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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: January 1, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ______
Commission File Number: 333-45179
MRS. FIELDS' ORIGINAL COOKIES, INC.
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(Exact name of registrant specified in its charter)
DELAWARE 87-0552899
- ----------------------------------------------- ----------------------------------------------------
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121-7050
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(Address of principal executive offices) (Zip code)
(801) 736-5600
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(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
- ------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X yes ____ no
- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Company had 400 shares of common stock outstanding at March 31, 2000.
Documents incorporated by reference: None
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MRS. FIELDS' ORIGINAL COOKIES, INC.
TABLE OF CONTENTS
PART I.
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Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 11
Item 3. Legal Proceedings....................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders..................................... 11
PART II.
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 12
Item 6. Selected Financial Data................................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 24
Item 8. Financial Statements and Supplementary Data............................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... II-1
PART III.
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Item 10. Directors and Executive Officers of the Registrant...................................... II-1
Item 11. Executive Compensation.................................................................. II-3
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... II-5
Item 13. Certain Relationships and Related Transactions.......................................... II-6
PART IV.
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ II-8
2
PART I
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements based on our current
expectations and projections about future events, developed from the information
currently available to us. The forward-looking statements include, among other
things, our expectations and estimates about Mrs. Fields' Original Cookies, Inc.
("Mrs. Fields") future financial performance, including growth in net sales and
earnings, cash flows from operations, capital expenditures, the ability to
refinance indebtedness, and the sale of assets.
These forward-looking statements are subject to risks, uncertainties and
assumptions, including the following:
. Our ability to realize the expected benefits and cost savings from our prior
acquisitions;
. Performance by franchisees and licensees;
. Difficulties or delays in developing and introducing anticipated new products
or failure of customers to accept new product offerings;
. Changes in consumer preferences and our ability to adequately anticipate such
changes;
. The seasonal nature of our operations;
. Changes in general economic and business conditions;
. Actions by competitors, including new product offerings and marketing and
promotional successes;
. Claims which might be made against Mrs. Fields, including product liability
claims;
. Changes in business strategy, new product lines, changes in raw ingredient
and employee labor costs;
. Changes in our relationships with our franchisees and licensees; and
. Changes in mall customer traffic.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report may not occur.
Item 1. Business
History
Mrs. Fields' Original Cookies, Inc. was formed in September 1996 in
connection with the acquisitions of Mrs. Fields Inc., The Original Cookie
Company, Inc. ("Original Cookie Company") and Hot Sam Company Inc,. ("Hot Sam")
by Mrs. Fields' Holding Company, Inc. ("Mrs. Fields' Holding"), a subsidiary of
Capricorn Investors II, L.P. ("Capricorn"). Capricorn retained Mr. Larry Hodges
as Chief Executive Officer of Mrs. Fields and as of March 31, 2000, Capricorn
had invested more than $30 million in Mrs. Fields through Mrs. Fields' Holding.
In November 1997, Mrs. Fields received as a contribution from Mrs. Fields'
Holding all of the common stock of The Mrs. Fields' Brand, Inc. ("Mrs. Fields'
Brand"). On the same date, Mrs. Fields' Holding also contributed the business of
Mrs. Fields' Pretzel Concepts and 56% of the shares of common stock of Pretzel
Time, Inc. ("Pretzel Time"). In conjunction with this transaction, the Company
issued $100 million of 10 1/8% Series A Senior Notes. In January, June and
December 1998, Mrs. Fields acquired an additional 4%, 10% and the final 30%,
respectively, of Pretzel Time's common stock.
In August 1998, Mrs. Fields consummated an add-on offering of 10 1/8%
Series C Senior Notes and received a capital contribution from Mrs. Fields'
Holding of $29.1 million, which were all of the net proceeds of a concurrent
offering of notes by Mrs. Fields' Holding. Mrs. Fields used the proceeds from
the offering, the capital contribution and other available cash to:
. finance the acquisition of Cookies USA, Inc., the parent of Great
American Cookie Company, Inc. ("Great American")
. finance the acquisition of the stock of two Great American franchisees,
Deblan and Chocolate Chip
3
. finance a tender offer and consent solicitation for all the outstanding
$40 million in total principal amount of Great American's 10 7/8% Senior
Secured Notes due 2001
In September 1998, Mrs. Fields, in connection with the purchase of Great
American, purchased eight additional Great American franchised stores ("Karp")
for $1.9 million.
In October 1998, Mrs. Fields purchased all the retail cookie and related
business and operations of eleven Great American franchised stores ("Cookie
Conglomerate") for $2.8 million.
In November 1998, Mrs. Fields purchased all of the outstanding capital
stock of Pretzelmaker Holdings, Inc. ("Pretzelmaker") for approximately $5.4
million and assumed indebtedness of approximately $1.6 million.
On February 9, 2000, an affiliate of our parent company, Capricorn, entered
into an agreement to acquire TCBY Enterprises, Inc. ("TCBY"), a retail snack
food company. It is expected that, if this acquisition is completed, Mrs. Fields
will enter into a management agreement to provide management services to TCBY.
If completed, this acquisition would occur no earlier than the second quarter of
2000. We cannot be sure that this acquisition will be completed, and there has
been no agreement signed regarding the terms of the management agreement.
Management of Mrs. Fields believes that, if completed, the agreement will be on
terms consistent with what could have been obtained from an unaffiliated third
party and this acquisition would offer Mrs. Fields the opportunity to sell its
products in TCBY stores.
General
Today, Mrs. Fields is one of the largest retailers in the premium snack-
food industry (based on number of units), with cookies and pretzels as its major
product lines. Mrs. Fields is the largest retailer of baked on-premises cookies
(based on the number of units) and the second largest retailer of baked on-
premises pretzels (based on the number of units) in the United States. In
addition, Mrs. Fields is one of the most widely recognized and respected brand
names in the premium cookie industry. Mrs. Fields operates in two industry
segments determined by revenue source: (1) company-owned stores and (2)
franchised and licensed stores and related activity.
Business Strategy. Our objective is to increase sales and profitability at our
continuing company-owned and franchised stores by implementing the key elements
of our long-term business strategy, which include the following:
. Build the Mrs. Fields brand in retail venues other than our traditional
mall-based locations
. Grow concept and product licensing programs and revenues
. Enhance the quality of our company-owned store base
. Improve the productivity of our continuing company-owned stores
. Capitalize on the strong "Mrs. Fields", "Great American", "Pretzel Time"
and "Pretzelmaker" brand names
. Develop new company-owned and franchised stores
. Pursue further strategic acquisitions of related businesses
. Perpetuate franchise growth in all core concepts, including company-owned
cookie and pretzel stores that management has determined to franchise.
We also intend to capitalize on our brand recognition and the perception of
quality among consumers to expand the product line to include products sold in
other retail environments through licensing agreements with other companies.
Product Offerings. The product offerings in our stores consist primarily of (1)
fresh baked cookies, brownies, muffins, and other baked goods and (2) fresh
baked sweet dough and "Bavarian" style pretzels. During fiscal year 1999, our
store revenue mix consisted of the following:
Cookies and Brownies............................................ 63%
Pretzels........................................................ 17%
Beverages....................................................... 19%
Other........................................................... 1%
4
Baked products are made using only pure and high quality vanilla,
chocolate, raisins, nuts and other ingredients. To maintain product quality and
consistency at both company-owned and franchised stores, Mrs. Fields and
Original Cookie stores use centrally manufactured frozen dough, which is
manufactured by outside suppliers according to our proprietary formulas. Great
American stores use refrigerated batter that is shipped daily from our Atlanta
production facility. Pretzel Time uses a dry mix batter that is shipped to the
stores from selected distributors. All products must pass strict quality
assurance and control steps at both the manufacturing plants and the stores.
Product Development. We maintain a product development department which
continually creates and tests new products to attract new customers and
revitalize the interest of current customers. Once a new product is identified,
we develop prototypes to determine the initial formula. Once the product has
been successfully produced, ingredient specifications, formulas, manufacturing
processes, finished product specifications, shelf life, storage and distribution
procedures are established. The new product is either immediately launched
throughout the system, as in the case of seasonal items or simple line
extensions, or test marketed in a limited number of stores. After a trial period
to evaluate both consumer response and store operations' ability to handle the
new product, it is fully commercialized, modified or discontinued.
Marketing and Advertising. We market our products using an in-house marketing
department. Our marketing programs emphasize product sampling, local store
marketing and brand name identification. At the store level, we advertise using
the aroma of fresh-baked cookies, sampling, posters and the attractive
arrangement of finished products to create a store ambiance that is conducive to
sales. We also promote products by offering special packaging and selling other
promotional items We cultivate local customer loyalty by offering regular 20%
discounts to employees in malls where stores are located and occasional other
discounts. Historically, we have spent relatively little on paid advertising,
relying mainly on in-store signage and promotions. We are currently working on
developing catered corporate accounts for both company-owned and franchised
stores and will be building awareness of products geared toward corporate
accounts at the store level for the local market area and through catalogue
sales. We also promote our products as gifts, particularly at holiday time.
Store Operations
Cookies. We operate, franchise and license 943 retail cookie stores: 542 under
the Mrs. Fields brand, 93 under the Original Cookie brand, and 308 under the
Great American brand. The Great American stores are concentrated in the
southeastern and south central states and Mrs. Fields and Original Cookie stores
are strongly represented in the western, midwestern and eastern states. There is
little overlap between Mrs. Fields, Original Cookie and Great American stores
with a dual presence in 18 of the 723 malls in which we have cookie stores.
These stores offer over 50 different types of cookies, brownies and muffins,
which are baked continuously and served fresh throughout the day.
Management believes that Mrs. Fields and Great American have more well-
recognized brand names than does Original Cookie. As a result, we intend to
continue selectively converting our Original Cookie stores to the Mrs. Fields
and Great American brand stores. We will also test the success of converting
selected Great American company-owned stores to Mrs. Fields brand stores. In
addition, any Great American franchisee will have the option to convert its
stores to Mrs. Fields brand franchise stores at its sole expense in areas where
there is no overlap with existing Mrs. Fields brand franchise stores.
Pretzels. We operate and franchise 500 retail pretzel stores: 234 under the
Pretzel Time name, 52 under the Hot Sam name and 214 under the Pretzelmaker
name. Pretzel Time and Pretzelmaker's primary product is an all natural, hand-
rolled soft pretzel, freshly baked at each store location. The Hot Sam pretzel
stores specialize in the Bavarian style pretzel. This product has declined in
popularity in recent years as sweet dough pretzel sales have grown dramatically.
We intend to continue selectively converting Hot Sam stores to Pretzel Time or
Pretzelmaker stores, which we believe will result in an increase in net sales,
comparable store sales and store contribution.
The retail pretzel business has grown more quickly than the retail cookie
business in recent years. We believe that the retail pretzel business has
similar operating characteristics to the retail cookie business that will permit
some co-branding of our products.
We are also growing our business in non-traditional locations that are not
located in shopping malls, but include any high pedestrian traffic areas, such
as second locations within malls, airport concourses, office building
5
lobbies, hospitals, universities, stadiums, and supermarket foyers, that have
easy proximity to pedestrian traffic flow and take advantage of the impulse
nature of our business.
Configuration. We have developed a number of retail configurations that have
wide application and adaptability to a variety of retail environments. In
addition to the stores that have been designed for prime mall locations, we have
developed other formats intended to extend the Company's presence within and
beyond mall locations.
All of the retail store configurations include the same high-quality
marketing, merchandising and design features which customers have come to expect
from Mrs. Fields. The store designs are bright with high-profile trademark
identity. All products are baked throughout the day on the premises with ovens
located in full view of the customer to support the "fresh-baked" image. All
cookie stores are uniformly designed in accordance with the Mrs. Fields,
Original Cookie or Great American prototype. All pretzel stores are uniformly
designed in accordance with the Pretzel Time or Pretzelmaker prototype. Mrs.
Fields and its franchisees also operate cookie kiosks and carts in certain malls
on a year-round basis. Through licensed locations, we also operate kiosks and
carts at airports, universities, stadiums, hospitals and office building
lobbies. Because of their small size, carts and other kiosks do not have baking
equipment, and are supplied with cookie products by a fully equipped store
usually located in the same mall.
Average store size based on square footage is as follows:
Store Type Average Square Footage
Cookie Store 350 - 800
Typical Company-Owned Cookie Store 600 - 700
Pretzel Store 500
Kiosks 100 - 250
Carts 30 - 92
Store Base. As of January 1, 2000, Mrs. Fields' store portfolio consisted of
462 company-owned stores, 722 domestic franchised locations, 133 international
franchised locations and 126 licensed locations. By product, the stores are
distributed as follows:
Company-Owned
------------------------------------------
To be To be Domestic International
Continuing Closed Franchised Franchised Franchised Licensed Total
------------ ------------- ------------- ------------ ------------- ----------- ---------
Mrs. Fields.............. 113 3 18 206 88 114 542
Original Cookie.......... 93 -- -- -- -- -- 93
Great American........... 86 6 1 215 -- -- 308
----- ----- ----- ----- ----- ----- -----
Cookie Subtotal.......... 292 9 19 421 88 114 943
----- ----- ----- ----- ----- ----- -----
Pretzel Time............. 85 -- 1 148 -- -- 234
Pretzelmaker............. 4 -- -- 153 45 12 214
Hot Sam.................. 52 -- -- -- -- -- 52
----- ----- ----- ----- ----- ----- -----
Pretzel Subtotal......... 141 -- 1 301 45 12 500
----- ----- ----- ----- ----- ----- -----
Totals................... 433 9 20 722 133 126 1,443
===== ===== ===== ===== ===== ===== =====
6
As of January 1, 2000, our domestic stores were located in 48 states, Guam
and Washington DC as follows:
Mrs. Fields' Original Cookies, Inc.
Store Geography List
% of
Company- Retail
State Owned Franchised Licensed Total Outlets
- ----- -------- ---------- -------- ----- --------
California 66 91 15 172 11.9%
Texas 43 55 5 103 7.1%
New York 32 24 11 67 4.6%
Ohio 47 13 7 67 4.6%
Florida 17 41 7 65 4.5%
Illinois 27 22 8 57 4.0%
Georgia 13 33 3 49 3.4%
Michigan 25 20 3 48 3.3%
Missouri 3 35 2 40 2.8%
Pennsylvania 15 12 13 40 2.8%
Virginia 17 18 2 37 2.6%
Arizona 12 18 3 33 2.3%
North Carolina 4 23 3 30 2.1%
Colorado 3 23 3 29 2.0%
New Jersey 9 16 3 28 1.9%
Indiana 13 10 4 27 1.9%
Iowa 3 24 -- 27 1.9%
Utah 6 20 1 27 1.9%
Washington 8 17 -- 25 1.7%
Louisiana 12 10 2 24 1.7%
Connecticut 8 11 4 23 1.6%
Wisconsin 16 7 -- 23 1.6%
Alabama -- 19 3 22 1.5%
Tennessee 2 18 2 22 1.5%
Maryland 12 6 3 21 1.5%
Minnesota 3 16 -- 19 1.3%
Massachusetts 6 7 5 18 1.2%
South Carolina 8 6 3 17 1.2%
Nevada 3 8 3 14 1.0%
Kansas 2 10 -- 12 0.8%
Kentucky 3 8 1 12 0.8%
Nebraska 3 9 -- 12 0.8%
Oklahoma 3 7 2 12 0.8%
West Virginia 4 5 1 10 0.7%
Oregon 1 8 -- 9 0.6%
Hawaii 1 7 -- 8 0.6%
Idaho 2 6 -- 8 0.6%
North Dakota -- 7 1 8 0.6%
Arkansas 3 3 1 7 0.5%
New Mexico 1 3 2 6 0.4%
South Dakota 1 5 -- 6 0.4%
New Hampshire 1 4 -- 5 0.3%
Wyoming 1 4 -- 5 0.3%
Mississippi -- 4 -- 4 0.3%
Alaska -- 2 -- 2 0.1%
Delaware 2 -- -- 2 0.1%
Guam -- 2 -- 2 0.1%
Maine 1 1 -- 2 0.1%
Montana -- 2 -- 2 0.1%
Washington DC -- 2 -- 2 0.1%
---- ---- ---- ----- -----
Subtotal 462 722 126 1,310 90.8%
International Locations -- -- 133 133 9.2%
---- ---- ---- ----- -----
TOTAL 462 722 259 1,443 100.0%
==== ==== ==== ===== =====
7
Ingredients, Supplies and Distribution
Ingredients and Supplies. We rely primarily on outside suppliers and
distributors for the ingredients used in our products as well as other items
used in our stores. Mrs. Fields' stores receive frozen products, made according
to our proprietary recipes, from our primary supplier, Pennant Food Corporation,
who currently supplies approximately 98% of Mrs. Fields and Original Cookie
frozen bakery product. The majority of our Hot Sam stores receive frozen pretzel
dough from J&J Foods, Inc. Pennant and J&J use stringent quality controls in
testing ingredients and manufacturing, and products are not released for
distribution unless they pass all quality control steps, including an evaluation
of the finished baked product. Pennant's contract for making frozen products for
Mrs. Fields is renewable every three years. We have identified alternative
suppliers for frozen dough at Mrs. Fields, Original Cookie and Hot Sam.
Our Pretzel Time stores buy a proprietary dry mix from selected
distributors and then mix and bake pretzels at each individual store.
Franchisees buy from various distributors. Pretzelmaker receives frozen pretzel
dough from two separate suppliers.
Great American stores receive "ready-to-bake" refrigerated batter from our
batter facility in Atlanta, which we acquired in the Great American acquisition.
The batter, which has a shelf life of about 90 days, is stored at the batter
facility for an average of one to three weeks, depending on demand, before being
shipped.
Most supplies other than dough (such as beverages and paper products) are
ordered from distributors by either Mrs. Fields or the franchisee and are
directly shipped to the store. We sell Coca Cola soft drinks in our stores under
an exclusive agreement with Coca-Cola USA Fountain.
Distribution. Regional distributors handle distribution of perishable and non-
perishable items to Mrs. Fields and Original Cookie stores weekly. The regional
distributors own and maintain all of the inventory, but are authorized to
purchase inventory items only from authorized vendors at prices that have been
negotiated by Mrs. Fields. Hot Sam and Pretzelmaker distribute perishable and
non-perishable items weekly to stores through selected distribution companies.
Great American stores receive batter from the Atlanta batter facility by
refrigerated common carrier and Pretzel Time and Pretzelmaker franchisees
receive items from a variety of distributors. We ship equipment related items,
including smallwares, equipment and oven parts, directly from public warehouses.
Store Management
Management Structure. We monitor all company-owned and franchised stores with a
staff of regional sales managers. Regional sales managers are responsible for
monitoring all cookie and pretzel stores in their territory. Each regional sales
manager is responsible for overseeing the company-owned or franchised cookie and
pretzel stores within his or her region and reports to one of four regional
vice-presidents of store operations. The field staff is also responsible for
introducing new products and processes to the stores, ensuring proper
implementation and quality control. Each store has an on-site management team
consisting of a manager and an assistant manager. The store manager is
responsible for hiring, training and motivating store personnel.
Management Incentives. Each manager of a company-owned store is eligible for
salary increases and bonuses based upon the performance of his or her store,
including sales, profits and store appearance. We believe that our incentive and
other programs for management have achieved a strong retention rate for
managers. 72% of Mrs. Fields' regional sales managers have been with Mrs. Fields
for at least four years (67% for over five years), and 51% of Mrs. Fields' store
managers have been with Mrs. Fields for at least four years (40% for over five
years).
Training. We believe that store managers are a critical component in creating
an effective retail environment, and accordingly have developed ongoing programs
to improve the quality and effectiveness of our store managers and to increase
retention rates. New store managers are required to attend a two-week training
program at our Salt Lake City training facility and ongoing training courses in
new products, standards, and procedures are made available throughout the year
to all our personnel. New franchisees and store managers of Great American are
required to attend a one-week training program at Great American's Atlanta
training facility, known as "Cookie University." In addition, training courses
are available throughout the year to all Great American and franchisee
personnel.
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Franchise Operations
In accordance with our business strategy, we have been selling, and expect
to continue to sell, selected company-owned stores to franchisees to reduce
costs, increase profitability and to provide for liquidity and the development
of additional stores in the future. We are also actively seeking to franchise
new stores.
Cookies. Each franchisee pays Mrs. Fields an initial franchising fee of $25,000
per Mrs. Fields or Great American store location and is responsible for funding
the building-out of the new store and purchasing initial dough inventory and
supplies, at a total cost of approximately $200,000 and $164,000, respectively
(including the initial franchise fee), although the cost of opening a new store
can vary based on individual operating and location costs. After a store is set
up, a Mrs. Fields franchisee pays royalty fees to us of 6% of the franchised
store's annual gross sales, and a marketing fee of 1% of annual gross sales.
Great American franchisees pay royalty fees of 7% of the franchised store's
annual gross sales. We do not currently anticipate franchising Original Cookie
stores.
Franchisees come from a wide variety of business backgrounds and bring with
them different operating styles and business objectives. Among our franchisees
are full-time store operators, passive investors, retired professionals and
people seeking a second source of income. The majority of our franchisees own
one store. As of January 1, 2000, the 15 largest Mrs. Fields franchisees
operated 160 stores, and the largest Mrs. Fields franchisee operated 16 stores.
Pretzels. Each franchisee pays Pretzel Time an initial franchising fee of
$25,000 per new Pretzel Time store location and is responsible for funding the
building-out of the new store and supplies, at a total cost of approximately
$190,000 to $240,000 (including the initial franchise fee), although the cost of
opening a new store can vary based on individual operating and location costs.
After a store is set up, a franchisee pays royalty fees to Pretzel Time of 7% of
the franchised store's annual gross sales, and a marketing fee of 1% of annual
gross sales.
Each Pretzelmaker franchisee pays an initial franchising fee of $20,000 per
store location and is responsible for funding the building-out of the new store
and supplies, at a total cost of approximately $90,000 to $208,000 (including
the initial franchise fee), although the cost of opening a new store can vary
based on individual operating and location costs. After a store is set up, a
franchisee pays royalty fees of 5% of the franchised store's annual gross sales,
and a marketing fee of 1 1/2% of annual gross sales. We do not franchise Hot Sam
stores.
Franchisee Recruiting and Training. We have been successful in recruiting
franchisees and completing franchise transactions and believe we will continue
to realize significant cash flow from franchising by (1) emphasizing the use of
proprietary dough that minimizes product quality issues and ensures a consistent
product across all outlets, (2) frequent quality, service and cleanliness
evaluations of franchised stores by operations support staff and (3) initial and
continuing training of franchisees to improve their financial and retail sales
skills.
We believe our franchisees are a critical component in creating an
effective retail environment, and accordingly make our ongoing training programs
available to franchisees to improve their quality and effectiveness. Franchisees
are required to attend a two-week training program at our Salt Lake City or
Atlanta training facilities and ongoing training courses in new products,
standards, and procedures are available throughout the year to all franchisee
personnel.
Licensing
In the past few years, we have utilized a "branding" strategy which has
capitalized on the highly-recognized Mrs. Fields brand to build traffic, expand
sales, improve market share, and to increase profits through cultivating
alternative channels of distribution. The following is a list of branding
options, with examples of current licensees within Mrs. Fields' system:
Concept Licensing. We have developed a licensing program for non-mall retail
outlets that enables us to enter difficult-to-reach markets and facilitate brand
exposure through "presence" and "prestige" marketing. Our licensees duplicate
the Mrs. Fields store concept and purchase dough from our various distributors.
Several of these licensees are contract management companies that manage and
operate food service in host locations. Our licensees and their respective
distribution channels include Host Marriott (airports and travel plazas),
ARAMark (stadiums and convention centers) and Holiday Inn Worldwide (hotels).
9
Retail Licensing. We plan to capitalize on our brand recognition and the
perception of quality among consumers to expand the product line to include
products sold in other retail environments, including refrigerated dough, dry-
mix and non-food products, and other applications outside the original scope of
our retail cookie store concept. A current example is Maxfield's Chocolates,
which has the exclusive North American rights to sell boxed chocolates and
chocolate candy bars and offers Mrs. Fields' chocolates throughout the
supermarket industry.
Supply Licensing. We currently have an agreement with United Airlines under
which our mail order division sells cookies to the airline and allows the
airline to promote the Mrs. Fields' brand and products to its first-class
customers. We are pursuing similar relationships to compete with other
manufacturers' brands selling in this channel of business.
Mail Order Business
Our mail order division markets a variety of fresh-baked cookies,
chocolates and other gift items through its mail order gift catalog using toll
free telephone numbers, including "1-800-COOKIES." In February 2000, we also
added fresh, hand-cut flowers to our product line. We believe that there is
significant potential in the mail order business and are developing this
division by targeting both corporate customers and individuals with a history of
purchases at Mrs. Fields stores. We also market our products through our web
site at www.mrsfields.com. Internet sales increased 222% in fiscal year 1999 to
-----------------
$1.2 million from $373,000 in fiscal year 1998. Overall, the mail order
division had $6.4 million in revenues in fiscal year 1999 representing an
increase of approximately 23.1% over sales for fiscal year 1998.
Trademarks
We are the holder of numerous trademarks that have been federally
registered in the United States and in other countries located throughout the
world. We are a party to disputes with respect to trademarks, none of which, in
the opinion of management of Mrs. Fields, is material to Mrs. Fields' business,
financial condition or results of operations.
Competition
We compete for both leasing opportunities and customers with other cookie
and pretzel retailers, as well as other confectionery, sweet snack and specialty
food retailers, including cinnamon rolls, yogurt, ice cream, baked goods and
candy shops. The specialty retail food and snack industry is highly competitive
with respect to price, service, location and food quality, and there are many
well-established competitors with greater resources than those of Mrs. Fields.
We compete with these retailers on the basis of price, quality, location and
service. We face competition from a wide variety of sources, including such
companies as Cinnabon, Auntie Anne's Soft Pretzels and Baskin-Robbins 31
Flavors.
Employees
As of January 1, 2000, we had approximately 3,893 employees in company-
owned stores, of whom approximately 691 were store managers and assistant store
managers and 3,202 were part-time sales assistants. Our typical store employs 5
to 13 employees. During the period from November through February, we may hire
as many as 750 additional part-time employees to handle additional mall traffic.
Most employees are paid on an hourly basis, except store managers. Our employees
are not unionized. We have never experienced any significant work stoppages and
believe that our employee relations are good.
Many of our employees are paid hourly rates based upon the federal minimum
wage. As of January 1, 2000, 602 of our 3,893 employees in company-owned stores
earned the federal minimum wage. Minimum wage increases are expected to
negatively impact our labor costs, but management believes this impact can be
negated in the long-term through increased efficiencies in its operations and,
as necessary, through retail price increases.
10
Seasonality
Our sales and profitability in both the cookie business and the pretzel
business are subject to seasonal fluctuation and are traditionally higher during
the Thanksgiving and Christmas holiday seasons and other gift-giving holidays
due to increased mall traffic and holiday gift purchases.
Management Information Systems
We have made a substantial investment in developing our point-of-sale
management information system, which gathers information transmitted daily to
corporate headquarters from most of the Mrs. Fields brand continuing company-
owned stores. The system tracks sales from the point of purchase through a
central mid-range computer to store, district and corporate management, allowing
management to track performance data and react quickly to developments at the
store level. We installed our upgraded back-office system, along with point-of-
sale registers and new computers in our continuing company-owned Original Cookie
stores, Hot Sam stores, Pretzelmaker stores, Pretzel Time stores and selected
Great American stores as of December 1999.
We have replaced our sales collection systems with software and hardware
that is Year 2000 compliant at a cost of approximately $1.9 million. Funding for
this project was provided by internal cash flow and by a lease finance company.
Prior to January 1, 2000, management assessed Year 2000 issues with respect
to our significant vendors and financial institutions as to their compliance
plans and whether any Year 2000 issues would impede the ability of such vendors
to continue providing goods and services to Mrs. Fields. We did not experience
any disruptions of our operations due to Year 2000 issues or Year 2000 issues
experienced by any of our vendors.
Government Regulation
Mrs. Fields' stores and products are subject to regulation by numerous
governmental authorities, including, without limitation, federal, state and
local laws and regulations governing health, sanitation, environmental
protection, safety and hiring and employment practices.
Item 2. Properties
As of January 1, 2000, Mrs. Fields leased 787 retail stores, of which 331
were subleased to franchisees under terms which cover all obligations of Mrs.
Fields thereunder. Under its franchise agreements, Mrs. Fields has certain
rights to gain control of a retail site in the event of default under the lease
or the franchise agreement. Most of Mrs. Fields' operating leases provide for
the payment of lease rents plus real estate taxes, utilities, insurance, common
area charges and certain other expenses, as well as contingent rents which
generally range from 8% to 10% of net retail store sales in excess of stipulated
amounts.
Mrs. Fields currently leases approximately 50,000 square feet of office
space in Salt Lake City, Utah for its corporate headquarters, product
development, training and mail order operations. Mrs. Fields also owns a 40,000
square foot batter facility in Atlanta, Georgia. Substantially all of the
equipment used in company-owned retail outlets, the batter facility and the
corporate headquarters are owned by Mrs. Fields.
Item 3. Legal Proceedings
In the ordinary course of business, Mrs. Fields is involved in routine
litigation, including franchise disputes and trademark disputes. Mrs. Fields is
not a party to any legal proceedings which, in the opinion of management of Mrs.
Fields, after consultation with legal counsel, is material to its business,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information and Number of Stockholders. Mrs. Fields' Original
Cookies, Inc. is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc.
("Mrs. Fields' Holding"). There is no established trading market for Mrs. Fields
or Mrs. Fields' Holding's common stock.
Dividends. For the fiscal years ended January 2, 1999 and January 1, 2000,
Mrs. Fields did not declare or pay cash dividends. During the fiscal year ended
January 3, 1998, the Company declared and paid a cash dividend of $1,065,000 to
Mrs. Fields' Holding. Mrs. Fields typically does not declare and pay cash
dividends to its common stockholders and has no intention of declaring such
dividends into the foreseeable future.
Item 6. Selected Financial Data
The following table presents historical financial data for Mrs. Fields'
Original Cookies, Inc. and subsidiaries and its predecessors; namely, Mrs.
Fields Inc. and subsidiaries, The Original Cookie Company, Incorporated and the
pretzel business of Hot Sam Company, Inc. as of the dates and for the periods
indicated. The selected historical financial data has been derived from the
audited financial statements of Mrs. Fields and its predecessors. Due to the
acquisitions of the net assets of Mrs. Fields Inc., Original Cookie and Hot Sam
on September 17, 1996, the financial data is not comparable for all periods.
However, in order for the presentations to be meaningful for the periods
presented, certain statement of operations information for the predecessors has
been reclassified to be consistent with the Mrs. Fields historical financial
statement presentation. The selected historical financial data should be read in
conjunction with ''Management's Discussion and Analysis of Financial Condition
and Results of Operations'' and the historical financial statements and the
related notes to it, contained elsewhere in this Form 10-K.
Predecessors
--------------------------------------------------------------------
The Original Cookie
Company, Incorporated
and the Carved-Out Portion
Mrs. Fields Inc. and of Hot Sam Company, Inc.
Subsidiaries(1) Combined(1)
--------------------------------------------------------------------
December
31, 1995 December 31,
52 Weeks Ended through 52 Weeks Ended 1995 through
December 30, September 17, December 30, September 17,
1995 (2) 1996 (2) 1995 (2) 1996 (2)
--------------------------------------------------------------------
(Dollars in thousands)
Statement of Operations Data:
Net store and food sales.................................... $ 59,956 $ 31,115 $ 85,581 $ 54,366
Net store contribution(3)................................... 6,591 3,747 13,063 5,854
Franchising and licensing, net.............................. 5,993 3,836 -- --
General and administrative expenses......................... 15,612 8,984 9,216 7,538
Income (loss) from operations............................... (3,526) (1,742) 2,435 (2,772)
Net loss.................................................... (2,368) (2,304) (2,096) (5,645)
Other Data:
Interest expense............................................ 51 80 4,356 2,895
Total depreciation and amortization......................... 3,525 1,911 6,902 4,937
Capital expenditures........................................ 4,146 1,054 568 1,200
Store contribution for stores in the process of.............
being closed or franchised(3).............................. $ (802) $ (695) $ (1,542) $ (1,751)
Ratio of earnings to fixed charges(4)....................... -- -- -- --
Balance Sheet Data:
Working capital (deficit)................................... $ (3,114) $ (21,704) $ 128 $ (3,640)
Total assets................................................ 23,033 19,144 66,282 59,024
Debt and capital lease obligations, including
current portion............................................ 21,226 21,224 32,357 30,977
Total stockholders' equity (deficit)........................ (28,017) (30,318) 22,588 16,943
12
Mrs. Fields(1)
----------------------------------------------------------
September 18, 53 Weeks 52 Weeks 52 Weeks
1996 through Ended Ended Ended
December 28, January 3, January 2, January 1,
1996(2) 1998(2) 1999(2) 2000(2)
------- ------ ------ ------
(Dollars in thousands)
Statement of Operations Data:
Net store and food sales.............................................. $ 40,849 $127,845 $140,235 $152,268
Net store contribution(3)............................................. 9,707 25,044 20,166 20,802
Franchising and licensing............................................. 1,267 6,563 14,001 28,669
General and administrative expenses................................... 4,035 16,192 19,017 21,972
Store closure provision (benefit)..................................... -- 538 7,303 (1,579)
Income (loss) from operations......................................... 5,649 8,415 (5,389) 10,381
Net income (loss)..................................................... 1,961 (974) (19,143) (8,221)
Other Data:
Interest expense...................................................... 1,867 7,830 13,197 17,880
Total depreciation and amortization................................... 2,344 10,403 19,820 24,206
Capital expenditures.................................................. 1,638 4,678 8,235 5,157
Store contribution for stores in the process of being
closed or franchised(3)............................................ $ 513 $ (1,798) $ (2,054) $ (312)
Ratio of earnings to fixed charges(4)................................. 2.85x -- -- --
Balance Sheet Data:
Working capital (deficit)............................................. $ (2,889) $ 13,133 $(12,727) $ (3,786)
Total assets.......................................................... 110,055 149,684 231,906 208,410
Mandatorily redeemable cumulative preferred stock of subsidiaries..... 3,597 902 1,261 1,070
Debt and capital lease obligations, including current portion......... 67,563 101,081 150,989 146,485
Total stockholder's equity............................................ 16,961 30,765 40,678 34,457
(1) On September 17, 1996, Mrs. Fields completed the acquisitions of
substantially all of the assets and assumed certain liabilities of the
predecessors. As a result of purchase accounting adjustments related to the
acquisitions, the Mrs. Fields' financial statements are not directly
comparable to the predecessors' financial statements.
(2) Mrs. Fields and its predecessors operate using a 52/53-week year ending
near December 31.
(3) Store contribution is determined by subtracting all store operating
expenses including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. Store contribution for stores in the process of being closed or
franchised as a separate caption is not in accordance with accounting
principles generally accepted in the United States. Store contribution may
not be comparable to other similarly titled measures.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued
and net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For fiscal year 1995 and the period December 31, 1995
through September 17, 1996, Mrs. Fields Inc. and subsidiaries' earnings
were insufficient to cover fixed charges by $2,127,000 and $2,099,000,
respectively. For fiscal year 1995 and the period December 31, 1995 through
September 17, 1996, Original Cookie and Hot Sam (combined) earnings were
insufficient to cover fixed charges by $1,833,000 and $5,645,000,
respectively. For the 53 weeks ended January 3, 1998, and the 52 weeks
ended January 2, 1999 and January 1, 2000, Mrs. Fields' earnings were
insufficient to cover fixed charges by $319,000, $18,827,000 and $8,003,000
respectively.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
In 1996, an investor group led by Capricorn Investors II, L.P. formed Mrs.
Fields' Original Cookies, Inc. and The Mrs. Fields' Brand, Inc. as subsidiaries
of Mrs. Fields' Holding Company, Inc.
On September 17, 1996, Mrs. Fields initiated operations when it purchased
substantially all of the assets and assumed certain liabilities of Mrs. Fields
Inc. and subsidiaries, The Original Cookie Company, Incorporated and the pretzel
business of Hot Sam Company, Inc.
Mrs. Fields set out to increase the sales and profitability of its cookie
and pretzel operations by implementing key elements of its business plan coupled
with strategic acquisitions. A key element of the business plan has been and
continues to be the closing or franchising of certain company-owned stores that
do not meet specific financial and geographical criteria established by
management. Implementation of this element of the business plan has resulted in
enhanced operating margins as these stores are franchised or closed. In some of
our tables we refer to stores not planned to be franchised or closed as "core"
stores, meaning continuing company-owned stores. Continuing company-owned stores
will be operated by Mrs. Fields into the foreseeable future. As a result of
converting certain stores to franchises, royalty revenues have and are expected
to continue to increase and net store sales and overhead expenses associated
with operating those stores are expected to decrease.
As Mrs. Fields exits stores it has identified for closure through closing
or franchising, results from operations are expected to improve on both a short-
term and long-term basis. With respect to these specific stores both ongoing
operating losses and negative cash flows are expected to cease.
Cash payments to landlords for early lease termination costs negatively
impact our immediate liquidity position. However, our overall financial position
is expected to be strengthened over time as cash flows from operating activities
increase. As cash is used to fund the store closure plans, corresponding store
closure reserves are reduced which has a neutral impact on working capital and
financial position. Should Mrs. Fields' cost estimates for exiting the remaining
stores not prove sufficient, it would have a negative impact on both liquidity
and results of operations.
Mrs. Fields believes that it has sufficient liquidity to complete its store
closure plans. A complete analysis of Mrs. Fields' store closure plans are
included in Note 5 to the Consolidated Financial Statements.
Mrs. Fields is pursuing growth in both its cookie and pretzel businesses
through strategic acquisitions. Management expects that significant operating
synergies, expense leveraging and geographic market share can be achieved
through targeted acquisitions. On July 25, 1997, a subsidiary of Mrs. Fields'
Holding, Mrs. Fields' Pretzel Concepts, Inc., acquired substantially all of the
assets and assumed certain liabilities of H&M Concepts Ltd. Co., the largest
franchisee of Pretzel Time, Inc. On September 2, 1997, Mrs. Fields' Holding
acquired 56% of the common stock of Pretzel Time, the franchisor of the Pretzel
Time concept.
On November 26, 1997, Mrs. Fields received as a contribution from Mrs.
Fields' Holding of all of the common stock of The Mrs. Fields' Brand, Inc., the
business of Mrs. Fields' Pretzel Concepts and 56% of the shares of common stock
of Pretzel Time. On January 2, 1998 and June 12, 1998, Mrs. Fields acquired an
additional 4% and 10%, respectively, of Pretzel Time common stock, bringing its
total ownership to 70%. On December 9, 1998, Mrs. Fields purchased three percent
of Pretzel Time common stock for $0.5 million in cash and on December 30, 1998
Mrs. Fields completed the acquisition of the remaining outstanding common stock
of Pretzel Time under a stock purchase agreement, for a purchase price of
approximately $4.7 million.
On August 24, 1998, Mrs. Fields acquired all of the outstanding capital
stock and subordinated indebtedness of Cookies USA, the parent company of Great
American Cookie Company, Inc., for a total purchase price of $18.4 million. Mrs.
Fields also retired approximately $38.9 million of outstanding Great American
notes. Concurrently, Cookies USA was merged with and into Mrs. Fields, at which
time Great American became a wholly owned subsidiary of Mrs. Fields. At the same
time Mrs. Fields also purchased the stock of two Great American franchisees,
Deblan Corporation and Chocolate Chip Cookies of Texas, Inc., together owning
and operating 29 Great American
14
franchised stores, for total consideration of $14.4 million. Deblan and
Chocolate Chip were merged with and into Great American at that time. On
September 9, 1998, Mrs. Fields acquired eight Great American franchise stores
(Karp) from a Great American franchisee, for a purchase price of $1.9 million.
On October 5, 1998, Mrs. Fields purchased all of the retail cookie and
related business and operations of eleven Great American franchise stores
(Cookie Conglomerate) from a Great American franchisee for a total purchase
price of $2.8 million.
On November 19, 1998, Mrs. Fields, under a stock purchase agreement among
Pretzelmaker Holdings, Inc., holders of all outstanding capital stock of
Pretzelmaker, and Mrs. Fields, acquired all of the outstanding capital stock of
Pretzelmaker for $5.4 million and assumed liabilities of $1.6 million related to
severance payments in lieu of outstanding stock options and other liabilities.
Year 2000
Prior to January 1, 2000, management assessed the Year 2000 issue and
determined that all internal information technology systems including financial
software, corporate networks, the AS400 system and all other systems are Year
2000 compliant with the exception of systems used for collecting and
communicating sales data from retail locations. This assessment was based
primarily on independent, third-party verification from our vendors and
suppliers.
Mrs. Fields replaced its sales collection systems with software and
hardware that is Year 2000 compliant. The approximate cost of this project was
$1.9 million and included software development and new store computers and
registers. Funding for this project was provided by internal cash flow and by a
lease finance company. No information technology projects were deferred as a
result of our Year 2000 efforts.
Prior to January 1, 2000, we completed an assessment of Year 2000 issues
with respect to our significant vendors and financial institutions as to their
compliance plans and whether any Year 2000 issues would impede the ability of
such vendors to continue providing goods and services to us. Failure of our key
suppliers to remedy their own Year 2000 issues could have delayed shipments of
essential products, thereby disrupting our operations. Furthermore, we rely on
various service providers, such as utility and telecommunication service
companies, which are beyond our control. We did not experience any disruptions
of our operations due to Year 2000 issues or Year 2000 issues experienced by any
of our vendors.
Results of Operations of Mrs. Fields
The following table sets forth, for the periods indicated, certain
information relating to the operations of Mrs. Fields expressed in thousands of
dollars and percentage changes from period to period.
15
% %
For the 53 For the 52 Change For the 52 Change
Weeks Ended Weeks Ended From Weeks Ended From
January 3, January 2, 1997 to January 1, 1998 to
1998 1999 1998 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data: (Dollars in thousands)
Revenues:
Net store and food sales..................................... $127,845 $140,235 9.7% $152,268 8.6%
Franchising.................................................. 4,535 12,464 174.8 24,782 98.8
Licensing.................................................... 2,028 1,537 (24.2) 3,887 152.9
-------- -------- --------
Total revenues.............................................. 134,408 154,236 14.8 180,937 17.3
-------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs............................ 66,832 75,003 12.2 79,634 6.2
Cost of sales................................................ 32,028 38,482 20.2 46,323 20.4
General and administrative expenses.......................... 16,192 19,017 17.4 21,972 15.5
Store closure provision (benefit)............................ 538 7,303 1,257.4 (1,579) (121.6)
Depreciation and amortization................................ 10,403 19,820 90.5 24,206 22.1
-------- -------- --------
Total operating costs and expenses.......................... 125,993 159,625 26.7 170,556 6.8
-------- -------- --------
Interest expense.............................................. (7,830) (13,197) 68.5 (17,880) 35.5
Interest income............................................... 246 623 153.3 53 (91.5)
Other expense, net............................................ (1,805) (1,180) (34.6) (775) (34.3)
-------- -------- --------
Net loss...................................................... $ (974) $(19,143) 1,865.4% $ (8,221) (57.1)%
======== ======== ========
Supplemental Information:
Continuing Company-owned Stores:
Net store and food sales..................................... $108,174 $122,713 13.4% $136,821 11.5%
-------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs............................ 50,858 60,900 19.7 68,564 12.6
Cost of sales................................................ 26,578 33,621 26.5 36,916 9.8
Depreciation and amortization................................ 3,896 5,972 53.3 10,227 71.2
-------- -------- --------
Total operating costs and expenses.......................... 81,332 100,493 23.6 115,707 15.1
-------- -------- --------
Continuing company-owned store contribution................... $ 26,842 $ 22,220 (17.2) $ 21,114 (5.0)
======== ======== ========
Stores in the Process of Being Closed or Franchised:
Net store and food sales...................................... $ 19,671 $ 17,522 (10.9) $ 15,447 (11.8)
-------- -------- --------
Operating costs and expenses:
Selling and store occupancy costs............................ 15,974 14,103 (11.7) 11,070 (21.5)
Cost of sales................................................ 5,450 4,861 (10.8) 4,529 (6.8)
Depreciation and amortization................................ 45 612 1,260.0 160 (73.9)
-------- -------- --------
Total operating costs and expenses.......................... 21,469 19,576 (8.8) 15,759 (19.5)
-------- -------- --------
Stores in the process of being closed or franchised loss...... $ (1,798) $ (2,054) 14.2% $ (312) (84.8)%
======== ======== ========
16
52 Weeks Ended January 1, 2000 ("Fiscal 1999") Compared to the 52 Weeks Ended
January 2, 1999 ("Fiscal 1998")
Company-owned and Franchised or Licensed Store Activity
As of January 1, 2000, there were 462 company-owned stores and 981
franchised or licensed stores in operation. The store activity for fiscal 1998
and fiscal 1999 is summarized as follows:
Fiscal 1998 Fiscal 1999
----------------------- ------------------------
Company- Franchised Company- Franchised
Owned or Licensed Owned or Licensed
----- ----------- ----- -----------
Stores open as of the beginning of the fiscal year.......... 481 553 566 972
Stores opened (including relocations and acquisitions)...... 128 504 13 100
Stores closed (including relocations)....................... (20) (78) (26) (123)
Non-continuing company-owned (exit plan) stores closed
(September 18, 1996 forward)............................... (30) -- (59) --
Stores sold to franchisees.................................. (11) 11 (13) 13
Non-continuing company-owned (exit plan) stores franchised
(September 18, 1996 forward)............................... (15) 15 (24) 24
Stores acquired from franchisees............................ 33 (33) 5 (5)
--- --- --- ----
Stores open as of the end of the fiscal year................ 566 972 462 981
=== === === ====
Revenues
Net Store and Food Sales. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $12,033,000, or 8.6%,
from $140,235,000 to $152,268,000 for fiscal 1999 compared to fiscal 1998.
Net store sales from continuing company-owned stores and mail order
increased $14,108,000, or 11.5%, from $122,713,000 to $136,821,000 for fiscal
1999 compared to fiscal 1998. The increase in net store sales from continuing
company-owned stores was primarily attributable to:
(1) the operation for a full year of 66 Great American stores
acquired in connection with the acquisitions of Great American,
Deblan, Chocolate Chip and Karp in August and September 1998,
(2) the operation of two Pretzelmaker continuing company-owned stores
acquired in connection with the Pretzelmaker acquisition in
November 1998,
(3) a 21% increase in mail order sales.
(4) the introduction of a refrigerated cookie dough product for sale
in retail supermarkets.
The increase in net store sales was also offset in part by negative same
store sales. Based on stores that have been open for at least two years
(adjusted for the calendar shift), system-wide continuing company-owned store
sales were down 1% during the fiscal 1999 compared to the same period in fiscal
1998.
Net store sales from stores in the process of being closed or franchised
decreased $2,075,000, or 11.8%, from $17,522,000 to $15,447,000 for fiscal 1999
compared to fiscal 1998. This decrease results from closing or franchising 150
stores during fiscal 1999.
Franchising Revenues. Franchising revenues increased $12,318,000, or 98.8%,
from $12,464,000 to $24,782,000 for fiscal 1999 compared to fiscal 1998. The
increase in franchising revenues was primarily attributable to royalties earned
from the 211 Great American franchised stores obtained in connection with the
acquisitions of Great American, Deblan, Chocolate Chip and Karp in August and
September 1998, the 199 Pretzelmaker franchised stores acquired in November 1998
and the additional stores that were franchised by the Company in 1999.
17
Licensing Revenues. Licensing revenues increased $2,350,000, or 152.9%,
from $1,537,000 to $3,887,000 for fiscal 1999 compared to fiscal 1998. The
increase in licensing revenues was attributable to license fees on new contracts
entered into in 1999 and royalties earned on existing licensing agreements. The
increase was partially offset by a decrease in the number of licensed locations
during 1999.
Total Revenues. Total revenues increased by $26,701,000, or 17.3%, from
$154,236,000 to $180,937,000 for fiscal 1999 compared to fiscal 1998 due to the
reasons discussed above.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $4,631,000, or 6.2%, from $75,003,000 to $79,634,000 for fiscal 1999
compared to fiscal 1998.
Selling and store occupancy costs for continuing company-owned stores
increased by $7,664,000, or 12.6%, from $60,900,000 to $68,564,000 for fiscal
1999 compared to fiscal 1998. Within this overall increase, selling expenses for
continuing company-owned stores increased by $4,222,000, or 15.7%, from
$26,930,000 to $31,152,000 for the fiscal 1999 compared to fiscal 1998. The
increase in selling expenses was primarily attributable to the 66 Great American
continuing company-owned stores acquired in connection with the acquisitions of
Great American, Deblan, Chocolate Chip and Karp in August and September 1998 and
the two Pretzelmaker stores acquired in November 1998. Store occupancy costs for
continuing company-owned stores increased $3,442,000, or 10.1%, from $33,970,000
to $37,412,000 for fiscal 1999 compared to fiscal 1998. The increase in store
occupancy costs was primarily attributable to the increase in the number of
stores discussed above, rent escalations in existing leases and lease renewal
increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $3,033,000, or 21.5%, from $14,103,000 to $11,070,000
for fiscal 1999 compared to fiscal 1998. This decrease was primarily the result
of closing 150 stores throughout fiscal 1999.
Cost of Sales. Total cost of sales increased $7,841,000, or 20.4%, from
$38,482,000 to $41,455,000 for fiscal 1999 compared to fiscal 1998.
Cost of sales for continuing company-owned stores increased $3,295,000, or
9.8%, from $33,621,000 to $36,916,000 for fiscal 1999 compared to fiscal 1998.
This increase was primarily the result of the addition 65 Great American
continuing company-owned stores acquired in connection with the acquisitions of
Great American, Deblan, Chocolate Chip and Karp in August and September 1998 and
2 Pretzelmaker stores acquired in November 1998. Mail order cost of sales
increased consistent with the increased mail order sales.
Cost of sales for stores in the process of being closed or franchised
decreased $332,000, or 6.8%, from $4,861,000 to $4,529,000 for fiscal 1999
compared to fiscal 1998. This decrease was primarily the result of closing or
franchising 150 stores during fiscal 1999.
General and Administrative Expenses. General and administrative expenses
increased $2,955,000, or 15.5%, from $19,017,000 to $21,972,000 for fiscal 1999
compared to fiscal 1998. The decrease in general and administrative expenses was
primarily attributable an effort on the part of the Company to reduce expenses.
Store Closure Provision. During the fourth quarter of 1998, the Company
recorded an additional $7,303,000 in store closure reserves to cover early lease
termination costs under a plan to close or franchise 54 existing stores that
were not earning acceptable levels of contribution. During 1999, the Company was
successful in closing certain of these stores at a negotiated cost less than had
been provided for in the plan. A total of $1,579,000 of costs in excess of the
amounts required to close the stores have been reversed in 1999. See Note 5 to
the Consolidated Financial Statements for a detailed explanation of the store
closure reserve.
Depreciation and Amortization Expense. Total depreciation and amortization
expense increased by $4,386,000, or 22.1%, from $19,820,000 to $24,206,000 for
fiscal 1999 compared to fiscal 1998. This increase was primarily attributable to
increased goodwill amortization from the acquisitions of H&M and Pretzel Time in
fiscal 1997 and the acquisitions of Great American, Deblan, Chocolate Chip and
Pretzelmaker in fiscal 1998.
18
During fiscal 1999, the Company wrote down, to net realizable value,
approximately $1,645,000 of impaired long-lived assets. This expense is included
in depreciation and amortization expense. The Company also assessed the
realization of goodwill associated with these stores and recorded an impairment
of goodwill totaling $237,000.
Depreciation and amortization expense for stores in the process of being
closed or franchised decreased $452,000, or 73.9%, from $612,000 to $160,000 for
fiscal 1999 compared to fiscal 1998. This decrease in depreciation and
amortization expense was primarily attributable to closing or franchising 150
stores in fiscal 1999. Substantially all of the long-lived assets had been
written down to their net realizable value in fiscal 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $10,931,000, or 6.8%, from $159,625,000 to $170,556,000 for fiscal
1999 compared to fiscal 1998 for the reasons discussed above.
Interest Expense. Interest expense increased $4,683,000, or 35.5%, from
$13,197,000 to $17,880,000 for fiscal 1999 compared to fiscal 1998. This
increase was primarily attributable to interest expense for a full fiscal year
on the $40,000,000 senior notes issued in August 1998, increased levels of
capital leases and usage of the Company's line of credit.
Interest Income. Interest income decreased $570,000, or 91.5%, from
$623,000 to $53,000 for fiscal 1999 compared to fiscal 1998. In 1998, the
Company earned interest on excess cash provided by the $100,000,000 senior notes
that were placed in November 1997 and the $40,000,000 senior notes placed in
August 1998. This excess cash was used to acquire Great American and
Pretzelmaker and, therefore, was not available for investment in 1999.
Other Expenses. Other expenses for fiscal 1999 were comparable to fiscal
1998.
Net Loss. The net loss decreased by $10,922,000, or 57.1%, from $19,143,000
to $8,221,000 for fiscal 1999, compared to fiscal 1998 due to the combination of
factors described above.
Income from Continuing Company-Owned Stores. Income from continuing
company-owned stores decreased $1,106,000, or 5.0%, from $22,220,000 in fiscal
1998 to $21,114,000 in fiscal 1999. Depreciation and amortization from the
stores acquired in fiscal 1998 increased $4,255,000.
Loss from Stores in the Process of Being Closed or Franchised. The loss
from stores in the process of being closed or franchised decreased by
$1,742,000, or 84.8%, from $2,054,000 to $312,000 for fiscal 1999 compared to
fiscal 1998. The decreased loss was primarily attributable to closing 150 stores
in fiscal 1999.
52 Weeks Ended January 2, 1999 ("Fiscal 1998") Compared to the 53 Weeks Ended
January 3, 1998 ("Fiscal 1997")
Company-owned and Franchised or Licensed Store Activity
As of January 2, 1999, there were 566 company-owned stores and 972
franchised or licensed stores in operation. The store activity for fiscal 1997
and fiscal 1998 is summarized as follows:
19
Fiscal 1997 Fiscal 1998
------------------------ ------------------------
Company- Franchised Company- Franchised
Owned or Licensed Owned or Licensed
----- ----------- ----- -----------
Stores open as of the beginning of the fiscal year.......... 482 418 481 553
Stores opened (including relocations and acquisitions)...... 86 217 128 504
Stores closed (including relocations)....................... (7) (89) (20) (78)
Non-continuing company-owned (exit plan) stores closed
(September 18, 1996 forward)............................... (73) -- (30) --
Stores sold to franchisees.................................. (3) 3 (11) 11
Non-continuing company-owned (exit plan) stores franchised
(September 18, 1996 forward)............................... (9) 9 (15) 15
Stores acquired from franchisees............................ 5 (5) 33 (33)
--- --- --- ---
Stores open as of the end of the fiscal year................ 481 553 566 972
=== === === ===
Revenues
Net Store and Food Sales. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $12,390,000, or 9.7%,
from $127,845,000 to $140,235,000 for fiscal 1998 compared to fiscal 1997.
Net store sales from continuing company-owned stores and mail order
increased $14,539,000, or 13.4%, from $108,174,000 to $122,713,000 for fiscal
1998 compared to fiscal 1997. The increase in net store sales from continuing
company-owned stores was primarily attributable to:
(1) the operation of 85 Pretzel Time continuing company-owned stores
acquired in connection with the acquisition of H&M and Pretzel
Time in July 1997,
(2) the operation of 65 Great American stores acquired in connection
with the acquisitions of Great American, Deblan, Chocolate Chip,
and Karp in August and September 1998,
(3) a 35.5% increase in mail order sales.
This increase in net store sales from continuing company-owned stores was
offset in part by the negative effect of a calendar shift. Mrs. Fields' year end
was December 28 in 1996 and January 3, 1998 in 1997. As a result, the New Year's
holiday week fell in the first quarter of fiscal 1997 and again in the fourth
quarter of fiscal 1997. The first quarter of 1998 did not benefit from the New
Year's holiday sales.
The increase in net store sales was also offset in part by negative same
store sales. Based on stores that have been open for at least two years
(adjusted for the calendar shift), system-wide continuing company-owned store
sales were down 1.8% during fiscal 1998 compared to fiscal 1997. Additionally,
there were only 52 weeks in fiscal 1998 compared to 53 weeks in fiscal 1997.
Net store sales from stores in the process of being closed or franchised
decreased $2,149,000, or 10.9%, from $19,671,000 to $17,522,000 for fiscal 1998
compared to fiscal 1997. This decrease results from closing or franchising 45
stores during fiscal 1998 and the effect of closing or franchising 82 stores
during fiscal 1997.
Franchising Revenues. Franchising revenues increased $7,929,000, or 174.8%,
from $4,535,000 to $12,464,000 for fiscal 1998 compared to fiscal 1997. The
increase in franchising revenues was primarily attributable to royalties earned
from 141 Pretzel Time franchised stores obtained in connection with the
acquisition of H&M and Pretzel Time in 1997, the 211 Great American franchised
stores obtained in connection with the acquisitions of Great American, Deblan,
Chocolate Chip and Karp in August and September 1998 and the 199 Pretzelmaker
franchised stores acquired in November 1998.
Licensing Revenues. Licensing revenues decreased $491,000, or 24.2%, from
$2,028,000 to $1,537,000 for fiscal 1998 compared to fiscal 1997. The decrease
in licensing revenues was primarily attributable to reduced concept licensing
royalties.
20
Total Revenues. Total revenues increased by $19,828,000, or 14.8%, from
$134,408,000 to $154,236,000 for fiscal 1998 compared to fiscal 1997 due to the
reasons discussed above.
Operating Costs and Expenses
Selling and Store Occupancy Costs. Total selling and store occupancy costs
increased $8,171,000, or 12.2%, from $66,832,000 to $75,003,000 for fiscal 1998
compared to fiscal 1997.
Selling and store occupancy costs for continuing company-owned stores
increased by $10,042,000, or 19.7%, from $50,858,000 to $60,900,000 for fiscal
1998 compared to fiscal 1997. Within this overall increase, selling expenses for
continuing company-owned stores increased by $4,836,000, or 21.9%, from
$22,094,000 to $26,930,000 for fiscal 1998 compared to fiscal 1997. The increase
in selling expenses was primarily attributable to the 85 Pretzel Time continuing
company-owned stores acquired in connection with the acquisitions of H&M and
Pretzel Time in 1997, the 65 Great American continuing company-owned stores
acquired in connection with the acquisitions of Great American, Deblan,
Chocolate Chip and Karp in August and September 1998, the 2 Pretzelmaker stores
acquired in November 1998, and the effect of the minimum wage increasing to
$5.15 from $4.75 on September 1, 1997. Store occupancy costs for continuing
company-owned stores increased $5,206,000, or 18.1%, from $28,764,000 to
$33,970,000 for fiscal 1998 compared to fiscal 1997. The increase in store
occupancy costs was primarily attributable to the increase in the number of
stores discussed above, Mrs. Fields' reacquiring 33 continuing company-owned
stores from franchisees during fiscal 1998, rent escalations in existing leases
and lease renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $1,871,000, or 11.7%, from $15,974,000 to $14,103,000
for fiscal 1998 compared to fiscal 1997. This decrease was primarily the result
of closing or franchising 45 stores during fiscal 1998 and the effect of closing
or franchising 82 stores during fiscal 1997.
Cost of Sales. Total cost of sales increased $6,454,000, or 20.2%, from
$32,028,000 to $38,482,000 for fiscal 1998 compared to fiscal 1997.
Cost of sales for continuing company-owned stores increased $7,043,000, or
26.5%, from $26,578,000 to $33,621,000 for fiscal 1998. This increase was
primarily the result of the addition of 85 Pretzel Time continuing company-owned
stores in July 1997, 65 Great American continuing company-owned stores acquired
in connection with the acquisitions of Great American, Deblan, Chocolate Chip
and Karp in August and September 1998 and 2 Pretzelmaker stores acquired in
November 1998. Cost of sales also increased due to the addition of the Great
American batter facility in August 1998 which produces batter for the Great
American stores, food costs associated with increased mail order sales and the
increasing cost of butter. Butter is one of the main ingredients in a variety of
our products and is a condiment for other products. The price of butter has
increased from $0.78/lb. at the beginning of fiscal 1997 to a peak of $2.92/lb.
in September 1998. Additionally, distribution costs increased during fiscal 1998
as Mrs. Fields' changed distributors to improve product availability and the
reliability of service to the stores.
Cost of sales for stores in the process of being closed or franchised
decreased $589,000, or 10.8%, from $5,450,000 to $4,861,000 for fiscal 1998
compared to fiscal 1997. This decrease was primarily the result of closing or
franchising 45 stores during fiscal 1998 and the effect of closing or
franchising 82 stores during fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased $2,825,000, or 17.4%, from $16,192,000 to $19,017,000 for fiscal 1998
compared to fiscal 1997. The increase in general and administrative expenses was
primarily attributable to the acquisitions of H&M and Pretzel Time in 1997, the
acquisitions of Great American, Deblan, Chocolate Chip, Karp and Pretzelmaker in
1998.
Store Closure Provision. During the fourth quarter of 1998, management
reassessed its strategy with respect to acceptable levels of contribution from
certain existing stores. This resulted in management setting out a plan to close
or franchise 54 existing stores. The Company recorded an additional $7,303,000
in store closure reserves to cover early lease termination costs. Management
believes that the level of store closure reserves is adequate to provide for all
closure costs for these stores.
21
Depreciation and Amortization Expense. Total depreciation and amortization
expense increased by $9,417,000, or 90.5%, from $10,403,000 to $19,820,000 for
fiscal 1998 compared to fiscal 1997. This increase was primarily attributable to
increased goodwill amortization from the acquisitions of H&M and Pretzel Time in
fiscal 1997 and the acquisitions of Great American, Deblan, Chocolate Chip and
Pretzelmaker in fiscal 1998.
For stores with negative contribution that were determined to be closed or
franchised, the Company wrote down the related long-lived assets to net
realizable value. This expense is included in depreciation and amortization in
the fiscal 1998 statement of operations and totaled $3,098,000. The Company also
assessed the realization of goodwill associated with these stores and recorded
an impairment of goodwill totaling $1,033,000 during fiscal 1998.
Depreciation and amortization expense for continuing company-owned stores
increased $ 2,076,000, or 53.3%, from $3,896,000 to $5,972,000 for fiscal 1998
compared to fiscal 1997. This increase in depreciation and amortization expense
was primarily attributable to the addition of 85 Pretzel Time continuing
company-owned stores in July 1997, 65 Great American continuing company-owned
stores in August and September 1998 and the acquisition of 2 Pretzelmaker
continuing company-owned stores in 1998.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $33,632,000, or 26.7%, from $125,993,000 to $159,625,000 for fiscal
1998 compared to fiscal 1997 for the reasons discussed above.
Interest Expense. Interest expense increased $5,367,000, or 68.5%, from
$7,830,000 to $13,197,000 for fiscal 1998 compared to fiscal 1997. This increase
was primarily attributable to interest expense on the $100,000,000 senior notes
that were placed in November 1997 and the $40,000,000 senior notes placed in
August 1998.
Interest Income. Interest income increased $377,000, or 153.3%, from
$246,000 to $623,000 for fiscal 1998 compared to fiscal 1997. This increase was
primarily the result of interest earned on excess cash provided by the
$100,000,000 senior notes that were placed in November 1997 and the $40,000,000
senior notes placed in August 1998.
Other Expenses. Other expenses decreased $625,000, or 34.6%, from
$1,805,000 to $1,180,000 for fiscal 1998 compared to fiscal 1997. This decrease
was primarily attributable to minority interest from the acquisitions of H&M and
Pretzel Time in 1997 and a decrease in the income tax provision during fiscal
1998.
Net Loss. The net loss increased by $18,169,000, or 1,865.4%, from $974,000
to $19,143,000 for fiscal 1998 compared to fiscal 1997 due to the combination of
factors described above.
Income from Continuing Company-Owned Stores. Income from continuing
company-owned stores decreased by $4,622,000, or 17.2%, from $26,842,000 to
$22,220,000 for fiscal 1998 compared to fiscal 1997. Income from continuing
company-owned stores was negatively impacted by a 1.8% decline in sales from
stores that have been open at least two years and by the increases in selling
and store occupancy costs, food cost of sales and depreciation and amortization
described above. Income from continuing company-owned stores was also negatively
impacted by a calendar shift whereby Mrs. Fields' year end was December 28 for
fiscal 1996 and January 3, 1998 for fiscal 1997. As a result, the New Year's
holiday week fell in the first quarter of 1997 and again in the fourth quarter
fiscal 1997. The first quarter of fiscal 1998 did not benefit from the New
Year's holiday sales. Additionally, there were only 52 weeks in fiscal year 1998
compared to 53 weeks in fiscal 1997.
Loss from Stores in the Process of Being Closed or Franchised. The loss
from stores in the process of being closed or franchised increased by $256,000,
or 14.2%, from $1,798,000 to $2,054,000 for fiscal 1998 compared to fiscal 1997.
The increased loss was primarily attributable to the addition of 65 stores from
the acquisitions of Great American, Deblan, Chocolate Chip and Karp in August
and September 1998, offset in part by closing or franchising 45 stores during
fiscal 1998.
22
Liquidity and Capital Resources
General
Mrs. Fields' principal sources of liquidity are cash flows from operating
activities, cash on hand and available borrowings under Mrs. Fields' existing
revolving credit facility. At January 1, 2000, Mrs. Fields had $4,919,000 of
cash and cash equivalents and a $15,000,000 credit facility. However, at January
1, 2000, the availability under this facility was limited by the bond indenture
to $8,055,000. During fiscal 2000, Mrs. Fields expects that its principal uses
of cash will be for working capital, capital expenditures, store closure costs,
debt service requirements and other general corporate purposes. Mrs. Fields is
highly leveraged. Mrs. Fields believes that its sources of cash will be adequate
to meet its anticipated requirements through at least fiscal 2000. There can be
no assurance, however, that Mrs. Fields' operating activities will continue to
generate cash flows at or above current levels. In addition, given borrowing
restrictions on the bond indenture and maintenance covenants in the revolving
credit facility, the ability for Mrs. Fields to make additional borrowings is
limited. Accordingly, Mrs. Fields may choose to defer capital expenditure plans
and extend vendor payments for additional cash flow flexibility.
January 1, 2000 Compared to January 2, 1999
As of January 1, 2000, Mrs. Fields had liquid assets (cash and cash
equivalents and accounts receivable) of $12,922,000, a decrease of 7.4%, or
$1,040,000, from January 2, 1999 when liquid assets were $13,962,000. Current
assets decreased by $3,748,000, or 15.4%, to $20,595,000 at January 1, 2000 from
$24,343,000 at January 2, 1999. This decrease was primarily the result of a
decrease in accounts receivable from franchisees and licensees, inventories and
prepaid rents, partially offset by an increase in accounts receivable.
Long-term assets decreased $19,748,000, or 9.5%, to $187,815,000 at January
1, 2000 from $207,563,000 at January 2, 1999. This decrease was primarily the
result of depreciation and amortization of property and equipment, goodwill and
other intangible assets.
Current liabilities decreased by $12,689,000, or 34.2%, to $24,381,000 at
January 1, 2000 from $37,070,000 at January 2, 1999. This decrease is due to
payments of debt due in 1999, the elimination of the bank overdraft and a
decrease in the current portion of the store closure reserve.
Mrs. Fields' working capital deficit decreased by $8,941,000, or 70.3%, to
a deficit of $3,786 at January 1, 2000 from a deficit of $12,727,000 at January
2, 1999, for the reasons described above.
Mrs. Fields generated $17,903,000 of cash from operating activities during
fiscal 1999, primarily from store sales and franchising and licensing revenues
less costs and expenses incurred to generate the store sales and franchising and
licensing revenues, and less interest paid on the $140,000,000 senior notes.
Mrs. Fields utilized $4,696,000 of cash from investing activities during
fiscal 1999, primarily for capital expenditures relating to store remodels and
renovations.
Mrs. Fields utilized $13,039,000 of cash from financing activities during
fiscal 1999, primarily for the payment of long-term debt and to decrease its
bank overdraft.
The specialty cookie and pretzel businesses do not require the maintenance
of significant receivables or inventories. However, Mrs. Fields continually
invests in its business by upgrading and remodeling stores and adding new
stores, carts, and kiosks as opportunities arise. Investments in these long-term
assets, which are key to generating current sales, reduce Mrs. Fields' working
capital. We expect to expend approximately $9,000,000 for capital expenditures
in fiscal year 2000. Management anticipates that these expenditures will be
funded with cash generated from operating activities and short-term borrowings
under its credit facility as needed. As of March 31, 2000, the Company had
available borrowing capacity of $8,055,000.
Inflation
The impact of inflation on the operations of the business has not been
significant in recent years. Most of Mrs. Fields' leases contain escalation
clauses. However, such leases are accounted for on a straight-line basis as
required
23
by accounting principles generally accepted in the United States which minimizes
fluctuations in operating income. In addition, many of Mrs. Fields' employees
are paid hourly wages at the Federal minimum wage level. Minimum wage increases
will negatively impact Mrs. Fields' payroll costs in the short term, but
management believes such impact can be offset in the long term through
operational efficiency gains and, if necessary, through product price increases.
Seasonality
Mrs. Fields' sales and income from store operations are highly seasonal
given the significant impact of its mall-based locations. Mrs. Fields' sales
tend to mirror customer traffic flow trends in malls which increase
significantly during the fourth quarter, primarily between Thanksgiving and the
end of the calendar year. Holiday gift purchases are also a significant factor
in increased sales in the fourth quarter.
The seasonality effect on income from store operations is even more
significant than the effect on sales. The impact on income from store operations
is more significant due to the fixed nature of certain store level costs, such
as occupancy costs and store manager salaries. Once these fixed costs are
covered by store sales, the flow through of sales to income from store
operations becomes greater. Accordingly, the fourth quarter is a key determinant
to overall profitability for the year.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's major market risk exposure is changing interest rates. The
Company does not hedge against changes in interest rates. The table below
provides information about the Company's financial instruments that are
sensitive to changes in interest rates including principal cash flows and
related weighted average interest rates by year of expected maturity dates. The
table does not include non-interest bearing notes totaling $141,000 and
unamortized discount of $489,000.
Fair
Value
2000 2001 2002 2003 2004 Thereafter Total as of 1/1/00
----- ----- ----- ----- ---- ---------- ----- ------------
(Dollars in thousands)
Long-term debt,
including current
portion (fixed rate) $ 740 $ 662 $ 718 $ 608 $140,091 $ 65 $142,884 $116,284
Weighted average
interest rate 9.52% 9.01% 9.50% 9.50% 10.12% 9.0% 10.12%
24
Item 8. Financial Statements and Supplementary Data
Page
----
Mrs. Fields' Original Cookies, Inc. and subsidiaries
Report of Independent Public Accountants.................................................................................. 26
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000..................................................... 27
Consolidated Statements of Operations for the years ended January 3, 1998, January 2, 1999 and January 1, 2000............ 29
Consolidated Statements of Stockholder's Equity for the years ended January 3, 1998, January 2, 1999 and January 1, 2000.. 30
Consolidated Statements of Cash Flows for the years ended January 3, 1998, January 2, 1999 and January 1, 2000............ 31
Notes to Consolidated Financial Statements................................................................................ 34
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields' Original Cookies, Inc.:
We have audited the accompanying consolidated balance sheets of Mrs. Fields'
Original Cookies, Inc. (a Delaware corporation) and subsidiaries as of January
2, 1999 and January 1, 2000, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three fiscal
years in the period ended January 1, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mrs.
Fields' Original Cookies, Inc. and subsidiaries as of January 2, 1999 and
January 1, 2000, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended January 1, 2000 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Salt Lake City, Utah
March 27, 2000
26
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
January 2, January 1,
1999 2000
-------- --------
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 4,751 $ 4,919
Accounts receivable, net of allowance for doubtful accounts of $74 and $111, respectively...... 3,208 4,295
Amounts due from franchisees and licensees, net of allowance for doubtful accounts of
$1,078 and $821, respectively........................................................... 6,003 3,708
Inventories.................................................................................... 5,503 4,977
Prepaid rent and other......................................................................... 4,017 1,336
Deferred income tax assets..................................................................... 861 1,360
-------- --------
Total current assets........................................................................ 24,343 20,595
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements......................................................................... 29,914 26,698
Equipment and fixtures......................................................................... 17,108 22,540
Land........................................................................................... 240 240
-------- --------
47,262 49,478
Less accumulated depreciation and amortization................................................. (15,465) (20,813)
-------- --------
Net property and equipment.................................................................. 31,797 28,665
-------- --------
DEFERRED INCOME TAX ASSETS....................................................................... 2,638 2,139
-------- --------
GOODWILL, net of accumulated amortization of $11,231 and $21,156, respectively................... 145,782 132,479
-------- --------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $2,615 and $3,700,
respectively............................................................................ 14,296 13,062
-------- --------
DEFERRED LOAN COSTS, net of accumulated amortization
of $1,320 and $4,052, respectively...................................................... 11,718 10,818
-------- --------
OTHER ASSETS ................................................................................... 1,332 652
-------- --------
$231,906 $208,410
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
27
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
January 2, January 1,
1999 2000
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... $ 8,046 $ 781
Current portion of capital lease obligations............................................ 299 842
Accounts payable........................................................................ 10,723 10,514
Bank overdraft.......................................................................... 4,133 -
Accrued liabilities..................................................................... 3,597 2,851
Current portion of store closure reserve................................................ 4,577 3,665
Accrued salaries, wages and benefits.................................................... 3,155 3,180
Accrued interest payable................................................................ 1,260 1,288
Sales taxes payable..................................................................... 962 1,128
Deferred credits........................................................................ 318 132
-------- --------
Total current liabilities............................................................ 37,070 24,381
LONG-TERM DEBT, net of current portion and discount....................................... 141,647 141,755
STORE CLOSURE RESERVE, net of current portion............................................. 10,134 3,529
CAPITAL LEASE OBLIGATIONS, net of current portion......................................... 997 3,107
-------- --------
Total liabilities.................................................................... 189,848 172,772
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK of Pretzel
Time (a wholly owned subsidiary), aggregate liquidation preference of $1,495 and
$1,070, respectively..................................................................... 1,261 1,070
-------- --------
MINORITY INTEREST......................................................................... 119 111
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized, 400 shares outstanding........... - -
Additional paid-in capital.............................................................. 59,899 61,899
Accumulated deficit..................................................................... (19,221) (27,442)
-------- --------
Total stockholder's equity........................................................... 40,678 34,457
-------- --------
$231,906 $208,410
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
28
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
53 52 52
Weeks Weeks Weeks
Ended Ended Ended
January 3, January 2, January 1,
1998 1999 2000
------------ ------------ ------------
REVENUES:
Net store and food sales............................................... $127,845 $140,235 $152,268
Franchising............................................................ 4,535 12,464 24,782
Licensing.............................................................. 2,028 1,537 3,887
-------- -------- --------
Total revenues...................................................... 134,408 154,236 180,937
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Selling and store occupancy costs...................................... 66,832 75,003 79,634
Cost of sales.......................................................... 32,028 38,482 46,323
General and administrative............................................. 16,192 19,017 21,972
Store closure provision (benefit)...................................... 538 7,303 (1,579)
Depreciation and amortization.......................................... 10,403 19,820 24,206
-------- -------- --------
Total operating costs and expenses.................................. 125,993 159,625 170,556
-------- -------- --------
Income (loss) from operations.................................... 8,415 (5,389) 10,381
-------- -------- --------
OTHER INCOME (EXPENSE), net:
Interest expense....................................................... (7,830) (13,197) (17,880)
Interest income........................................................ 246 623 53
Other expense, net..................................................... (368) (409) (230)
-------- -------- --------
Total other expense, net............................................ (7,952) (12,983) (18,057)
-------- -------- --------
Income (loss) before provision for income taxes, preferred stock
accretion and dividends o