MRS FIELDS ORIGINAL COOKIES INC - 10-Q Quarterly Report

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MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 29, 2002
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 333-45179

MRS. FIELDS' ORIGINAL COOKIES, INC.
(Exact name of registrant specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		87-0552899 (IRS employer identification no.)
2855 East Cottonwood Parkway, Suite 400 Salt Lake City, Utah (Address of principal executive offices)		84121-7050 (Zip code)

(801) 736-5600
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

The registrant had 400 shares of common stock, $0.01 par value, outstanding at August 1, 2002.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

*PART I—FINANCIAL INFORMATION*
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 29, 2002 and December 29, 2001
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the 13 Weeks Ended June 29, 2002 and June 30, 2001
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the 26 Weeks Ended June 29, 2002 and June 30, 2001
	Condensed Consolidated Statements of Cash Flows for the 26 Weeks Ended June 29, 2002 and June 30, 2001
	Notes to Condensed Consolidated Financial Statements
Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
*PART II—OTHER INFORMATION*
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K

PART 1—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(Dollars in thousands)

ASSETS

			June 29, 2002			December 29, 2001
CURRENT ASSETS:
	Cash and cash equivalents		$	1,919		$	3,503
	Accounts receivable, net of allowance for doubtful accounts of $103 and $61, respectively			2,994			2,513
	Amounts due from franchisees and licensees, net of allowance for doubtful accounts of $949 and $1,083, respectively			2,912			4,584
	Amounts due from affiliates			820			552
	Inventories			3,717			3,987
	Prepaid rent and other			813			399
	Assets held for sale			—			1,664

		Total current assets		13,175			17,202

PROPERTY AND EQUIPMENT, at cost:
	Leasehold improvements			35,781			42,205
	Equipment and fixtures			28,818			29,091
	Land			240			240

				64,839			71,536
	Less accumulated depreciation and amortization			(39,962	)		(36,943	)

		Net property and equipment		24,877			34,593

GOODWILL, net of accumulated amortization of $44,866 and $44,858, respectively				103,231			105,513

TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $7,265 and $6,728, respectively				11,386			12,627

DEFERRED LOAN COSTS, net of accumulated amortization of $10,419 and $9,263, respectively				4,789			5,945

AMOUNTS DUE FROM AFFILIATES				1,000			—

OTHER ASSETS				495			457

			$	158,953		$	176,337

The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(Dollars in thousands, except share data)

LIABILITIES AND STOCKHOLDER'S DEFICIT

			June 29, 2002			December 29, 2001
CURRENT LIABILITIES:
	Current portion of long-term debt		$	1,794		$	1,715
	Current portion of capital lease obligations			578			850
	Accounts payable			10,891			16,296
	Bank borrowings under line of credit			8,750			8,990
	Accrued liabilities			2,843			3,152
	Current portion of store closure reserve			1,181			1,182
	Accrued salaries, wages and benefits			4,887			4,219
	Accrued interest payable			1,154			1,163
	Sales taxes payable			673			1,122
	Amounts due to affiliates			937			881
	Current portion of deferred revenue			264			73

		Total current liabilities		33,952			39,643
LONG-TERM DEBT, net of current portion and discount				141,008			141,849
CAPITAL LEASE OBLIGATIONS, net of current portion				348			559
STORE CLOSURE RESERVE, net of current portion				1,169			1,857
DEFERRED REVENUE, net of current portion				2,568			965

		Total liabilities		179,045			184,873

MINORITY INTEREST				15			38

STOCKHOLDER'S DEFICIT:
	Common stock, $.01 par value; 1,000 shares authorized, 400 shares outstanding			—			—
	Additional paid-in capital			63,889			63,889
	Accumulated deficit			(83,867	)		(72,371	)
	Accumulated other comprehensive loss			(129	)		(92	)

		Total stockholder's deficit		(20,107	)		(8,574	)

			$	158,953		$	176,337

The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)
(Dollars in thousands)

			13 Weeks Ended
			June 29, 2002			June 30, 2001
REVENUES:
	Net store and food sales		$	27,954		$	28,622
	Franchising and licensing			6,528			6,571
	Mail order			2,357			2,301
	Management fee revenue			2,600			3,100
	Other operating revenue			1,578			—

		Total revenues		41,017			40,594

OPERATING COSTS AND EXPENSES:
	Selling and store occupancy costs			18,379			17,795
	Cost of sales—store and food			6,638			6,383
	Franchising and licensing			1,868			2,020
	Mail order			1,491			1,310
	General and administrative			10,008			8,646
	Store closure provision (reversal)			38			(109	)
	Impairment—Wal-Mart locations			5,288			—
	Depreciation			3,422			2,897
	Amortization—goodwill and intangibles			349			3,508

	Total operating costs and expenses			47,481			42,450

		Loss from operations		(6,464	)		(1,856	)

OTHER EXPENSE, net:
	Interest expense, net			(4,300	)		(4,314	)
	Other income, net			225			77

		Total other expense, net		(4,075	)		(4,237	)

Loss before provision for income taxes and minority interest				(10,539	)		(6,093	)
PROVISION FOR INCOME TAXES				(33	)		(7	)

Loss before minority interest				(10,572	)		(6,100	)
MINORITY INTEREST				17			2

		Net loss	$	(10,555	)	$	(6,098	)

COMPREHENSIVE LOSS:
	Net loss		$	(10,555	)	$	(6,098	)
	Foreign currency translation adjustment			7			(6	)

		Comprehensive loss	$	(10,548	)	$	(6,104	)

The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)
(Dollars in thousands)

			26 Weeks Ended
			June 29, 2002			June 30, 2001
REVENUES:
	Net store and food sales		$	58,696		$	58,738
	Franchising and licensing			15,388			14,743
	Mail order			4,611			4,315
	Management fee revenue			5,890			6,275
	Other operating revenue			1,711			—

		Total revenues		86,296			84,071

OPERATING COSTS AND EXPENSES:
	Selling and store occupancy costs			37,640			35,367
	Cost of sales—store and food			14,031			13,205
	Franchising and licensing			3,751			3,738
	Mail order			2,563			2,504
	General and administrative			19,085			16,437
	Store closure provision (reversal)			38			(102	)
	Impairment—Wal-Mart locations			5,288			—
	Depreciation			5,847			5,324
	Amortization—goodwill and intangibles			624			6,413

	Total operating costs and expenses			88,867			82,886

		(Loss) income from operations		(2,571	)		1,185

OTHER EXPENSE, net:
	Interest expense, net			(8,717	)		(8,701	)
	Other (expense) income, net			(120	)		87

		Total other expense, net		(8,837	)		(8,614	)

Loss before provision for income taxes and minority interest				(11,408	)		(7,429	)
PROVISION FOR INCOME TAXES				(111	)		(13	)

Loss before minority interest				(11,519	)		(7,442	)
MINORITY INTEREST				23			4

		Net loss	$	(11,496	)	$	(7,438	)

COMPREHENSIVE LOSS:
	Net loss		$	(11,496	)	$	(7,438	)
	Foreign currency translation adjustment			(37	)		(34	)

		Comprehensive loss	$	(11,533	)	$	(7,472	)

The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(Dollars in thousands)

				26 Weeks Ended
				June 29, 2002			June 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(11,496	)	$	(7,438	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			6,471			11,737
		Impairment—Wal-Mart locations			5,288			—
		Amortization of deferred loan costs and accretion of loan discount			1,207			1,340
		Loss (gain) on disposition of assets			104			(99	)
		Minority interest			(23	)		(14	)
		Changes in assets and liabilities:
			Accounts receivable		(481	)		1,560
			Amounts due from franchisees and licensees		1,672			450
			Amounts due to/from affiliates		(1,212	)		(1,179	)
			Inventories		270			183
			Prepaid rent and other		(414	)		(2,462	)
			Other assets		1,626			236
			Accounts payable		(6,506	)		(5,017	)
			Accrued liabilities		(309	)		(923	)
			Store closure reserve		(689	)		(928	)
			Accrued salaries, wages and benefits		668			(193	)
			Accrued interest payable		(9	)		—
			Sales taxes payable		(449	)		(412	)
			Deferred revenue		1,794			180

			Net cash used in operating activities		(2,488	)		(2,979	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment				(4,043	)		(5,177	)
	Proceeds from sale of property and equipment				5,419			267

			Net cash provided by (used in) investing activities		1,376			(4,910	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings under line of credit				(240	)		8,063
	Drafts in transit in excess of borrowing availability				1,101			—
	Principal payments on long-term debt				(813	)		(319	)
	Payment of debt financing costs				—			(186	)
	Principal payments on capital lease obligations				(483	)		(490	)
	Tax sharing distribution to Mrs. Fields' Holdings				—			(300	)

			Net cash (used in) provided by financing activities		(435	)		6,768

	Effect of foreign exchange rate changes on cash				(37	)		(34	)

NET DECREASE IN CASH AND CASH EQUIVALENTS					(1,584	)		(1,155	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					3,503			3,511

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	1,919		$	2,356

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
		Cash paid for interest		$	7,537		$	7,354
		Cash paid for income taxes			71			125

The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Mrs. Fields' Original Cookies, Inc. and subsidiaries ("Mrs. Fields" or the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and, accordingly, do not include all of the information and footnotes required by accounting principles generally accepted in the United States. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position of Mrs. Fields as of June 29, 2002 and December 29, 2001, and the results of its operations and its cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 29, 2001 contained in Mrs. Fields' Annual Report on Form 10-K.

The results of operations for the 13 and 26 weeks ended June 29, 2002 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending December 28, 2002. Loss per share information is not presented as Mrs. Fields is wholly owned by Mrs. Fields' Holding Company, Inc. ("Mrs. Fields' Holding") and, therefore, its shares are not publicly traded.

(2) RECLASSIFICATIONS

Certain reclassifications have been made to the prior period's condensed consolidated financial statements to conform with the current period's presentation.

(3) IMPAIRMENT—WAL-MART LOCATIONS

During the 13 weeks ended June 29, 2002, the Company recorded a non-cash charge of $5.3 million for an impairment of the Company's stores located within Wal-Mart. The impairment was recorded to write down the assets of these locations to their net realizable value based upon their current and historical operating trends. Management is currently in discussions with Wal-Mart to obtain a release from these locations or to identify solutions to minimize or eliminate the operating losses. Management expects to incur future operating losses from the Wal-Mart locations. In addition, management expects to incur significant additional costs associated with the closing and exiting from these locations. However, since management has not completed identification of its plan, these costs are not estimable.

(4) RELATED PARTY TRANSACTIONS

The Company is party to various related party transactions with its parent companies, Famous Brands and Mrs. Fields' Holding, and with TCBY and its affiliates. The intercompany activity with Famous Brands represents payments made by the Company on behalf of Famous Brands for various operating costs. Famous Brands repaid $171,000 in August 2002. The intercompany balance due to Mrs. Fields' Holding is principally the amount due under an Assignment and Assumption Agreement entered into on December 29, 2001 for the assignment of 20 Pretzel Time stores formerly owned and operated by Mrs. Fields' Holding.

Amounts receivable from TCBY primarily represent amounts receivable under the Management Agreement with the retention amount receivable classified as long-term.

Amounts due to Riverport Equipment Co., ("Riverport"), an affiliate of TCBY, are for purchases of supplies and equipment used in the Company owned and operated stores.

Amounts due to/from affiliates and the Company's minority owned subsidiary as of June 29, 2002 and December 29, 2001 are as follows (in thousands):

		June 29, 2002		December 29, 2001
Amounts due from affiliates:
	UVEST—minority interest subsidiary	$	156	$	131
	Famous Brands		171		—
	Riverport		—		406
	TCBY		493		15

			820		552
	TCBY—retention amount, long-term		1,000		—

		$	1,820	$	552

Amounts due to affiliates:
	Mrs. Fields' Holding—note payable	$	516	$	607
	Mrs. Fields' Holding		274		274
	Riverport		147		—

		$	937	$	881

(5) STORE CLOSURE RESERVE

The Company's management reviews the historical and projected operating performance of its stores on a periodic basis to identify under-performing stores for impairment of net property investment or for targeted closing. The Company's policy is to recognize a loss for that portion of the net property investment determined to be impaired. Additionally, when a store is identified for targeted closing, the costs of closing the store are reserved. These costs consist primarily of estimated lease termination costs. Lease termination costs include both one-time settlement payments and continued contractual payments over time under the original lease agreements where no settlement can be reached with the landlord. As a result, although all stores targeted for closure may have been closed, the store closure reserve will continue to have a balance until all cash payments have been made. The Company does not accrue for future expected operating losses.

Management periodically reassesses the remaining store closure reserves based on all available relevant data. If and when a reserve that was established as part of purchase accounting is not fully utilized, the Company reduces the reserve to zero and goodwill is adjusted for the corresponding amount. Reserves for closed stores that are settled on terms more favorable than were originally estimated and expensed through the store closure provision are reversed through the store closure provision (reversal) in the statement of operations. As of June 29, 2002, the remaining store closure reserve was $2.4 million.

Consolidated Analysis

The following table presents a summary of the activity in the store closure reserve during the 26 weeks ended June 29, 2002 and June 30, 2001 (in thousands):

		Mrs. Fields, Inc. and Original Cookie Co						Pretzel Time						Great American						Pretzelmaker						Consolidated
		Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated To Acquisition			Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Total Business Combinations and Company Owned Stores
Balance, December 29, 2001		$	515		$	1,348		$	318		$	202		$	549		$	—