:
(i) against any and all loss, liability, claim, damage or expense
whatsoever arising out of or based upon an untrue statement or alleged
untrue statement of a material fact contained in any registration statement
(or any amendment or supplement thereto), including all documents
incorporated therein by reference, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading, or arising out of an untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein not misleading;
(ii) against any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any
state securities law in connection with any matter relating to such
registration statement;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in settlement of any
litigation, or investigation or proceeding by any governmental agency or
body, commenced or threatened, or of any claim whatsoever based upon any
such untrue statement or
22
<PAGE>
omission, or any such alleged untrue statement or omission, if such
settlement is effected with the written consent of the Company; and
(iv) against any and all expense reasonably incurred by them in
connection with investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under clauses
(i), (ii) or (iii) above;
provided, however, that this indemnity does not apply to any loss, liability,
- -------- -------
claim, damage or expense to the extent arising out of an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any such seller or underwriter specifically stating that it is for use
in the preparation of any registration statement (or any amendment thereto) or
any preliminary prospectus or prospectus (or any amendment or supplement
thereto); and provided, further, that the Company will not be liable (A) in the
-------- -------
case of any Underwritten Offering, to any Person who participates as an
underwriter in the offering or sale of Registrable Securities or any other
Person, if any, who controls such underwriter within the meaning of the
Securities Act, or (B) in the case of any offering other than an Underwritten
Offering, to any seller of Registrable Securities covered by such registration
statement or any other Person, if any, who controls such seller within the
meaning of the Securities Act, under the indemnity agreement in this Section
5.4(a) with respect to any preliminary prospectus or final prospectus or final
prospectus as amended or supplemented, as the case may be, to the extent that
any such loss, claim, damage or liability of such underwriter or controlling
Person (or seller or controlling Person, as the case may be) results from the
fact that such underwriter (or seller, as the case may be) sold Registrable
Securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final prospectus or of the
final prospectus as then amended or supplemented, whichever is most recent, if
the Company has previously furnished copies thereof to such underwriter. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such seller, director, officer, employee, agent,
underwriter or controlling Person, and shall survive the transfer of such
securities by such seller.
(b) The Company may require, as a condition to including any Registrable
Securities in any registration statement filed in accordance with Section 5.1 or
5.2 hereof, that the Company shall have received an undertaking reasonably
satisfactory to it from the prospective seller of such Registrable Securities or
any underwriter, to indemnify and
23
<PAGE>
hold harmless (in the same manner and to the same extent as set forth in Section
5.4(a) hereof) the Company and its directors and officers and each other Person,
if any, who controls the Company within the meaning of the Securities Act, with
respect to any statement or alleged statement in or omission or alleged omission
from such registration statement, any preliminary, final or summary prospectus
contained therein, or any such amendment or supplement, if such statement or
alleged statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by or on behalf
of such seller or underwriter specifically stating that it is for use in the
preparation of such registration statement, preliminary, final or summary
prospectus or amendment or supplement; provided, however, that the maximum
-------- -------
liability of any seller of Registrable Securities for such indemnification shall
not exceed the net proceeds received by such seller from the sale of such
Registrable Securities. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or any such
director, officer or controlling Person and shall survive the transfer of such
securities by such seller.
(c) Promptly after receipt by an indemnified party hereunder of written
notice of the commencement of any action or proceeding involving a claim
referred to in this Section 5.4, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to such indemnifying party of the commencement of such action; provided,
--------
however, that the failure of any indemnified party to give notice as provided
- -------
herein shall not relieve the indemnifying party of its obligations under this
Section 5.4, except to the extent (not including any such notice of an
underwriter) that the indemnifying party is actually prejudiced by such failure
to give notice. In case any such action is brought against an indemnified
party, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim (in which case the indemnifying party shall not be liable for the
fees and expenses of more than one counsel for the sellers of Registrable
Securities or for more than one counsel for the underwriters in connection with
any one action or separate but similar or related actions), the indemnifying
party will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified, to the extent that
it may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof.
24
<PAGE>
(d) The Company and each seller of Registrable Securities shall provide
for the foregoing indemnity (with appropriate modifications) in any underwriting
agreement with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority.
Section 5.5. Contribution. In order to provide for just and equitable
------------
contribution in circumstances under which the indemnity contemplated by Section
5.4 hereof is for any reason not available, the parties required to indemnify by
the terms thereof shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity agreement
incurred by the Company, any seller of Registrable Securities and one or more of
the underwriters, except to the extent that contribution is not permitted under
Section 11(f) of the Securities Act. In determining the amounts that the
respective parties shall contribute, there shall be considered the relative
benefits received by each party from the offering of the Registrable Securities
(taking into account the portion of the proceeds of the offering realized by
each), the parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity to correct
and prevent any statement or omission and any other equitable considerations
appropriate under the circumstances. The Company and each Person selling
securities agree with each other that no seller of Registrable Securities shall
be required to contribute any amount in excess of the amount such seller would
have been required to pay to an indemnified party if the indemnity under Section
5.4 hereof were available. The Company and each such seller agree with each
other and the underwriters of the Registrable Securities, if requested by such
underwriters, that it would not be equitable if the amount of such contribution
were determined by pro rata or per capita allocation (even if the underwriters
--- ----
were treated as one entity for such purpose) or for the underwriters' portion of
such contribution to exceed the percentage that the underwriting discount bears
to the initial public offering price of the Registrable Securities. For
purposes of this Section 5.5, each Person, if any, who controls an underwriter
within the meaning of the Securities Act shall have the same rights to
contribution as such underwriter, and each director and each officer of the
Company who signed the registration statement, and each Person, if any, who
controls the Company or a seller of Registrable Securities, shall have the same
rights to contribution as the Company or a seller of Registrable Securities, as
the case may be.
Section 5.6. Rule 144. If the Company shall have filed a registration
--------
statement pursuant to the requirements of Section 12 of the Exchange Act or a
registration statement pursuant to the requirements of the Securities Act, the
Company covenants that it will file the reports required to be filed by it under
the Securities Act and the Exchange Act and the rules and regulations adopted by
the Commission thereunder (or, if the
25
<PAGE>
Company is not required to file such reports, it will, upon the request of any
holder of Registrable Securities, make publicly available other information),
and it will take such further action as any holder of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
holder to sell shares of Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (i) Rule 144
under the Securities Act, as such Rule may be amended from time to time or (ii)
any similar rule or regulation hereafter adopted by the Commission. Upon the
request of any holder of Registrable Securities, the Company will deliver to
such holder a written statement as to whether the Company has complied with such
requirements.
Section 6. Call Right of the Company; Put Right of Management Investors
------------------------------------------------------------
and the Director Investors.
- --------------------------
Section 6.1. Call Right; Purchase Price. If a Management Investor's
--------------------------
employment with the Company or any of its Subsidiaries is terminated, or a
Director Investor' status as a director of the Company is terminated, for any
reason prior to equity securities of the Company having been registered under
the Securities Act, the Company shall have the option, for a period commencing
46 days and ending 90 days after the Date of Termination, to purchase all or any
portion of the shares of Common Stock held by such Management Investor, Director
Investor or his Permitted Transferees. The Company may exercise such option by
giving notice thereof (the "Call Notice") to such Management Investor or
Director Investor prior to the expiration of such period. If such termination
is other than by the Company for Cause, the purchase price applicable to such
shares of Common Stock shall be the Fair Market Value of such shares as of the
Date of Termination and if such termination is by the Company for Cause, the
Company shall have the right to require such Management Investor to forfeit to
the Company on the Termination Date all of the shares of Common Stock held by
such Management Investor or his Permitted Transferees.
Section 6.2. Call Notices. The Call Notice shall specify the number of
------------
shares of Common Stock owned by the Management Investor or Director Investor as
to which the Company is exercising its call right pursuant to Section 6.1 and
shall contain an irrevocable offer to purchase such shares at a price equal to
the price required to be paid by the Company pursuant to Section 6.1.
Section 6.3. Put Right; Sale Price. If a Management Investor's employment
---------------------
with the Company or any of its Subsidiaries is terminated other than for Cause,
or a Director Investor's status a director of the Company is terminated, prior
to equity securities of the
26
<PAGE>
Company having been registered under the Securities Act, then such Management
Investor or Director Investor shall have the right for a period of 45 days after
the Date of Termination to sell all or any portion of his shares of Common Stock
to the Company and the Company shall be obligated to purchase such shares. The
Management Investor or Director Investor may exercise such right by giving
notice thereof (the "Put Notice") to the Company prior to the expiration of such
period. The purchase price applicable to such shares of Common Stock shall be:
(i) if the Management Investor's employment with the Company is terminated
involuntarily other than for Cause, the greater of (A) the amount paid (or
deemed to have been paid) by such Management Investor for such shares and (B)
the Fair Market Value of such shares as of the Date of Termination; (ii) if the
Management Investor's employment with the Company is terminated voluntarily, the
lesser of (A) the amount paid (or deemed to have been paid) by such Management
Investor for such shares and (B) the Fair Market Value of such shares as of the
Date of Termination; (iii) if the Director Investor's status as a director of
the Company is terminated involuntarily, the greater of (A) the amount paid (or
deemed to have been paid) by such Director Investor for such shares and (B) the
Fair Market Value of such shares as of the Date of Termination; or (ii) if the
Director Investor's status as a director of the Company is terminated
voluntarily, the lesser of (A) the amount paid (or deemed to have been paid) by
such Director Investor for such shares and (B) the Fair Market Value of such
shares as of the Date of Termination.
Section 6.4. Put Notices. The Put Notice shall specify the number of
-----------
shares owned by the Management Investor or Director Investor as to which he is
exercising his put right pursuant to Section 6.3 and shall contain an
irrevocable offer to purchase such shares at a price equal to the price required
to be paid by the Company pursuant to Section 6.3.
Section 6.5. Method of Payment. Upon any exercise by the Company of its
-----------------
call right or the Management Investor or Director Investor of his put right
under Section 6, the Company shall pay the applicable purchase price by a
certified check or checks or in cash; provided, however, that, at the election
-------- -------
of the Company, the purchase price may be paid by a certified check or checks
for 25% of the appropriate amount, plus a note of the Company in the principal
amount of 75% of the purchase price, payable in three equal annual installments
commencing on the first anniversary of the issuance thereof and bearing interest
payable annually at the rate then paid by the Company on its bank debt or other
senior debt as determined by the Board of Directors. If the Company is
prohibited by any agreement from making a payment contemplated by this Section 6
or if any Subsidiary of the Company is prohibited from making a payment to the
Company to
27
<PAGE>
enable the Company to make such payment, such payment by the Company shall be
deferred until such time as such payments are permitted.
Section 6.6. Closing. The closing by the Company of any exercise of its
-------
call right under Section 6.1 or of any exercise by a Management Investor or
Director Investor of his put right under Section 6.3 shall take place at the
offices of the Company, or such other place as may be mutually agreed, not less
than 15 nor more than 30 days after the date such right is exercised, as
specified by the Company in its Call Notice or by the Management Investor or the
Director Investor in his Put Notice. At such closing, such Management Investor
or the Director Investor shall deliver certificates for the shares of Common
Stock to be sold to the Company duly endorsed, or accompanied by written
instruments to transfer in form satisfactory to the Company duly executed, by
such Management Investor or Director Investor, free and clear of any liens,
against payment by the Company of the applicable purchase price therefor.
Shares of Common Stock forfeited pursuant to Section 6.1 hereof shall be
transferred to, and reacquired by, the Company without payment of any
consideration by the Company, and neither the Management Investor or the
Director Investor nor any of his successors, heirs, assigns or personal
representatives shall thereafter have any further rights or interests in such
shares or certificates. If certificates containing restrictive legends shall
have theretofore been delivered to the Management Investor or the Director
Investor, such certificates shall be returned to the Company, complete with any
necessary signatures or instruments of transfer.
Section 7. Miscellaneous.
-------------
Section 7.1. Inspection Rights. Each Shareholder shall have the right,
-----------------
upon reasonable prior notice to the Company, to visit and inspect the properties
of the Company and its Subsidiaries and to examine and copy (at its own expense)
their books of record and accounts, and to discuss their affairs, finances, and
accounts with their officers and their current and prior independent public
accountants, all at such times (during normal business hours) as such
Shareholder may reasonably request. The foregoing rights are in addition to,
and are not intended to limit, any rights that the Shareholders may have under
the law of the State of Delaware, including Sections 219 and 220 of the Delaware
General Corporation Law.
Section 7.2. Confidentiality. All materials and information obtained by
---------------
any Shareholder pursuant to Section 7.1 hereof shall be kept confidential and
shall not be disclosed to any third party except (a) as has become generally
available to the public (other than through disclosure by such Shareholder in
contravention of this Agreement), (b) to such Shareholder's directors, officers,
trustees, partners, employees, agents, and professional consultants on a need to
know basis, (c) to any other holder of shares of
28
<PAGE>
Common Stock, (d) to any Person to which such Shareholder offers to sell or
transfer any shares of Common Stock, provided that the prospective transferee
--------
shall agree to be bound by the provisions of this Section 7.2, (e) in any
report, statement, testimony or other submission to any governmental authority
having or claiming to have jurisdiction over such Shareholder, or (f) in order
to comply with any law, rule, regulation, or order applicable to such
Shareholder, or in response to any summons, subpoena or other legal process or
formal or informal investigative demand issued to such Shareholder in the course
of any litigation, investigation or administrative proceeding.
Section 7.3. Successors and Assigns. Except as otherwise provided herein,
----------------------
all the terms and provisions of this Agreement shall be binding upon, shall
inure to the benefit of and shall be enforceable by the respective successors
and assigns of the parties hereto. No Shareholder may assign any of its rights
hereunder to any Person other than a transferee that has complied in all
respects with the requirements of this Agreement (including, without limitation,
Section 3.4 hereof). The Company may not assign any of its rights hereunder to
any other Person. If any transferee of any Shareholder shall acquire any shares
of Common Stock in any manner, whether by operation of law or otherwise, such
shares shall be held subject to all of the terms of this Agreement, and by
taking and holding such shares such Person shall be entitled to receive the
benefits of and be conclusively deemed to have agreed to be bound by and to
comply with all of the terms and provisions of this Agreement.
Section 7.4. Amendment and Modification: Waiver of Compliances; Conflicts.
------------------------------------------------------------
(a) This Agreement may be amended only by a written instrument duly
executed by all of the Shareholders. In the event of the amendment or
modification of this Agreement in accordance with its terms, the Shareholders
shall cause the Board of Directors to meet within 30 calendar days following
such amendment or modification or as soon thereafter as is practicable for the
purpose of adopting any amendment to the Certificate of Incorporation and By-
Laws that may be required as a result of such amendment or modification to this
Agreement, and, if required, proposing such amendments to the Shareholders
entitled to vote thereon, and the Shareholders agree to vote in favor of such
amendments.
(b) Except as otherwise provided in this Agreement, any failure of any of
the parties to comply with any obligation, covenant, agreement or condition
herein may be waived by the party entitled to the benefits thereof only by a
written instrument signed by the party granting such waiver, but such waiver or
failure to insist upon strict compliance
29
<PAGE>
with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
(c) In the event of any conflict between the provisions of this Agreement
and the provisions of any other agreement, the provisions of this Agreement
shall govern and prevail.
Section 7.5. Notices. All notices and other communications provided for
-------
hereunder shall be in writing and delivered by hand or sent by first class mail
or sent by telecopy (with such telecopy to be confirmed promptly in writing sent
by first class mail), sent as follows:
(i) If to Capricorn, addressed to:
Capricorn Investors II, L.P.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Herbert S. Winokur, Jr.
Telecopy: (203) 861-6671
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Randall H. Doud
Telecopy: (212) 735-3636
(ii) If to a Management Investor, a Director Investor or an Other
Investor,addressed to such shareholder at the address set forth in the
stock records of the Company;
(iii) If to the Company, addressed to:
Mrs. Fields' Holding Company, Inc.
c/o Capricorn Investors II, L.P.
30 East Elm Street
Greenwich, Connecticut 06830
Attention: Herbert S. Winokur, Jr.
30
<PAGE>
Telecopy: (203) 861-6671
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Randall H. Doud
Telecopy: (212) 735-3636
(iv) If to Harvard, addressed to:
Harvard Private Capital Group, Inc.
600 Atlantic Avenue
26th Floor
Boston, Massachusetts 02210-2203
Attention: John Sallay
Telecopy: (617) 523-1063
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
Attention: Larry Rowe
Telecopy: (617) 951-7050
or to such other address or addresses or telecopy number or numbers as any of
the parties hereto may most recently have designated in writing to the other
parties hereto by such notice. All such communications shall be deemed to have
been given or made when so delivered by hand or sent by telecopy, or three
business days after being so mailed.
Section 7.6. Entire Agreement: Governing Law.
-------------------------------
(a) This Agreement and the other writings referred to herein or delivered
pursuant hereto which form a part hereof contain the entire agreement among the
parties hereto with respect to the subject transactions contemplated hereby and
supersede all prior oral and written agreements and memoranda and undertakings
among the parties hereto with
31
<PAGE>
regard to this subject matter. The Company represents to the Shareholders that
the rights granted to the holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted or obligations accepted under any
other agreement (including the Certificate of Incorporation) to which the
Company is a party. Neither the Company nor any Subsidiary of the Company will
hereafter enter into any agreement with respect to its equity or debt securities
which is inconsistent with the rights granted to any Shareholder under this
Agreement without obtaining the prior written consent of such Shareholder.
(B) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING EFFECT TO THE CHOICE OF LAW
PRINCIPLES THEREOF).
Section 7.7. Injunctive Relief. The Shareholders acknowledge and agree
-----------------
that a violation of any of the terms of this Agreement will cause the
Shareholders irreparable injury for which an adequate remedy at law is not
available. Therefore, the Shareholders agree that each Shareholder shall be
entitled to, an injunction, restraining order or other equitable relief from any
court of competent jurisdiction, restraining any Shareholder from committing any
violations of the provisions of this Agreement.
Section 7.8. Availability of Agreement. For so long as this Agreement
-------------------------
shall be in effect, this Agreement shall be made available for inspection by any
Shareholder upon request at the principal executive offices of the Company.
Section 7.9. Headings. The section and paragraph headings contained in
--------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
Section 7.10. Recapitalizations, Exchanges, Etc. Affecting the Shares of
----------------------------------------------------------
Common Stock; New Issuances. The provisions of this Agreement shall apply, to
- ---------------------------
the full extent set forth herein with respect to the shares of Common Stock and
to any and all equity or debt securities of the Company or any successor or
assign of the Company (whether by merger, consolidation, sale of assets, or
otherwise) which may be issued in respect of, in exchange for, or in
substitution of, such equity or debt securities and shall be appropriately
adjusted for any stock dividends, splits, reverse splits, combinations,
reclassifications, recapitalizations, reorganizations and the like occurring
after the date hereof.
32
<PAGE>
Section 7.11. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 7.12. Arbitration.
-----------
(a) Any disagreement, dispute, controversy or claim arising out of
or relating to this Agreement or the transactions contemplated hereby,
including, without limitation, the interpretation hereof and any breach,
termination or invalidity hereof, shall be settled exclusively and finally (i)
through good faith negotiation of the parties for a period not in excess of 30
days and (ii) in the event such negotiations do not yield a settlement within
such 30-day period, by arbitration (irrespective of the magnitude thereof, the
amount in controversy or whether such matter would otherwise be considered
justiciable or ripe by a court or arbitral tribunal).
(b) The arbitration shall be conducted in accordance with the
commercial arbitration rules of the American Arbitration Association (the
AArbitration Rules@), except as those rules conflict with the provisions of this
Section 7.12, in which event the provisions of this Section 7.12 shall control.
(c) The arbitral tribunal shall consist of three arbitrators chosen
in accordance with the Arbitration Rules. The arbitration shall be conducted in
New York City. Any submission of a matter for arbitration shall include joint
written instructions of the parties requiring the arbitral tribunal to render a
decision resolving the matters submitted within 60 days following the submission
thereof.
(d) Any decision or award of the arbitral tribunal shall be final and
binding upon the parties to the arbitration proceeding. The parties agree that
the arbitral award may be enforced against the parties to the arbitration
proceeding or their assets wherever they may be found and that a judgment upon
the arbitral award may be entered in any court having jurisdiction thereof.
(e) All out-of-pocket costs and expenses incurred by any party in
connection with the resolution of any disagreement, dispute, controversy or
claim pursuant to this Section 7.12, including, but not limited to, reasonable
attorney's fees and disbursements, shall be borne by the party incurring the
same; provided, however, that the arbitral tribunal shall have the discretion to
-------- -------
declare any party as the Aprevailing party@ with respect to one or more of the
issues that were the subject of the arbitration and to
33
<PAGE>
require the other parties to the arbitration to reimburse such Aprevailing
party@ for some or all of its costs and expenses incurred in connection with
such proceeding.
(f) The costs of the arbitral tribunal shall be divided evenly
between the parties, unless there is a Aprevailing party,@ in which case the
arbitral tribunal may allocate more or all of such costs to the party thereto
that is not the Aprevailing party@.
(g) This Section 7.12 shall not prohibit or limit in any way any
party from seeking or obtaining preliminary or interim injunctive or other
equitable relief from a court for a breach or alleged breach of any of the
covenants and agreements of another party contained in this Agreement.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MRS. FIELDS' HOLDING COMPANY, INC.
By:__________________________
Name:
Title:
HARVARD PRIVATE CAPITAL HOLDINGS, INC.
By:___________________________
Name:
Title:
By:___________________________
Name:
Title:
CAPRICORN INVESTORS II, L.P.
By Capricorn Holdings L.L.C.,
General Partner
By:___________________________
Name:
Title:
35
<PAGE>
MANAGEMENT INVESTORS:
________________________________
Larry A. Hodges
_________________________________
L. Timothy Pierce
______________________________
Michael R. Ward
______________________________
Garry Remington
______________________________
Pat W. Knotts
36
<PAGE>
DIRECTOR INVESTORS:
________________________________
Peter Mullin
________________________________
Richard Ferry
________________________________
Walker Lewis
________________________________
Gilbert Osnos
OTHER INVESTORS:
________________________________
Karen Mills
37
<PAGE>
TABLE OF CONTENTS
(Not Part of Agreement)
<TABLE>
<CAPTION>
Section Heading Page
- ------- ------- ----
<S> <C> <C>
1. Certain Definitions........................................... 2
2. Management.................................................... 7
2.1. Board of Directors; Shareholders...................... 7
2.2. Authority of Board of Directors....................... 8
2.3. No Conflict with Agreement............................ 8
3. Transfers of Shares of Common Stock .......................... 8
3.1. Restrictions on Transfer.............................. 8
3.2. Exceptions to Restrictions............................ 9
3.3. Endorsement of Certificates........................... 10
3.4. Improper Transfer..................................... 11
4. Rights of First Refusal; Drag-Along Rights; Tag-Along Rights.. 11
4.1. Transfers by Shareholders............................. 11
4.2. Transfer of Offered Securities to Third Parties....... 13
4.3. Purchase of Offered Securities........................ 13
4.4. Drag-Along Rights..................................... 14
4.5. Tag-Along Rights...................................... 16
5. Registration Rights........................................... 17
5.1. Demand Registration................................... 17
5.2. Piggyback Registrations............................... 20
5.3. Registration Procedures............................... 22
5.4. Indemnification....................................... 27
5.5. Contribution.......................................... 30
5.6. Rule 144.............................................. 31
6. Call Right of the Company; Put Right of Management Investors.. 32
6.1. Call Right; Purchase Price............................ 32
6.2. Call Notices.......................................... 32
6.3. Put Right; Sale Price................................. 32
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
6.4. Put Notices........................................... 33
6.5. Method of Payment..................................... 33
6.6. Closing............................................... 33
7. Miscellaneous.................................................. 34
7.1. Inspection Rights..................................... 34
7.2. Confidentiality....................................... 34
7.3. Successors and Assigns................................ 35
7.4. Amendment and Modification: Waiver of
Compliances; Conflicts............................... 35
7.5. Notices............................................... 36
7.6. Entire Agreement: Governing Law....................... 37
7.7. Injunctive Relief..................................... 38
7.8. Availability of Agreement............................. 38
7.9. Headings.............................................. 38
7.10. Recapitalizations, Exchanges, Etc.
Affecting the Shares of Common Stock; New Issuances.. 38
7.11. Counterparts.......................................... 38
7.12. Arbitration........................................... 39
</TABLE>
2
<PAGE>
SETTLEMENT AGREEMENT AND RELEASE
SETTLEMENT AGREEMENT AND RELEASE, dated as of June , 1998 (this
"Agreement"), by and among Mrs. Fields' Original Cookies, Inc., a Delaware
corporation ("Mrs. Fields"), Capricorn Investors II, L.P., a Delaware limited
partnership ("Capricorn"), Great American Cookie Company, Inc., a Delaware
corporation ("GACC"), Cookies USA, Inc., a Delaware corporation ("Cookies USA"),
The Jordan Company ("Jordan"), ____________ (the "Franchisee"), and
____________, the controlling investor in the Franchisee (the "Franchisee
Principal").
WHEREAS, Mrs. Fields proposes to enter into an agreement pursuant to which
it would acquire Cookies USA, the parent entity of GACC (the "Proposed GACC
Acquisition");
WHEREAS, Mrs. Fields, its indirect controlling shareholder Capricorn, GACC
and Jordan are defendants in an action brought by certain franchisees of GACC in
the Superior Court of New Jersey, Law Division, Mercer County, under the caption
Robert and Sheila Goldberg, et al, vs. Great American Cookie Company, et al (the
- ---------------------------------------------------------------------------
"Litigation"), in which the plaintiffs in the Litigation have made certain
claims, including claims relating to the Proposed GACC Acquisition;
WHEREAS, Mrs. Fields, without conceding that there is a legal basis for any
such claims, is prepared to address such claims by making certain undertakings
provided for in Sections 2 and 3 of this Agreement (the "Undertakings") if the
Proposed GACC Acquisition is consummated and as an inducement to franchisees of
GACC and the investors in such franchisees (the "GACC Franchisees") to waive and
release such claims and any other claims that they may have relating to their
status as franchisees of GACC on terms and conditions satisfactory to Mrs.
Fields (the "Necessary Releases");
WHEREAS, Mrs. Fields is only willing to complete the Proposed GACC
Acquisition if the Litigation is dismissed with prejudice and the Necessary
Releases are received from all of the GACC Franchisees who are selling stock or
franchises pursuant to or contemporaneously with the Proposed GACC Acquisition
and at least 80% of the other GACC Franchisees;
WHEREAS, Mrs. Fields is willing to provide the Undertakings upon the terms
and conditions of this Agreement but only to GACC Franchisees that provide the
Necessary Releases; and
WHEREAS, the Franchisee and the Franchisee Principal are willing to provide
the Necessary Releases upon the terms and conditions of this Agreement.
NOW, THEREFORE,
The parties to this Agreement hereby agree as follows:
1. The Release. (a) In consideration of the Undertakings and other
good and valuable consideration and to settle a dispute among the parties, the
receipt and sufficiency of which is hereby acknowledged, the Franchisee and the
Franchisee Principal, on behalf of themselves, any predecessor or other past,
current or future direct or indirect investors in or directors, officers and
employees of the Franchisee and each such person's successors and assigns
(collectively with the Franchisee and
<PAGE>
the Franchisee Principal, the "Releasor Group") hereby release any and all
rights, causes and actions, whether or not known or anticipated, that any member
of the Releasor Group may have, directly or indirectly, against Mrs. Fields,
Capricorn, Cookies USA, GACC or Jordan and any of their respective past, current
or future direct or indirect investors, lenders, affiliates, directors, officers
or employees or any such person's successors and assigns (collectively, the
"Releasees") arising out of or otherwise relating to, directly or indirectly,
the Releasor Group's franchising, lease and supplier relationships with GACC or
the Proposed GACC Acquisition (the "Released Matters"), except for any rights,
causes of action or claims that (i) arise out of the express terms of this
Agreement, (ii) arise out of any failure by GACC to remit to any lessor any
sublease payments received from the Franchisee that were required under the
related lease to be remitted to such lessor, (iii) arise out of product
liability for ingredients or products supplied by GACC to the Franchisee, or
(iv) otherwise arise following the completion of the Proposed GACC Acquisition,
or (y) arise out of inadvertent errors of fact in the ordinary course of
business. The Released Matters include but are not limited to the subject matter
of each and every right, cause of action or claim (A) relating to the offering
and purchase of the GACC franchises owned by the Franchisee, (B) relating to the
proximity of any Mrs. Fields owned or franchised stores to GACC owned or
franchised stores or (C) otherwise asserted against any of the Releasees by the
plaintiffs in the Litigation or the Association of Great American Cookie
Franchisees (the "GACC Franchisee Association") in a writing addressed to Mrs.
Fields, Cookies USA, GACC, Capricorn or Jordan.
(1) The members of the Releasor Group understand and agree that this
is a full and final release applicable to all unknown and unanticipated claims,
as well as those known or disclosed, and in consideration of and as an
inducement for the Undertakings, the members of the Releasor Group hereby
expressly waive all rights or benefits which they now have or may in the future
have against any of the Releasees under the provisions of Section 1542 of the
California Civil Code, which section provides that "a general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known to him must have
materially affected his settlement with the debtor", or of provisions of similar
import under the laws of other jurisdictions.
(2) The Franchisee and the Franchisee Principal hereby represent and
warrant that (i) this Agreement has been approved by all necessary action
required to make it a valid and binding obligation of the Franchisee, the
Franchisee Principal and all the other members of the Releasor Group, as the
case may be, and
2
<PAGE>
(ii) this Agreement is the valid, binding and legal obligation of the
Franchisee, the Franchisee Principal and all other members of the Releasor
Group.
(3) Mrs. Fields, Capricorn, GACC, Jordan and their respective
successors and assigns, in consideration of the benefits afforded to them in
consequence of the execution of this Agreement, do hereby release and waive,
irrevocably, any and all rights, causes of actions, whether or not known or
anticipated, that they or any of them has or may have, directly or indirectly,
against the Franchisee, or the Franchisee Principal, or against the GACC
Franchisee Association and its officers, agents and directors (said Association
and its officers, agents and directors being intended beneficiaries of this
provision), arising out of or otherwise relating to, directly or indirectly the
assertion of claims in the Litigation or the Proposed GACC Acquisition; but
excluding claims arising out of or in relation to the execution and performance
of this Agreement.
2. Tag-Along Rights. (a) If following the consummation of the Proposed
GACC Acquisition (i) Mrs. Fields, its parent company Mrs. Fields' Holding
Company, Inc. or any parent company thereof of Mrs. Fields ("MFH") or GACC
proposes to sell, in a single transaction or a series of related transactions,
to an unaffiliated party substantially all of its rights as owner of the GACC
brand or as the franchisor of GACC (the "Franchise Sale"), (ii) Mrs. Fields or
MFH proposes to make a public offering of its common stock (the first such
public offering, the "Qualifying Public Offering") or (iii) Mrs. Fields or MFH
proposes to enter into a transaction that is not a Franchise Sale or a
Qualifying Public Offering but would effect a transfer of control of Mrs. Fields
or of MFH to an unaffiliated party (a "Change of Control" and, together with a
Franchise Sale or a Qualified Public Offering, the "Transaction"), Mrs. Fields
shall notify the Franchisee of the proposed Franchise Sale, the proposed
Qualifying Public Offering or the proposed Change of Control if at the time of
the notice the Franchisee is the franchisee of one or more stores franchising
the GACC, Mrs. Fields or Pretzel Time brands or any other brand or concept then
franchised by MFH or a subsidiary thereof (the "Stores"). In the case of the
proposed Franchise Sale or Change of Control, Mrs. Fields shall give 60 days'
written notice prior to the consummation of the proposed Franchise Sale, and, in
the case of the proposed Qualifying Public Offering, Mrs. Fields shall give not
less than 120 days' notice before the filing of the initial registration
statement prepared in connection with the proposed Qualifying Public Offering.
(1) If upon its receipt of a notice pursuant to Section 2(a) the
Franchisee is not a Qualifying Franchisee (as defined in Section 2(c)), it shall
have
3
<PAGE>
the right, subject to the completion of such proposed Franchise Sale, Qualifying
Public Offering or Change of Control and to the Franchisee then being in
compliance with its obligations under its franchising arrangements with GACC,
Mrs. Fields, Pretzel Time and any other subsidiary of MFH, upon notice to Mrs.
Fields within thirty (30) days of the right of sending of the notice by Mrs.
Fields, to receive, at Mrs. Fields' election, either the greater of $3,500 in
cash or $2,000 per store for each such Store (the "Payment Amount") or, if the
proposed Qualifying Public Offering is completed, shares of common stock of Mrs.
Fields or MFH (the "Shares") issued therein with a value not less than the
Payment Amount based on the initial offering price of such stock in such
Qualifying Public Offering, subject to such reasonable transfer restrictions as
Mrs. Fields determines to be advisable to ensure successful completion of such
Qualifying Public Offering. For purposes of Sections 2 and 3, the Franchisee
shall be deemed to be in compliance with its obligations under its various
franchising agreements if there are no uncured notices of material defaults by
the Franchisee during the period from the date by which a Qualifying Franchisee
must give a notice pursuant to Section 2(c) to exercise its rights through the
Payment Date (as defined in Section 2(e)). The delivery of the Franchisees
notice to Mrs. Fields pursuant to this Section 2(b) shall obligate Mrs. Fields,
within thirty (30) days after the completion of the Transaction, either (i) to
pay the Payment Amount to the Franchisee, or (ii) to deliver the Shares to the
Franchisee.
(2) If upon its receipt of a notice of election pursuant to this
Section 2(c) the Franchisee is the franchisee of five or more Qualifying Stores
or within 30 days after the date of the sending of such notice enters into a
binding agreement to acquire additional stores bringing its number to five or
more Qualifying Stores (as defined below) (a "Qualifying Franchisee"), and
wishes to exercise its rights under this Section 2 in connection with such
proposed Franchise Sale, Qualified Public Offering or Change of Control, it must
do so by providing written notice to Mrs. Fields within 30 days of the date of
the sending by Mrs. Fields of such notice. If the Franchisee is a Qualifying
Franchisee and fails to so notify Mrs. Fields within such 30 day period, it will
be deemed to have waived its rights hereunder. If the Franchisee is a Qualifying
Franchisee, provides such notice within such period and is in material
compliance with its obligations under its franchising arrangements with GACC,
Mrs. Fields, Pretzel Time and any other subsidiary of MFH, or for any other
concept franchised by GACC, Mrs. Fields, or MFH or any of their affiliates, the
Franchisee shall have the right to sell, at the Purchase Price (as defined
below), subject to the terms and conditions hereof, all, but not less than all,
of the Franchisee's Qualifying Stores to Mrs. Fields or a subsidiary thereof.
For purposes of this Section 2, a "Qualifying Store" is deemed to be a Store
which has had cash flow
4
<PAGE>
in the aggregate for the twelve fiscal months (or such fewer number of fiscal
months as it has been operating) most recently completed for which financial
information is available as of the date of the sending of the notice pursuant to
Section 2(a) that is both positive in the aggregate for such period and sales
not more than twenty (20%) percent below the twelve (12) fiscal month period
immediately preceding such period. The delivery of the Franchisee' notice to
Mrs. Fields pursuant to the provisions of this Section 2(c) shall create an
agreement between the Franchisee and Mrs. Fields whereby Mrs. Fields shall
purchase from the Franchisee, and the Franchisee shall sell to Mrs. Fields, the
Franchisee's Qualifying Stores for the Purchase Price and upon the other terms
and conditions contained in this Section 2.
(3) The aggregate purchase price (the "Purchase Price") for all of
the Qualifying Stores of a Qualifying Franchisee shall be (i) in the case of
Stores which have had at least twelve fiscal months of completed operations, 5 x
EBITDA (as defined below) for all such Stores for the twelve fiscal months most
recently completed for which financial information is available as of the date
of the sending of the notice pursuant to Section 2(a) attributable to such
Stores as of the end of the latest such fiscal month and (ii) in the case of
Stores which have had less than twelve fiscal months of completed operations,
the greater of the amount determined pursuant to clause (i) and the documented
development costs of the Franchisee with respect to such Store. "EBITDA" shall
mean, for any period of twelve fiscal months (or such fewer number of fiscal
months as it has been operating), the aggregate earnings before depreciation,
amortization, interest, income taxes and other income (expense) during such
period attributable to the Stores as to which the determination is being made,
as adjusted to reflect any increased annual lease payments necessitated by
reason of the sale of the Qualifying Stores. Mrs. Fields and the Franchisee
agree that the Purchase Price will be allocated to the assets acquired at their
book value with any residual amount allocated to goodwill.
(4) The Purchase Price shall be paid by wire transfer to an account
designated by written notice from the Franchisee at least three business days
before payment is due on the third business day after Mrs. Fields or MFH
receives the proceeds from the Franchise Sale or the Qualifying Public Offering,
as the case may be (the "Payment Date").
(5) Mrs. Fields' obligation to pay the Purchase Price shall be
subject to (i) completion of the Franchise Sale, the Qualifying Public Offering
or the Change of Control and the receipt by Mrs. Fields or MFH of the proceeds
therefrom, (ii) each Store being purchased having customary equipment, inventory
and
5
<PAGE>
smallwares as of the closing, (iii) any required consent to the assignment of
the leases relating to the Stores having been obtained and delivered to Mrs.
Fields in form and substance reasonably satisfactory to Mrs. Fields not later
than 30 days following the giving of the notice of exercise by the Franchisee
pursuant to Section 2(c), and (iv) the Qualifying Franchisee executing and
delivering to Mrs. Fields an asset purchase agreement contemplating a sale of
all the assets and, to the extent indicated below, the ordinary course
liabilities attributable to the Stores to be transferred and containing
representations and warranties, covenants, conditions and indemnification
arrangements as are customary to the purchases of stores from franchisees by
Mrs. Fields, and exemplified in an agreement in the form of the Asset Purchase
Agreement attached hereto. The asset purchase agreement will provide that Mrs.
Fields will assume and indemnify the Qualifying Franchisee against post-closing
leasehold obligations and liabilities and obtain the release of any related
personal guaranties and that the Qualifying Franchisee will retain
responsibility for and indemnify Mrs. Fields against all pre-closing leasehold
obligations and liabilities, all pre-closing taxes, all debt and all other pre-
closing fixed or contingent liabilities (including litigation). Unless otherwise
agreed to by Mrs. Fields in its sole discretion, any employment agreements or
other agreements or arrangements with the Franchisee Principal or affiliates
thereof that relate to the Stores purchased will be terminated on or prior to
the closing without liability or cost to the Store or Mrs. Fields.
3. Other Undertakings. As further consideration for the members of the
Releasor Group providing the release pursuant to Section 1, Mrs. Fields hereby
agrees for the benefit of the Franchisee as follows, each such undertaking to be
subject to the consummation of the Proposed GACC Acquisition and to the
Franchisee then being in compliance with its obligations under its franchising
arrangements with GACC, Mrs. Fields, Pretzel Time and any other subsidiary of
MFH:
(1) The margin that is presently in effect for batter that is
provided to the Franchisee by GACC for use in the Franchisee's Stores will not
be changed for at least three years following completion of the Proposed GACC
Acquisition. For purposes of the foregoing, it is agreed that (i) costs taken
into account shall consist only of ingredients, utilities and labor and other
direct or indirect costs (as defined by Arthur Andersen) and (ii) any and all
increases or decreases in ingredient prices or shipping costs (without respect
to inefficiencies brought about by lower volumes) will be passed through on a
dollar for dollar basis except to the extent that an increase is reasonably
determined by Mrs. Fields to have been caused primarily by
6
<PAGE>
actions of Mrs. Fields and that Mrs. Fields' compliance with this undertaking
will be subject to verification by Mrs. Fields' independent auditors in
connection with their annual audit of Mrs. Fields' financial statements.
(2) At the time that the license agreement relating to any of the
Stores owned by the Franchisee as of the date of this Agreement is next up for
renewal, the Franchisee will be permitted to extend its franchise relating to
such Store for a renewal period equal to the new term of its lease and otherwise
on the terms and conditions as are now applicable under the 1998 version of
GACC's license agreement.
(3) The Franchisee may elect to convert some or all of the Stores
owned by the Franchisee (if there is not an existing MFOC cookie store in the
mall) to Mrs. Fields franchises, subject to the Franchisee entering into Mrs.
Fields' standard form of franchising agreement as then in effect, paying the
difference, if any, between the initial franchise fee it originally paid and the
then current fee required under the new franchise agreement and paying the cost
of conversion in accordance with Mrs. Fields' current store design.
(4) The Franchisee will be eligible on an equal footing with
existing franchisees of Mrs. Fields to acquire new Mrs. Fields and, subject to
then-existing area development rights, Pretzel Time franchises as and when Mrs.
Fields determines to offer them to existing franchises in the geographical areas
where the Franchisee currently owns Stores. In any such cases in which Mrs.
Fields must choose between the Franchisee and other potential franchisees for
the same location, the location will be offered to the best franchisee for the
location that is in good standing, based on criteria that will be developed by
the GACC Franchisee Association (which Mrs. Fields agrees to recognize) and
approved by Mrs. Fields. The same procedures shall apply to any brand or concept
franchised by Mrs. Fields. The procedures set forth in this Section 3(d) shall
not apply to any proposed or potential site in a mall in which a franchisee has
developed or created the opportunity for through his or her own efforts. If a
second GACC franchise is to be developed in a mall where there is an existing
GACC franchised store, the terms of the existing GACC franchise agreement shall
apply.
(5) Mrs. Fields will maintain product development support and
marketing expense for GACC products at no less than their fiscal year 1997
levels.
7
<PAGE>
(6) Any material change made to the GACC franchise agreement will be
made with the involvement of the GACC Franchisee Association.
(7) Mrs. Fields agrees to recognize and discuss with the GACC
Franchisee Association on all material matters directly affecting the GACC
franchisees for so long as the GACC Franchisee Association continues to
represent a majority of the existing GACC franchise stores and its Board of
Directors is elected through democratic procedures.
(8) Unless otherwise agreed to by the GACC Franchisee Association,
Mrs. Fields agrees to maintain the GACC product and brand indefinitely.
4. Undertakings Not Transferable. The Undertakings of Mrs. Fields in
Section 2 are specific to the Franchisee and may not be transferred to any other
party without the prior written consent of Mrs. Fields in its sole and absolute
discretion, but Mrs. Fields shall allow a GACC franchisee's heirs or other
successors by operation of law to exercise the tag-along rights provided for in
Section 2. The benefits of the Undertakings in Section 3 are transferable to a
successor franchisee in conjunction with an assignment of the GACC franchise
agreement.
5. Miscellaneous. This Agreement may be executed in one or more
counterparts, may not be changed orally and is made and shall be governed by and
construed in all respects in accordance with the laws of the State of Delaware,
without regard to the principles of conflicts of laws thereof which might refer
such interpretation to the laws of a different state or jurisdiction. This
Agreement benefits and binds the parties hereto and, subject to Section 4, their
respective successors and assigns. Notices hereunder shall be in writing and
addressed to the address indicated below or to such other address as the
intended recipient has specified in writing, and (assuming actual receipt) are
deemed given when delivered in person, one business day after being sent by
telecopier or by overnight express mail service, or four business days after
being sent by mail. All disputes arising in connection with the interpretation,
performance and enforcement of this Agreement shall be resolved through binding
arbitration under the Federal Arbitration Act and conducted by the American
Arbitration Association under its rules for commercial arbitration, provided
that the arbitrator may award reasonable fees and costs to the prevailing party.
Arbitration shall take place in the state where the respondent's principal place
of business is located.
8
<PAGE>
6. Nonseverability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
Mrs. Fields' Original Cookies, Inc. Capricorn Investors II, L.P.
By:_________________________________ By:_______________________________
Name:_______________________________ Name:_____________________________
Title:______________________________ Title:____________________________
Address: 2855 East Cottonwood Parkway, Suite 400
Address: 30 East Elm Street
Salt Lake City, Utah 84121 Greenwich, Connecticut
06830
Great American Cookie Company, Inc. The Jordan Company
By:_________________________________ By:_______________________________
Name:_______________________________ Name:_____________________________
Title:______________________________ Title:____________________________
Address: 4685 Frederick Drive, SW Address:
9 West 57th Street, Suite
4000
Atlanta, Georgia 30336 New York, New York
10019
Cookies USA, Inc.
By:_________________________________
Name:_______________________________
Title:______________________________
Address: 9 West 57th Street, Suite 4000
New York, New York 10019
9
<PAGE>
The Franchisee: The Franchisee Principal:
[_] ____________________________________
By:__________________________ Name:_______________________________
Name:________________________ Address:
Title:_______________________
Address:
10
<PAGE>
Exhibit 12
MRS. FIELDS AND PREDECESSORS
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
The Original Cookie Company, Incorporated and
Mrs. Fields Inc. and Subsidiaries the Carved-out Portion of Hot Sam Company, Inc.
-------------------------------------------- -------------------------------------------
DECEMBER DECEMBER
FISCAL YEARS ENDED 31, 1995 FISCAL YEARS ENDED 31, 1995
-------------------------------- THROUGH -------------------------------- THROUGH
DECEMBER DECEMBER DECEMBER SEPTEMBER DECEMBER DECEMBER DECEMBER SEPTEMBER
31, 1993 31, 1994 30, 1995 17, 1996 31, 1993 31, 1994 30, 1995 17, 1996
-------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net loss .......................... $(2,243) $(5,320) $(2,368) $(2,304) $ (333) $(5,355) $(2,096) $(5,645)
Add: Income taxes ................. 215 191 241 205 213 224 263 --
Fixed charges ..................... 1,088 2,155 51 80 4,172 4,381 4,268 2,828
------- ------- ------- ------- ------- ------- ------- -------
Total loss ................... $ (940) $(2,974) $(2,076) $(2,019) $ 4,052 $ (750) $ 2,435 $(2,817)
======= ======= ======= ======= ======= ======= ======= =======
Fixed charges:
Total fixed charges ....... $ 1,088 $ 2,155 $ 51 $ 80 $ 4,172 $ 4,381 $ 4,268 $ 2,828
======= ======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges (a) -- -- -- -- 0.97x -- 0.57x --
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(a) 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 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.
<TABLE>
<CAPTION>
Mrs. Fields
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER FISCAL
18, 1996 YEAR 39 39
THROUGH ENDED PRO FORMA WEEKS ENDED WEEKS ENDED PRO FORMA
DECEMBER 28, JANUARY 3, JANUARY 3, SEPTEMBER 27, OCTOBER 3, OCTOBER 3,
1996 1998 1998 1997 1998 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision for
income taxes ..................... $ 3,856 $ 463 $ (1,361) $ (2,767) $ (9,021) $(11,457)
Fixed charges .......................... 2,027 8,891 21,778 5,525 9,549 13,794
Exclude pref. dividends ................ (97) (644) (1,436) (276) (108) (620)
Full minority interest loss ............ -- (138) (307) (2) (268) (268)
-------- -------- -------- -------- -------- --------
Total earnings .................... $ 5,786 $ 8,572 $ 18,674 $ 2,480 $ 152 $ 1,449
======== ======== ======== ======== ======== ========
Fixed charges:
Interest expense ....................... $ 1,867 $ 7,830 $ 19,413 $ 5,070 $ 9,001 $ 12,402
Preferred stock dividends as
adjusted .......................... 160 1,061 2,365 455 548 1,392
-------- -------- -------- -------- -------- --------
Total fixed charges ............... $ 2,027 $ 8,891 $ 21,778 $ 5,525 $ 9,549 $ 13,794
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges(a)...... 2.85x 0.96x 0.86x 0.45x 0.02x 0.11x
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
MRS. FIELDS' ORIGINAL COOKIES, INC.
SUBSIDIARY COMPANIES:
Great American Cookie Company, Inc.
Mrs. Fields Cookies (Canada) Ltd.
Mrs. Fields Cookies Australia
Mrs. Fields' Brand, Inc.
Mrs. Fields' Other Names, Inc.
Fairfield Foods, Inc.
Airport Cookies, Inc.
Pretzel Time, Inc.
Uvest
LV-H&M
H&M Concepts of Idaho, Inc.
<PAGE>
Exhibit 23.1
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.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
November 13, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Mrs. Fields' Original
Cookies, Inc. on Form S-4 of our report on Mrs. Fields Inc. and subsidiaries
dated February 9, 1996, appearing in the Prospectus, which is a part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
November 13, 1998
<PAGE>
Exhibit 23.3
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 this Registration
Statement on Form S-4 and to the reference to our Firm under the caption
"Experts" in the Prospectus.
WEINSTEIN SPIRA & COMPANY P.C.
Houston, Texas
November 13, 1998
<PAGE>
Exhibit 23.4
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. 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.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
November 16, 1998
<PAGE>
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [_]
__________________
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
__________________
MRS. FIELDS' ORIGINAL COOKIES, INC.
(Exact name of obligor as specified in its charter)
Delaware 87-0552899
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(Address of principal executive offices) (Zip code)
__________________
GREAT AMERICAN COOKIE COMPANY, INC.
(Exact name of obligor as specified in its charter)
Delaware 58-1295221
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(Address of principal executive offices) (Zip code)
__________________
THE MRS. FIELDS' BRAND, INC.
(Exact name of obligor as specified in its charter)
Delaware 87-0563472
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121
(Address of principal executive offices) (Zip code)
__________________
10-1/8% Series B Senior Notes due 2004
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-
29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-
44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 9th day of November, 1998.
THE BANK OF NEW YORK
By: /s/ THOMAS C. KNIGHT
-------------------------------------------
Name: THOMAS C. KNIGHT
Title: ASSISTANT VICE PRESIDENT
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin............................................ $ 7,301,241
Interest-bearing balances..................................... 1,385,944
Securities:
Held-to-maturity securities................................... 1,000,737
Available-for-sale securities................................. 4,240,655
Federal funds sold and Securities pur-
chased under agreements to resell............................. 971,453
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ..................................................... 38,788,269
LESS: Allowance for loan and
lease losses ............................................... 632,875
LESS: Allocated transfer risk
reserve..................................................... 0
Loans and leases, net of unearned
income, allowance, and reserve.............................. 38,155,394
Assets held in trading accounts................................. 1,307,562
Premises and fixed assets (including
capitalized leases)........................................... 670,445
Other real estate owned......................................... 13,598
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Investments in unconsolidated
subsidiaries and associated
companies.................................................... 215,024
Customers' liability to this bank on
acceptances outstanding...................................... 974,237
Intangible assets.............................................. 1,102,625
Other assets................................................... 1,944,777
-----------
Total assets................................................... $59,283,692
===========
LIABILITIES
Deposits:
In domestic offices.......................................... $26,930,258
Noninterest-bearing ......................................... 11,579,390
Interest-bearing ............................................ 15,350,868
In foreign offices, Edge and
Agreement subsidiaries, and IBFs............................. 16,117,854
Noninterest-bearing ......................................... 187,464
Interest-bearing ............................................ 15,930,390
Federal funds purchased and Securities
sold under agreements to repurchase.......................... 2,170,238
Demand notes issued to the U.S.
Treasury..................................................... 300,000
Trading liabilities............................................ 1,310,867
Other borrowed money:
With remaining maturity of one year
or less.................................................... 2,549,479
With remaining maturity of more than
one year through three years............................... 0
With remaining maturity of more than
three years................................................ 46,654
Bank's liability on acceptances exe-
cuted and outstanding........................................ 983,398
Subordinated notes and debentures.............................. 1,314,000
Other liabilities.............................................. 2,295,520
-----------
Total liabilities.............................................. 54,018,268
-----------
EQUITY CAPITAL
Common stock................................................... 1,135,284
Surplus........................................................ 731,319
Undivided profits and capital
reserves..................................................... 3,385,227
Net unrealized holding gains
(losses) on available-for-sale
securities................................................... 51,233
Cumulative foreign currency transla-
tion adjustments............................................. ( 37,639)
-----------
Total equity capital........................................... 5,265,424
-----------
Total liabilities and equity
capital...................................................... $59,283,692
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Robert E. Keilman
-4-
<PAGE>
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
.
J. Carter Bacot .
Thomas A. Renyi . Directors
Alan R. Griffith .
.
_______________________________
<PAGE>
EXHIBIT 99.3
------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Mrs. Fields' Holding Company, Inc. and
subsidiaries as of December 28, 1996 and January 3, 1998 and for the period from
inception (September 18, 1996) to December 28, 1996 and for the year ended
January 3, 1998 included in this registration statement and have issued our
report thereon dated June 10, 1998. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. Schedule II, "Valuation and Qualifying Accounts", is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Salt Lake City, Utah
June 10, 1998
<PAGE>
EXHIBIT 99.3
-----------------
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
beginning Balance at
Description of period Additions Deductions end of period
- -------------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Period from Inception (September
18, 1996) through December 28, 1996 ............... $ 269,000 $ 106,000 $ -- $ 375,000
=========== =========== =========== ===========
Year Ended January 3, 1998 ........................... $ 375,000 $ 494,000 $ 255,000 $ 614,000
=========== =========== =========== ===========
Period Ended October 3, 1998 (unaudited) ............. $ 614,000 $ 681,000 $ 276,000 $ 1,019,000
=========== =========== =========== ===========
Store Closure Reserve:
Store Closure Reserve ............................... $ 5,060,000 -- 305,000 $ 4,755,000
Transaction Fee Accrual ............................. 2,400,000 -- 2,173,000 227,000
Legal Accrual ........................................ 1,250,000 -- 53,000 1,197,000
Lease Obligation Accrual ............................. 1,200,000 -- 174,000 1,026,000
Finders' Fee Accrual ................................ 735,000 -- -- 735,000
Severance and Related Costs Accrual .................. 655,000 -- 539,000 116,000
----------- ----------- ----------- -----------
Period from Inception (September
18, 1996) through December 28, 1996 .................... $11,300,000 $ -- $ 3,244,000 $ 8,056,000
=========== =========== =========== ===========
Store Closure Reserve ............................... $ 4,755,000 $ 3,395,000 $ 2,684,000 $ 5,466,000
Transaction Fee Accrual ............................. 227,000 -- 227,000 --
Legal Accrual ........................................ 1,197,000 -- 548,000 649,000
Lease Obligation Accrual ............................. 1,026,000 -- 867,000 159,000
Finders' Fee Accrual ................................ 735,000 -- 735,000 --
Severance and Related Costs Accrual .................. 116,000 -- 116,000 --
----------- ----------- ----------- -----------
Year Ended January 3, 1998 ............................. $ 8,056,000 $ 3,395,000 $ 5,177,000 $ 6,274,000
=========== =========== =========== ===========
Store Closure Reserve (unaudited) ................... $ 5,466,000 $ 3,548,000 $ 1,891,000 $ 7,123,000
Transaction Fee Accrual (unaudited) ................. -- -- -- --
Legal Accrual (unaudited) ............................ 649,000 -- 252,000 397,000
Lease Obligation Accrual (unaudited) ................. 159,000 -- 159,000 --
Finders' Fee Accrual (unaudited) .................... -- -- -- --
Severance and Related Costs Accrual (unaudited) ...... -- -- -- --
----------- ----------- ----------- -----------
Period Ended October 3, 1998 (unaudited) ............. $ 6,274,000 $ 3,548,000 $ 2,302,000 $ 7,520,000
=========== =========== =========== ===========
Impairment Reserve (1):
Stores to be Closed .................................. $ 7,587,000 $ -- $ 854,000 $ 6,733,000
Stores to be Franchised .............................. 3,334,000 -- 215,000 3,119,000
----------- ----------- ----------- -----------
Period from Inception (September
18, 1996) through December 28, 1996 ............... $10,921,000 $ -- $ 1,069,000 $ 9,852,000
=========== =========== =========== ===========
Stores to be Closed .................................. $ 6,733,000 $ 1,423,000 $ 3,507,000 $ 4,649,000
Stores to be Franchised .............................. 3,119,000 1,077,000 492,000 3,704,000
----------- ----------- ----------- -----------
Year Ended January 3, 1998 ........................... $ 9,852,000 $ 2,500,000 $ 3,999,000 $ 8,353,000
=========== =========== =========== ===========
Stores to be Closed (unaudited) ...................... $ 4,649,000 $ 1,942,000 1,779,000 $ 4,812,000
Stores to be Franchised (unaudited) .................. 3,704,000 208,000 676,000 3,236,000
----------- ----------- ----------- -----------
Period Ended October 3, 1998 (unaudited) ............... $ 8,353,000 $ 2,150,000 $ 2,455,000 $ 8,048,000
=========== =========== =========== ===========
</TABLE>
(1) THE IMPAIRMENT RESERVE REDUCES THE CARRYING AMOUNTS OF PROPERTY AND
EQUIPMENT AT STORES TO BE CLOSED TO ZERO AND THE CARRYING AMOUNTS OF
PROPERTY AND EQUIPMENT AT STORES TO BE FRANCHISED TO NET REALIZABLE VALUE.
