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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: January 2, 1999
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.
(Exact name of registrant specified in its charter)
DELAWARE 87-0552899
- --------------------------------------------------- --------------------------------------------------
(State or other jurisdiction of incorporation or (IRS employer identification no.)
organization)
2855 East Cottonwood Parkway, Suite 400
Salt Lake City, Utah 84121-7050
- --------------------------------------------------- --------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 736-5600
(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,
1999.
Documents incorporated by reference: NONE
MRS. FIELDS' ORIGINAL COOKIES, INC.
TABLE OF CONTENTS
PART I.
Item 1. Business........................................................................................3
Item 2. Properties......................................................................................12
Item 3. Legal Proceedings...............................................................................12
Item 4. Submission of Matters to a Vote of Security Holders.............................................12
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................13
Item 6. Selected Financial Data.........................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................25
Item 8. Financial Statements and Supplementary Data.....................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............67
PART III.
Item 10. Directors and Executive Officers of the Registrant..............................................67
Item 11. Executive Compensation..........................................................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................71
Item 13. Certain Relationships and Related Transactions...................................................72
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................74
PART I
FORWARD-LOOKING INFORMATION
This report contains certain 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:
o Our ability to combine the businesses of companies acquired during the year
with Mrs. Fields and to realize the expected benefits and cost savings from
our acquisitions;
o Performance by franchisees and licensees;
o Difficulties or delays in developing and introducing anticipated new
products or failure of customers to accept new product offerings;
o Changes in consumer preferences and our ability to adequately anticipate
such changes;
o The seasonal nature of our operations;
o Changes in general economic and business conditions;
o Actions by competitors, including new product offerings and marketing and
promotional successes;
o Claims which might be made against Mrs. Fields, including product liability
claims;
o Changes in business strategy, new product lines, changes in raw ingredient
and employee labor costs;
o Changes in our relationships with our franchisees and licensees;
o Changes in mall customer traffic and
o The inability of our vendors, service providers and financial institutions
to resolve Year 2000 issues in a timely manner.
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's Inc,. ("Hot Sam") by
Mrs. Fields' Holding Company, Inc. ("Mrs. Fields' Holding"), a subsidiary of
Capricorn Investors II, L.P. ("Capricorn"). Capricorn retained Mr. Hodges as
Chief Executive Officer of Mrs. Fields and as of January 2, 1999, Capricorn had
invested more than $28 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 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 offering of 10 1/8% Series C
Senior Notes due 2004 resulting in net proceeds of $35.4 million 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:
o finance the acquisition of Cookies USA, Inc., the parent of Great American
Cookie Company, Inc. ("Great American")
o finance the acquisition of the stock of two Great American franchisees, Deblan
and Chocolate Chip
o 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.
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
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. By the end of fiscal 2000, we plan to close
or franchise approximately 59 company-owned cookie stores and 23 company-owned
pretzel stores that do not meet certain financial and geographical criteria
established by management. The key elements of this business strategy are as
follows:
o Build the Mrs. Fields Brand in other Retail Venues
o Grow concept and product licensing
o Enhance Quality of Company-Owned Store Base
o Improve Productivity of Continuing Company-Owned Stores
o Capitalize on the Strong "Mrs. Fields" and "Pretzel Time" Brand Names
o Develop the Great American Brand Name
o Develop New Company-Owned and Franchised Stores
o Pursue Further Strategic Acquisitions of Related Businesses
o Perpetuate franchise growth in all core concepts
PRODUCT OFFERINGS. Our product offerings consist primarily of (1) fresh baked
cookies, brownies, muffins, and other baked goods and (2) fresh baked sweet
dough and "Bavarian" style pretzels. During fiscal year 1998, our revenue mix
consisted of the following:
Cookies and Brownies.............................................................56%.
Pretzels.........................................................................21%
Beverages........................................................................22%
Other.............................................................................1%
Baked products are made using only pure, high quality, vanilla, chocolate,
raisins, nuts and other ingredients. To maintain product quality and consistency
at both company-owned and franchised stores, Mrs. Fields and Original Cookie
stores use centrally manufactured frozen dough, which is manufactured by outside
suppliers according to 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.
Mrs. Fields continually reviews its product mix in an effort to
maximize its offerings and profitability. For example, new muffin flavors,
bagels, croissants and a revitalized coffee program were introduced to enhance
morning offerings, as cookies begin selling primarily after mid-day.
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.
Our product development efforts for the cookie stores are currently focused
on a fresh-baked, sugar-free cookie dough and other products, such as cheesecake
brownies, reduced-fat cookies and seasonal items that are designed to capitalize
on consumer trends and draw interest to Mrs. Fields' store locations.
Development efforts for the pretzel stores include jalapeno, cinnamon raisin and
garlic pretzels with a sweet dough base.
MARKETING AND ADVERTISING. Our in-house marketing department markets products
emphasizing product sampling, local store marketing and brand name
identification. We advertise at the store level, using the aroma of fresh-baked
cookies and the attractive arrangement of finished products to create a store
ambiance that is conducive to sales. We cultivate local customer loyalty by
offering regular 20% discounts to employees in malls where stores are located
and occasional other discounts. We historically have spent relatively little on
paid advertising, relying mainly on in-store signage, promotions and the public
relations of Debbi Fields, who makes store visits and local media appearances
throughout the country and internationally for Mrs. Fields. In addition to
posters and displays of products, we promote products by offering special
packaging and selling other promotional items. 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 and franchise 1,020 retail cookie stores: 580 under the Mrs.
Fields brand, 120 under the Original Cookie brand, and 320 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 31 malls. 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 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 518 retail pretzel stores: 233 under the
Pretzel Time name, 77 under the Hot Sam name and 208 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.
Taking the impulse nature of our business into consideration,
locational possibilities include any high pedestrian traffic areas, including
second locations within malls, airport concourses, office building lobbies,
hospitals, universities, stadiums, and supermarket foyers, with easy proximity
to pedestrian traffic flow
CONFIGURATION. We have developed a number of retail configurations, which have
wide application and adaptability to a variety of retail environments. In
addition to the stores that have been designed for prime mall locations, we have
developed other formats intended to extend its presence within and beyond mall
locations.
All of the retail store configurations are executed to include the same
high-quality marketing, merchandising and design features which customers have
come to expect from 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 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 2, 1999, Mrs. Fields' store portfolio consisted of 566
company-owned stores, 695 domestic franchised locations, 113 international
franchised locations and 164 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............... 135 5 7 187 82 164 580
Original Cookie.......... 92 11 17 --- --- --- 120
Great American............ 65 43 11 201 --- --- 320
-- -- -- --- --- --- ---
Cookie Subtotal........... 292 59 35 388 82 164 1,020
--- -- -- --- -- --- -----
Pretzel Time.............. 85 9 --- 139 --- --- 233
Pretzelmaker.............. 2 7 --- 168 31 --- 208
Hot Sam................... 58 7 12 --- --- --- 77
-- - -- ---- --- --- --
Pretzel Subtotal.......... 145 23 12 307 31 --- 518
--- -- -- --- -- --- ---
Totals.................... 437 82 47 695 113 164 1,538
=== == == === === === =====
As of January 2, 1999, 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................................. 80 85 15 180 12.6%
Texas...................................... 47 58 5 110 7.7%
Florida.................................... 27 41 14 82 5.8%
New York................................... 39 22 16 77 5.4%
Ohio....................................... 53 9 11 73 5.1%
Illinois................................... 32 21 12 65 4.6%
Michigan................................... 33 14 3 50 3.5%
Georgia.................................... 17 25 3 45 3.2%
Missouri................................... 6 34 1 41 2.9%
Colorado................................... 9 23 8 40 2.8%
Pennsylvania............................... 17 11 12 40 2.8%
Virginia................................... 20 17 3 40 2.8%
Arizona.................................... 14 17 5 36 2.5%
Utah ..................................... 7 26 1 34 2.4%
North Carolina............................. 7 23 3 33 2.3%
New Jersey................................. 11 13 7 31 2.2%
Indiana.................................... 14 11 4 29 2.0%
Iowa...................................... 4 24 -- 28 2.0%
Tennessee.................................. 4 21 3 28 2.0%
Washington................................. 9 15 -- 24 1.7%
Louisiana.................................. 12 9 2 23 1.6%
Maryland................................... 10 9 4 23 1.6%
Massachusetts.............................. 11 7 5 23 1.6%
Wisconsin.................................. 17 6 -- 23 1.6%
Connecticut................................ 7 10 5 22 1.5%
Alabama.................................... -- 18 3 21 1.5%
Minnesota................................. 4 17 -- 21 1.5%
South Carolina............................. 12 7 2 21 1.5%
Nevada.................................... 3 7 7 17 1.2%
Kansas.................................... 5 9 1 15 1.1%
Oklahoma.................................. 5 6 2 13 0.9%
Kentucky.................................. 3 8 1 12 0.8%
Nebraska................................... 5 7 -- 12 0.8%
West Virginia.............................. 4 7 1 12 0.8%
Oregon.................................... 1 8 -- 9 0.6%
Hawaii.................................... 1 7 -- 8 0.6%
Idaho..................................... 3 5 -- 8 0.6%
Arkansas.................................. 4 3 -- 7 0.5%
North Dakota.............................. -- 7 -- 7 0.5%
New Hampshire............................. 1 6 -- 7 0.5%
New Mexico................................ 2 3 2 7 0.5%
South Dakota.............................. 1 5 -- 6 0.4%
Alaska.................................... -- 2 3 5 0.4%
Mississippi............................... -- 4 -- 4 0.3%
Delaware.................................. 2 1 -- 3 0.2%
Guam...................................... -- 2 -- 2 0.4%
Maine...................................... 1 1 -- 2 0.1%
Montana.................................... -- 2 -- 2 0.1%
Washington DC.............................. -- 2 -- 2 0.1%
Wyoming.................................... 1 -- -- 1 0.1%
- -- -- -
Subtotal 565 695 164 1,424 100.0%
International Locations 1 113 -- 114
- --- -- ---
TOTAL 566 808 164 1,538
=== === === =====
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.
Pretzel Time stores buy a proprietary dry mix from selected
distributors and mix and bake pretzels at individual stores. 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 exclusively Coca Cola soft drinks in our
stores under an 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
regionally based staff of regional sales managers. District sales managers are
responsible for monitoring all cookie and pretzel stores in their territory.
Each regional sales manager is responsible for overseeing approximately 30
company-owned or franchised cookie and pretzel stores within his or her region
and reports to one of the four regional vice-presidents of store operations. The
field staff is also responsible for introducing new products and processes to
the stores, ensuring proper implementation and quality control. 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 store managers are a critical component in creating an
effective retail environment, and accordingly have developed ongoing programs to
improve the quality and effectiveness of our store managers and to increase
retention rates. New store managers are required to attend a two-week training
program at our Salt Lake City training facility and ongoing training courses in
new products, standards, and procedures are available throughout the year to all
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.
FRANCHISE OPERATIONS
In accordance with our business strategy, we have been selling, and
expect to continue to sell, selected company-owned stores to franchisees to
reduce costs, increase profitability and provide for liquidity and development
of additional stores in the future. We are also actively seeking to franchise
new stores.
COOKIES. Each franchisee pays Mrs. Fields an initial licensing fee of $25,000
per Mrs. Fields and 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. Mrs. Fields also
charges franchisees a fee to handle equipment purchases and to provide other
assistance in helping the franchisee to set up operations. After a store is set
up, a 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 2, 1999, the 22 largest Mrs. Fields
franchisees operated 164 stores, and the largest Mrs. Fields franchisee operated
14 stores.
PRETZELS. Each franchisee pays Pretzel Time an initial licensing 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.
Pretzel Time also charges franchisees a fee to handle equipment purchases and to
provide other assistance in helping the franchisee to set up operations. After a
store is set up, a franchisee pays royalty fees to Pretzel Time of 7% of the
franchised store's annual gross sales, and a marketing fee of 1% of annual gross
sales.
Each Pretzelmaker franchisee pays an initial licensing 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).
RETAIL LICENSING. We plan to capitalize on our brand awareness and the
perception of quality among consumers to expand the product line to include
products sold in other retail environments, including refrigerated dough,
dry-mix and non-food products, and other applications outside the original scope
of our retail cookie store concept. A current example is Legacy Brands, which
has the exclusive North American rights to retail frozen dough and offers Mrs.
Fields cookies throughout the supermarket industry. Another licensee is Wham-O,
Inc., which has a license to market the Mrs. Fields Baking Oven for children
sold in most toy stores and through mass merchandisers.
SUPPLY LICENSING. We currently have an agreement with United Airlines under
which our mail order division sells cookies to the airlines and allows the
airlines to promote the Mrs. Fields brand and products to its first-class
customers. 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 and other gift
items through its mail order gift catalogue using toll free telephone numbers,
including "1-800-COOKIES." 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. The
mail order division had $5.2 million in revenues in fiscal year 1998
representing an increase of approximately 35.5% over sales for fiscal year 1997.
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, Inc., TCBY Yogurt Inc., Auntie Anne's Soft Pretzels and
Baskin-Robbins 31 Flavors.
EMPLOYEES
As of January 2, 1999, we had approximately 6,614 employees in
company-owned stores, of whom approximately 943 were store managers and
assistant store managers, 58 were full-time sales assistants and 5,613 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 2, 1999, 1,636 of our 6,614 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.
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 a customized,
sophisticated 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 are upgrading our back-office
system to a Windows NT environment and are currently upgrading all our stores to
Pentium 333 machines. Completion of the upgrades is targeted for August 1999.
We have 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: (1) systems used for collecting and communicating sales data from
retail locations, and (2) internally developed plant production and distribution
software. This assessment was based primarily on independent, third party
verification from our information technology vendors and suppliers.
We are currently replacing our sales collection systems with software
and hardware that is Year 2000 compliant. Programming and development of the
software is complete and has been installed in approximately 10% of our stores.
We project installation will be complete by August 1999. The estimated cost of
this project is $1.9 million and includes software development and new store
computers and is included in the Mrs. Fields' 1999 budget. Funding for this
project is being provided by internal cash flow and by a lease finance company.
Upgrades of the plant production and distribution software will take
place in the first and second quarters of 1999 at an estimated cost of $10,000.
To date, approximately 50% of the upgrades have been implemented, we are
confident that this timetable will be met. No information technology projects
have been deferred as a result of our Year 2000 efforts.
We are neither dependent on the proper operation of the sales
collection systems nor the plant production and distribution software to run the
day-to-day operations of the business. Therefore, failure or malfunction of
these systems due to untimely or incomplete remediation would not have a
material adverse effect on Mrs. Fields' results of operations.
We are in the process of assessing Year 2000 issues with respect to our
significant vendors and financial institutions as to their compliance plans and
whether any Year 2000 issues will impede the ability of such vendors to continue
providing goods and services to Mrs. Fields. Failure of our key suppliers to
remedy their own Year 2000 issues could delay shipments of essential products,
thereby disrupting our operations. Furthermore, we rely on various service
providers, such as utility and telecommunication service companies, which are
beyond our control. This assessment is approximately 60% complete with final
completion anticipated by the second quarter of 1999. Based upon the results of
the assessment to date, we are not aware of any Year 2000 issues relating to our
significant vendors, financial institutions or our non-information technology
systems.
We do not have a contingency plan in place to address untimely or
incomplete remediation of Year 2000 issues, but we intend to develop such a plan
during the first half of 1999. These contingency plans are expected to address
issues related to significant vendors and financial institutions.
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 2, 1999, Mrs. Fields leased 997 retail stores, of which
391 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.
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 period from inception (September 18, 1996) to
December 28, 1996, and for the fiscal years ended January 3, 1998 and January 2,
1999, Mrs. Fields did not declare or pay cash dividends. Mrs. Fields has no
history of declaring and paying 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, Inc. as of the dates and for the periods indicated.
The results of operations for the periods December 31, 1995 through September
17, 1996 and September 18, 1996 through December 28, 1996 are not indicative of
the results for the full fiscal year. The selected historical financial data has
been derived from the audited financial statements of Mrs. Fields 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 of Hot
Mrs. Fields Inc. and Sam Company, Inc. (Combined)(1)
Subsidiaries(1)
December December
31, 1995 31, 1995
52 Weeks Ended(2) through 52 Weeks Ended(2) through
December December September December December September
31, 1994 30, 1995 17,1996(2) 31, 1994 30, 1995 17,1996(2)
---------- ---------- ------------ --------- ---------- ----------
Statement of Operations Data: (Dollars in thousands)
Net store and food sales............... $ 87,863 $ 59,956 $ 31,115 $ 89,648 $ 85,581 $ 54,366
Net store contribution(3).............. 8,083 6,591 3,747 13,912 13,063 5,854
Franchising and licensing, net........ 7,241 5,993 3,836 -- -- --
General and administrative expenses.... 16,379 15,612 8,984 12,546 9,216 7,538
Income (loss) from operations.......... (1,691) (3,526) (1,742) (750) 2,435 (2,772)
Net loss............................... (5,320) (2,368) (2,304) (5,355) (2,096) (5,645)
Other Data:
Interest expense....................... 2,155 51 80 4,381 4,356 2,895
Total depreciation and amortization.... 4,415 3,525 1,911 7,423 6,902 4,937
Capital expenditures................... 4,895 4,146 1,054 3,779 568 1,200
Store contribution for stores in the
process of $ 319 $ (802) $ (695) $ (542) $ (1,542) $ (1,751)
being closed or franchised(3)........
Ratio of earnings to fixed charges(4). -- -- -- -- -- --
Balance Sheet Data:
Working capital (deficit).............. $ (1,067) $ (3,114) $ (21,704) $ (46) $ 128 $ (3,640)
Total assets........................... 30,128 23,033 19,144 74,490 66,282 59,024
Debt and capital lease obligations,
including 22,850 21,226 21,224 36,956 32,357 30,977
current portion......................
Total stockholders' equity (deficit)... (25,419) (28,017) (30,318) 24,684 22,588 16,943
Mrs. Fields(1)
September 18, 53 Weeks 52 Weeks
1996 through Ended Ended
December 28, January 3, January 2,
1996(2) 1998(2) 1999(2)
--------- -------- -------
(Dollars in thousands)
Statement of Operations Data:
Net store and food sales....................................... $ 40,849 $ 127,845 $ 140,235
Net store contribution(3)...................................... 9,707 25,044 20,166
Franchising and licensing, net................................. 1,267 6,563 14,001
General and administrative expenses............................ 4,035 16,192 19,017
Store closure provision........................................ -- 538 7,303
Income (loss) from operations.................................. 5,649 8,415 (5,389)
Net income (loss).............................................. 1,961 (974) (19,143)
Other Data:
Interest expense............................................... 1,867 7,830 13,197
Total depreciation and amortization............................ 2,344 10,403 19,820
Capital expenditures........................................... 1,638 4,678 8,235
Store contribution for stores in the process of being closed or $ 513 $ (1,798) $ (2,054)
franchised(3)..................................................
Ratio of earnings to fixed charges(4).......................... 2.85x -- --
Balance Sheet Data:
Working capital (deficit)...................................... $ (2,889) $ 13,133 $ (12,727)
Total assets................................................... 110,055 149,684 231,906
Mandatorily redeemable cumulative preferred stock of subsidiaries 3,597 902 1,261
.
Debt and capital lease obligations, including current portion. 67,563 101,081 150,989
Total stockholder's equity..................................... 16,961 30,765 40,678
(1) On September 17, 1996, Mrs. Fields completed the acquisitions of
substantially all of the assets and assumed certain liabilities of the
predecessors. As a result of purchase accounting adjustments related to the
acquisitions, the Mrs. Fields financial statements are not directly
comparable to the predecessors' financial statements.
(2) Mrs. Fields and its predecessors operate using a 52/53-week year ending near
December 31.
(3) Store contribution is determined by subtracting all store operating expenses
including depreciation from net store sales. Management uses store
contribution information to measure operating performance at the store
level. Store contribution for stores in the process of being closed or
franchised as a separate caption is not in accordance with generally
accepted accounting principles. Store contribution may not be comparable to
other similarly titled measures.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness (whether paid or accrued and
net of debt premium amortization), including the amortization of debt
issuance costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with capital lease obligations, letter
of credit commissions, fees or discounts and the product of all dividends
and accretion on mandatorily redeemable cumulative preferred stock
multiplied by a fraction, the numerator of which is one and the denominator
of which is one minus the current combined federal, state and local
statutory tax rate. For fiscal years 1994 and 1995 and the period December
31, 1995 through September 17, 1996, Mrs. Fields Inc. and subsidiaries'
earnings were insufficient to cover fixed charges by $5,129,000, $2,127,000
and $2,099,000, respectively. For fiscal years 1994 and 1995 and the period
December 31, 1995 through September 17, 1996, Original Cookie and Hot Sam
(combined) earnings were insufficient to cover fixed charges by $5,131,000,
$1,833,000 and $5,645,000, respectively. For the 53 weeks ended January 3,
1998, and the 52 weeks ended January 2, 1999, Mrs. Fields' earnings were
insufficient to cover fixed charges by $319,000 and $18,827,000,
respectively.
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 sales and profitability of its cookie and
pretzel operations by implementing key elements of its business plan coupled
with strategic acquisitions. A key element of the business plan is closing or
franchising certain company-owned stores that do not meet specific financial and
geographical criteria established by management. Implementation of this element
of the business plan is expected to result in enhanced operating margins as
these stores are franchised or closed. 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 are expected to increase and net store sales and
overhead expenses associated with operating those stores are expected to be
reduced.
As Mrs. Fields exits stores it has identified for closure through
closing or franchising, results from operations are expected to improve on both
a short-term and long-term basis. With respect to these specific stores both
ongoing operating losses and negative cash flows are expected to cease.
Cash payments to landlords for early lease termination costs negatively
impact our immediate liquidity position. However, our overall financial position
is expected to be strengthened over time as cash flows from operating activities
increase. As cash is used to fund the store closure plans, corresponding store
closure reserves are reduced which has a neutral impact on working capital and
financial position. Should Mrs. Fields' cost estimates for exiting the remaining
stores not prove sufficient, it would have a negative impact on both liquidity
and results of operations.
Mrs. Fields believes that it has sufficient liquidity to complete its store
closure plans. A complete analysis of Mrs. Fields' store closure plans 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 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 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
Management has assessed the Year 2000 issue and has determined that all
internal information technology systems including financial software, corporate
networks, the AS400 system and all other systems are Year 2000 compliant with
the exception of:
(1) systems used for collecting and communicating sales data from
retail locations, and
(2) internally developed plant production and distribution software.
This assessment was based primarily on independent, third-party
verification from our vendors and suppliers.
We are currently replacing our sales collection systems with software and
hardware that is Year 2000 compliant. Programming and development of the
software is complete and has been installed in approximately 20% of our stores.
We project installation will be complete by August 1999. The estimated cost of
this project is $1.9 million and includes software development and new store
computers and registers. The costs to complete this project are included in Mrs.
Fields' 1999 budget. Funding for this project is being provided by internal cash
flow and by a lease finance company.
Upgrades of the plant production and distribution software will take place
in the first and second quarters of 1999 at an estimated cost of $10,000. To
date, approximately 50% of the upgrades have been implemented. We are confident
that this time table will be met. No information technology projects have been
deferred as a result of our Year 2000 efforts.
We are neither dependent on the proper operation of the sales collection
systems nor the plant production and distribution software to run the day-to-day
operations of the business. Therefore, failure or malfunction of these systems
due to untimely or incomplete remediation would not have a material adverse
effect on our results of operations.
We are in the process of assessing Year 2000 issues with respect to our
significant vendors and financial institutions as to their compliance plans and
whether any Year 2000 issues will impede the ability of such vendors to continue
providing goods and services to us. Failure of our key suppliers to remedy their
own Year 2000 issues could delay shipments of essential products, thereby
disrupting our operations. Furthermore, we rely on various service providers,
such as utility and telecommunication service companies, which are beyond our
control. This assessment is approximately 60% complete with final completion
anticipated by the end of the second quarter of 1999. Based upon the results of
the assessment to date, we are not aware of any Year 2000 issues relating to our
significant vendors, financial institutions or our non-information technology
systems.
We do not have a contingency plan in place to address untimely or
incomplete remediation of Year 2000 issues, but we intend to develop such plans
during the first half of 1999. These contingency plans are expected to address
issues related to significant vendors and financial institutions.
RESULTS OF OPERATIONS OF MRS. FIELDS AND ITS PREDECESSORS
The following table sets forth, for the periods indicated, certain
information relating to the operations of Mrs. Fields and its predecessors
expressed in thousands of dollars and percentage changes from period to period.
Annual data in the table reflects the combined results of the predecessors (for
the period December 31, 1995 through September 17, 1996) and Mrs. Fields (for
the period September 18, 1996 through December 28, 1996) and the consolidated
results of Mrs. Fields for the 53 weeks ended January 3, 1998 ("fiscal year
1997") and for the 52 weeks ended January 2, 1999 ("fiscal year 1998"). In order
for the presentations to be comparable, certain historical financial statement
information for the predecessors has been reclassified to be consistent with the
Mrs. Fields historical financial statement presentation.
For the 53 % of % of
For the 52 Weeks Change For the 52 Change
Weeks Ended Ended from Weeks Ended from
December 28, January 3, 1996 to January 2, 1997 to
1996 1998 1997 1999 1998
------------- ----------- -------- ----------- ------
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Revenues:
Net store and food sales............................ $ 126,330 $ 127,845 1.2% $140,235 9.7%
Franchising, net.................................... 3,447 4,535 31.6 12,464 174.8
Licensing, net...................................... 1,656 2,028 22.5 1,537 (24.2)
----------- ---------- -------------
Total revenues.................................... 131,433 134,408 2.3 154,236 14.8
Operating costs and expenses:
Selling and store occupancy costs................... 69,209 66,832 (3.4) 75,003 12.2
Cost of sales....................................... 31,340 32,028 2.2 38,482 20.2
General and administrative expenses................. 20,557 16,192 (21.2) 19,017 17.4
Store closure provision............................. --- 538 --- 7,303 1257.4
Depreciation and amortization....................... 9,192 10,403 13.2 19,820 90.5
----------- ---------- -------------
Total operating costs and expenses................ 130,298 125,993 (3.3) 159,625 26.7
Interest expense...................................... (4,842) (7,830) 61.7 (13,197) 68.5
Interest income....................................... 141 246 74.4 623 153.3
Other income (expense)................................ (2,422) (1,805) (25.5) (1,180) (34.6)
------------ ----------- --------------
Net loss.............................................. $ (5,988) $ (974) (83.7)% $(19,143) 1865.4%
============ =========== ==============
SUPPLEMENTAL INFORMATION:
CONTINUING COMPANY-OWNED STORES:
Net store and food sales............................ $ 95,635 $ 108,174 13.1% $ 122,713 13.4%
----------- ---------- ----------------
Operating costs and expenses:
Selling and store occupancy costs................... 44,963 50,858 13.1 60,900 19.7
Cost of sales....................................... 24,499 26,578 8.5 33,621 26.5
Depreciation and amortization....................... 4,932 3,896 (21.0) 5,972 53.3
----------- ---------- -------------
Total operating costs and expenses................ 74,394 81,332 9.3 100,493 23.6
----------- ---------- -------------
Continuing company-owned store contribution........... $ 21,241 $ 26,842 26.4% $ 22,220 (17.2)%
=========== =========== =============
STORES IN THE PROCESS OF BEING CLOSED OR FRANCHISED:
Net store and food sales............................. $ 30,695 $ 19,671 (35.9)%$ 17,522 (10.9)%
----------- ----------- -------------
Operating costs and expenses:
Selling and store occupancy costs................... 24,246 15,974 (34.1) 14,103 (11.7)
Cost of sales....................................... 6,841 5,450 (20.3) 4,861 (10.8)
Depreciation and amortization....................... 1,541 45 (97.1) 612 1260.0
----------- ---------- -------------
Total operating costs and expenses................ 32,628 21,469 (34.2) 19,576 (8.8)
Stores in the process of being closed or franchised loss $ (1,933) $ (1,798) (7.0) $ (2,054) 14.2%
=========== =========== =============
52 Weeks Ended January 2, 1999 Compared to the 53 Weeks Ended January 3, 1998
Company-owned and Franchised or Licensed Store Activity
As of January 2, 1999, there were 566 company-owned stores and 972
franchised or licensed stores in operation. The store activity for the 53 weeks
ended January 3, 1998 ("fiscal 1997") and the 52 weeks ended January 2, 1999
("fiscal 1998") is summarized as follows:
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 the 52 weeks ended January 2, 1999
compared to the 53 weeks ended January 3, 1998.
Net store sales from continuing company-owned stores and mail order
increased $14,539,000, or 13.4%, from $108,174,000 to $122,713,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. The
increase in net store sales from continuing company-owned stores was primarily
attributable to:
(1) the operation of 85 Pretzel Time continuing company-owned stores
acquired in connection with the acquisition of H&M and Pretzel
Time in July 1997,
(2) the operation of 65 Great American stores acquired in connection
with the acquisitions of Great American, Deblan, Chocolate Chip,
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 the 52 weeks ended January 2, 1999 compared to the
same period in fiscal 1997. Additionally, there were only 52 weeks in fiscal
1998 compared to 53 weeks in fiscal 1997.
Net store sales from stores in the process of being closed or franchised
decreased $2,149,000, or 10.9%, from $19,671,000 to $17,522,000 for the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. This
decrease results from closing or franchising 45 stores during the 52 weeks ended
January 2, 1999 and the effect of closing or franchising 82 stores during the 53
weeks ended January 3, 1998.
FRANCHISING REVENUES. Franchising revenues increased $7,929,000, or 174.8%,
from $4,535,000 to $12,464,000 for the 52 weeks ended January 2, 1999 compared
to the 53 weeks ended January 3, 1998. The increase in franchising revenues was
primarily attributable to royalties earned from 141 Pretzel Time franchised
stores obtained in connection with the acquisition of H&M and Pretzel Time in
1997, 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 the 52 weeks ended January 2, 1999 compared to the
53 weeks ended January 3, 1998. The decrease in licensing revenues was primarily
attributable to reduced concept licensing royalties.
TOTAL REVENUES. Total revenues increased by $19,828,000, or 14.8%, from
$134,408,000 to $154,236,000 for the 52 weeks ended January 2, 1999 compared to
the 53 weeks ended January 3, 1998 due to the reasons discussed above.
OPERATING COSTS AND EXPENSES
SELLING AND STORE OCCUPANCY COSTS. Total selling and store occupancy costs
increased $8,171,000, or 12.2%, from $66,832,000 to $75,003,000 for the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998.
Selling and store occupancy costs for continuing company-owned stores
increased by $10,042,000, or 19.7%, from $50,858,000 to $60,900,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998.
Within this overall increase, selling expenses for continuing company-owned
stores increased by $4,836,000, or 21.9%, from $22,094,000 to $26,930,000 for
the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January 3,
1998. The increase in selling expenses was primarily attributable to the 85
Pretzel Time continuing company-owned stores acquired in connection with the
acquisitions of H&M and Pretzel Time in 1997, the 65 Great American continuing
company-owned stores acquired in connection with the acquisitions of Great
American, Deblan, Chocolate Chip 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 the 52 weeks ended January 2, 1999 compared to
the 53 weeks ended January 3, 1998. The increase in store occupancy costs was
primarily attributable to the increase in the number of stores discussed above,
Mrs. Fields' reacquiring 33 continuing company-owned stores from franchisees
during the 52 weeks ended January 2, 1999, rent escalations in existing leases
and lease renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $1,871,000, or 11.7%, from $15,974,000 to $14,103,000
for the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January 3,
1998. This decrease was primarily the result of closing or franchising 45 stores
during the 52 weeks ended January 2, 1999 and the effect of closing or
franchising 82 stores during the 53 weeks ended January 3, 1998.
COST OF SALES. Total cost of sales increased $6,454,000, or 20.2%, from
$32,028,000 to $38,482,000 for the 52 weeks ended January 2, 1999 compared to
the 53 weeks ended January 3, 1998.
Cost of sales for continuing company-owned stores increased $7,043,000, or
26.5%, from $26,578,000 to $33,621,000 for the 52 weeks ended January 2, 1999.
This increase was primarily the result of the addition of 85 Pretzel Time
continuing company-owned stores in July 1997, 65 Great American continuing
company-owned stores acquired in connection with the acquisitions of Great
American, Deblan, Chocolate Chip 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 the 52 weeks ended January 2, 1999 as Mrs. Fields'
changed distributors to improve product availability and the reliability of
service to the stores.
Cost of sales for stores in the process of being closed or franchised
decreased $589,000, or 10.8%, from $5,450,000 to $4,861,000 for the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. This
decrease was primarily the result of closing or franchising 45 stores during the
52 weeks ended January 2, 1999 and the effect of closing or franchising 82
stores during the 53 weeks ended January 3, 1998.
GENERAL AND ADMINISTRATIVE Expenses. General and administrative expenses
increased $2,825,000, or 17.4%, from $16,192,000 to $19,017,000 for the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. The
increase in general and administrative expenses was primarily attributable to
the acquisitions of H&M and Pretzel Time in 1997, the acquisitions of Great
American, Deblan, Chocolate Chip, Karp 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.
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
the 52 weeks ended January 2, 1999 compared to the 53 weeks ended January 3,
1998. This increase was primarily attributable to increased goodwill
amortization from the acquisitions of H&M and Pretzel Time in fiscal 1997 and
the acquisitions of Great American, Deblan, Chocolate Chip 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 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 the 52 weeks
ended January 2, 1999 compared to the 53 weeks ended January 3, 1998. This
increase in depreciation and amortization expense was primarily attributable to
the addition of 85 Pretzel Time continuing company-owned stores in July 1997, 65
Great American continuing company-owned stores in August and September 1998 and
the acquisition of 2 Pretzelmaker continuing company-owned stores in 1998.
TOTAL OPERATING COSTS AND EXPENSES. Total operating costs and expenses
increased by $33,632,000, or 26.7%, from $125,993,000 to $159,625,000 for the 52
weeks ended January 2, 1999 compared to the 53 weeks ended January 3, 1998, for
the reasons discussed above.
INTEREST EXPENSE. Interest expense increased $5,367,000, or 68.5%, from
$7,830,000 to $13,197,000 for the 52 weeks ended January 2, 1999 compared to the
53 weeks ended January 3, 1998. This increase was primarily attributable to
interest expense on the $100,000,000 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 the 52 weeks ended January 2, 1999 compared to the 53
weeks ended January 3, 1998. This increase was primarily the result of interest
earned on excess cash provided by the $100,000,000 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 the 52 weeks ended January 2, 1999 compared to the
53 weeks ended January 3, 1998. This decrease was primarily attributable to
minority interest from the acquisitions of H&M and Pretzel Time in 1997 and a
decrease in the income tax provision during the 52 weeks ended January 2, 1999.
NET LOSS. The net loss increased by $18,169,000, or 1865.4%, from $974,000
to $19,143,000 for the 52 weeks ended January 2, 1999 compared to the 53 weeks
ended January 3, 1998 due to the combination of factors described above.
INCOME FROM CONTINUING COMPANY-OWNED STORES. Income from continuing
company-owned stores decreased by $4,622,000, or 17.2%, from $26,842,000 to
$22,220,000 for the 52 weeks ended January 2, 1999 compared to the 53 weeks
ended January 3, 1998. Income from continuing company-owned stores was
negatively impacted by a 1.8% decline in sales from stores that have been open
at least two years and by the increases in selling and store occupancy costs,
food cost of sales and depreciation and amortization described above. Income
from continuing company-owned stores was also negatively impacted by a calendar
shift whereby Mrs. Fields' year end was December 28 for fiscal 1996 and January
3, 1998 for fiscal 1997. As a result, the New Year's holiday week fell in the
first quarter of 1997 and again in the fourth quarter 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 the 52 weeks ended January 2, 1999
compared to the 53 weeks ended January 3, 1998. The increased loss was primarily
attributable to the addition of 65 stores from the acquisitions of Great
American, Deblan, Chocolate Chip and Karp in August and September 1998, offset
in part by closing or franchising 45 stores during the 52 weeks ended January 2,
1999.
53 Weeks Ended January 3, 1998 ("Fiscal Year 1997") Compared to the 52 Weeks
Ended December 28, 1996 ("Fiscal Year 1996") (Comprised of the Mrs. Fields Inc.,
Original Cookie and Hot Sam Pre-Acquisition Period of December 31, 1995 through
September 17, 1996 and the Mrs. Fields Post-Acquisition Period of September 18,
1996 through December 28, 1996)
COMPANY-OWNED AND FRANCHISED OR LICENSED STORE ACTIVITY
As of January 3, 1998, there were 481 company-owned stores and 553
franchised or licensed stores in operation. The store activity for the 52 weeks
ended December 28, 1996 and the 53 weeks ended January 3, 1998 is summarized as
follows:
Fiscal 1996 Fiscal 1997
Company- Franchised Company- Franchised
owned or Licensed owned or Licensed
Stores open as of the beginning of the fiscal year............ 540 415 482 418
Stores opened (including relocations)......................... 5 118 3 76
Stores acquired through business acquisitions................. -- -- 83 141
Stores closed (including relocations)......................... (39) (122) (7) (89)
Non-continuing company-owned (exit plan) stores closed
(September 18, 1996 forward)............................... (17) -- (73) --
Stores sold to franchisees.................................... (9) 9 (3) 3
Non-continuing company-owned (exit plan) stores franchised
(September 18, 1996 forward)............................... (3) 3 (9) 9
Stores acquired from franchisees.............................. 5 (5) 5 (5)
--------- ---------- ---------- ----------
Stores open as of the end of the fiscal year.................. 482 418 481 553
========= ========== ========= ==========
REVENUES
NET STORE AND FOOD SALES. Total net store and food sales, which includes
sales from stores and the mail order facility, increased $1,515,000, or 1.2%,
from $126,330,000 to $127,845,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996.
Net store sales from continuing company-owned stores and mail order
increased $12,539,000, or 13.1%, from $95,635,000 to $108,174,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
The increase in net store sales from continuing company-owned stores was
primarily attributable to the operation of Pretzel Time continuing company-owned
stores obtained in connection with the acquisitions of H&M and Pretzel Time in
July 1997 and an increase in average transaction amounts resulting from the
introduction of product line extensions and aggressive marketing initiatives,
offset in part by declining transaction counts in certain concepts. Also, three
new continuing company-owned stores were opened and five stores were acquired
from franchises during the 53 weeks ended January 3, 1998.
Based on stores that have been open for at least two years (adjusted for
the calendar shift), system-wide continuing company-owned store sales were up
0.8% during the 53 weeks ended January 3, 1998 compared to the 52 weeks ended
December 28, 1996.
Net store sales from stores in the process of being closed or franchised
decreased $11,024,000, or 35.9%, from $30,695,000 to $19,671,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
This decrease results from the partial year effect of closing 73 stores and
franchising 7 (net) stores during fiscal year 1997 and the full year effect of
closing 56 stores and franchising 7 (net) stores during fiscal year 1996.
FRANCHISING REVENUES. Franchising revenues increased $1,088,000, or 31.6%,
from $3,447,000 to $4,535,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996. The increase in franchising revenues was
primarily attributable to royalties earned from Pretzel Time franchised stores
obtained in connection with the acquisitions of H&M and Pretzel Time coupled
with new franchise openings in fiscal year 1997 and the full year effect of new
franchise openings in fiscal year 1996.
LICENSING REVENUES. Licensing revenues increased $372,000, or 22.5%, from
$1,656,000 to $2,028,000 for the 53 weeks ended January 3, 1998 compared to the
52 weeks ended December 28, 1996. The increase in licensing revenues is
primarily attributable to licensing fees earned on new license agreements
entered into during the 53 weeks ended January 3, 1998, and increased royalties
received from existing licensees.
TOTAL REVENUES. Total revenues increased by $2,975,000, or 2.3%, from
$131,433,000 to $134,408,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996, for the reasons discussed above.
OPERATING COSTS AND EXPENSES
SELLING AND STORE OCCUPANCY COSTS. Total selling and store occupancy costs
decreased $2,377,000, or 3.4%, from $69,209,000 to $66,832,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
Selling and store occupancy costs for continuing company-owned stores
increased by $5,895,000, or 13.1%, from $44,963,000 to $50,858,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996.
Within this overall increase, selling expenses increased by $4,029,000, or
15.7%, from $25,650,000 to $29,679,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. The increase in selling
expenses was primarily attributable to an increase in the minimum wage during
the third quarter of 1996 from $4.15 to $4.75 an hour and an increase in labor
hours to support the increase in sales. Store occupancy costs increased
$1,866,000, or 9.7%, from $19,313,000 to $21,179,000 for the 53 weeks ended
January 3, 1998 compared to the 52 weeks ended December 28, 1996. The increase
in store occupancy costs was primarily attributable to the addition of Pretzel
Time continuing company-owned stores in July 1997, and the opening of three
continuing company-owned stores and acquiring five stores from franchises during
the 53 weeks ended January 3, 1998 coupled with lease renewal increases.
Selling and store occupancy costs for stores in the process of being closed
or franchised decreased $8,272,000, or 34.1%, from $24,246,000 to $15,974,000
for the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December
28, 1996. This decrease is primarily the result of closing 73 stores and
franchising seven (net) stores during fiscal year 1997 and the full year effect
of closing 56 stores and franchising seven (net) stores during fiscal year 1996.
COST OF SALES. Total cost of sales increased $688,000, or 2.2%, from
$31,340,000 to $32,028,000 for the 53 weeks ended January 3, 1998 compared to
the 52 weeks ended December 28, 1996.
Cost of sales for continuing company-owned stores increased $2,079,000, or
8.5%, from $24,499,000 to $26,578,000 for the 53 weeks ended January 3, 1998.
This increase is primarily the result of the addition in July 1997 of Pretzel
Time continuing company-owned stores, offset by an aggressive product waste
control program which was uniformly applied to all product lines early in the
year. Additionally, Mrs. Fields re-negotiated certain vendor contracts to
capitalize on Mrs. Fields' economies of scale.
Cost of sales for stores in the process of being closed or franchised
decreased $1,391,000, or 20.3%, from $6,841,000 to $5,450,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996. This
decrease is primarily the result of closing 73 stores and franchising seven
(net) stores during fiscal year 1997 and the full year effect of closing 56
stores and franchising seven (net) stores during fiscal year 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $4,365,000, or 21.2%, from $20,557,000 to $16,192,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996. The
decrease in expenses was primarily attributable to the cost savings achieved by
combining the operations of Mrs. Fields Inc. and subsidiaries, Original Cookie,
Hot Sam and Pretzel Time which resulted in:
(1) reduced headcount with corresponding decreases in administrative
salaries and benefits;
(2) decreased professional service fees, including
legal and accounting services; and
(3) decreased corporate office expenditures, including general insurance,
repairs and maintenance and utilities as a direct result of closing
the Original Cookie and Hot Sam headquarters in Cleveland, Ohio, the
Pretzel Time headquarters in Harrisburg, Pennsylvania and the H&M
headquarters in Boise, Idaho.
DEPRECIATION AND AMORTIZATION EXPENSe. Total depreciation and amortization
expense increased by $1,211,000, or 13.2%, from $9,192,000 to $10,403,000 for
the 53 weeks ended January 3, 1998 compared to the 52 weeks ended December 28,
1996.
Depreciation and amortization expense for continuing company-owned stores
decreased $1,036,000, or 21.0%, from $4,932,000 to $3,896,000 for the 53 weeks
ended January 3, 1998 compared to the 52 weeks ended December 28, 1996. The
decrease in depreciation and amortization expense was primarily attributable to
Mrs. Fields recording the acquired assets of Mrs. Fields Inc. and subsidiaries,
Original Cookie and Hot Sam at their fair values at the time of purchase on
September 17, 1996, resulting in an overall reduction to the store asset base
and the corresponding depreciation. This decrease is partially offset by
additional depreciation expense resulting from the addition of Pretzel Time
continuing company-owned stores in July 1997, three newly opened continuing
company-owned stores and five stores acquired from franchises in fiscal year
1997.
TOTAL OPERATING COSTS AND EXPENSES. Total operating costs and expenses
decreased by $4,305,000, or 3.3%, from $130,298,000 to $125,993,000 for the 53
weeks ended January 3, 1998 compared to the 52 weeks ended December 28, 1996,
for the reasons discussed above.
INTEREST EXPENSE. Interest expense increased $2,988,000, or 61.7%, from
$4,842,000 to $7,830,000 for the 53 weeks ended January 3, 1998 compared to the
52 weeks ended December 28, 1996. This increase is primarily attributable to an
increase in interest expense as a result of the debt incurred to fund the
purchase of the assets of Mrs. Fields Inc. and subsidiaries, Original Cookie and
Hot Sam on September 17, 1996.
OTHER EXPENSES. Other expenses decreased $617,000, or 25.5%, from
$2,422,000 to $1,805,000 for the 53 weeks ended January 3, 1998 compared to the
52 weeks ended December 28, 1996. This decrease was primarily attributable to a
decrease in income tax provision, offset in part by an increase in accretion and
dividends on preferred stock of subsidiaries.
NET LOSS. The net loss decreased by $5,014,000, or 83.7%, from $5,988,000
to $974,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996. The net loss equaled 0.7% of total revenues during the
53 weeks ended January 3, 1998 compared to 4.6% of total revenues during the 52
weeks ended December 28, 1996. The decrease in net loss is primarily due to cost
savings achieved by combining the operations of Mrs. Fields Inc. and
subsidiaries, Original Cookie and Hot Sam, cost savings associated with the
acquisitions of H&M and Pretzel Time and improved store operations.
INCOME FROM CONTINUING COMPANY-OWNED STORES. The income from continuing
company-owned stores increased by $5,601,000, or 26.4%, from $21,241,000 to
$26,842,000 for the 53 weeks ended January 3, 1998 compared to the 52 weeks
ended December 28, 1996 due to the combination of the factors described above.
LOSS FROM STORES IN THE PROCESS OF BEING CLOSED OR FRANCHISED. The loss
from stores in the process of being closed or franchised decreased by $135,000,
or 7.0%, from $1,933,000 to $1,798,000 for the 53 weeks ended January 3, 1998
compared to the 52 weeks ended December 28, 1996. The decrease in negative
income was primarily attributable to closing 73 stores and franchising seven
(net) stores during fiscal year 1997 and the full year effect of closing 56
stores and franchising seven (net) stores during fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Mrs. Fields' principal sources of liquidity are cash flows from operations,
cash on hand and available borrowings under Mrs. Fields' existing revolving
credit facility. At January 2, 1999, Mrs. Fields had $4,751,000 of cash and cash
equivalents and $15,000,000 of available borrowings under its credit facility.
However, at January 2, 1999, this availability was limited by the bond indenture
to $4,777,000. It is expected that Mrs. Fields' principal uses of cash will be
to provide working capital, finance capital expenditures, including acquisitions
and store closure costs, meet debt service requirements and other general
corporate purposes. Mrs. Fields is highly leveraged. Based on current operations
and anticipated cost savings, Mrs. Fields believes that its sources of liquidity
will be adequate to meet its anticipated requirements for working capital,
capital expenditures and store closure costs, scheduled debt service
requirements and other general corporate purposes. There can be no assurance,
however, that Mrs. Fields' business will continue to generate cash flows at or
above current levels or that cost savings can be achieved. 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 2, 1999 COMPARED TO JANUARY 3, 1998
As of January 2, 1999, Mrs. Fields had liquid assets (cash and cash
equivalents and accounts receivable) of $13,962,000, a decrease of 30.2%, or
$6,036,000, from January 3, 1998 when liquid assets were $19,998,000. Cash and
cash equivalents decreased $11,536,000, or 70.8%, to $4,751,000 at January 2,
1999 from $16,287,000 at January 3, 1998. This decrease was primarily the result
of cash used for the acquisitions of Great American, Deblan and Chocolate Chip,
and Karp in August and September 1998, the acquisition of Pretzelmaker in
November 1998, the acquisition of 30% of Pretzel Time's common stock in November
and December 1998, capital expenditures of $8,235,000 relating to store remodels
and renovations and interest payments of $12,440,000 primarily relating to the
$140,000,000 total principal amount of senior notes, offset in part, by $623,000
in interest income earned during the year from excess cash investments.
Current assets decreased by $4,480,000 or 15.5%, to $24,343,000 at January
2, 1999 from $28,823,000 at January 3, 1998. This decrease was primarily the
result of a decrease in cash and cash equivalents of $11,536,000, offset by an
increase in accounts receivable of $5,500,000, an increase in inventories of
$2,403,000 and a decrease in the current portion of deferred income tax assets.
Long-term assets increased $86,702,000, or 71.1%, to $207,563,000 at
January 2, 1999 from $120,861,000 at January 3, 1998. This increase was
primarily the result of an increase in property and equipment and goodwill
related to the acquisitions of Great American, Deblan, Chocolate Chip, Karp and
Pretzelmaker.
Current liabilities increased by $21,380,000, or 136.3%, to $37,070,000 at
January 2, 1999 from $15,690,000 at January 3, 1998. This increase is due to an
increase in accounts payable, accrued interest payable, current portion of
long-term debt, accrued salaries, wages and benefits, store closure reserves and
accrued liabilities offset by a decrease in deferred income.
Mrs. Fields' working capital decreased by $25,860,000, or 196.9%, to a
negative $12,727,000 at January 2, 1999 from $13,133,000 at January 3, 1998, for
the reasons described above.
Mrs. Fields generated $9,429,000 of cash from operating activities during
the 52 weeks ended January 2, 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 $40,894,000 of cash from investing activities during
the 52 weeks ended January 2, 1999, primarily for the acquisition of Great
American, Deblan, Chocolate Chip, Karp and Pretzelmaker and capital expenditures
relating to store remodels and renovations.
Mrs. Fields generated $19,929,000 of cash from financing activities during
the 52 weeks ended January 2, 1999, primarily from the issuance of new senior
notes and a capital contribution from Mrs. Fields' Holding, net of principal
payments to retire Great American long-term debt and payment of acquisition
costs.
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. During the 52 weeks ended January 2, 1999, Mrs. Fields expended
$8,235,000 for capital assets and expects to expend approximately $7,000,000 for
all of 1999. Management anticipates that these expenditures will be funded with
cash generated from operations and short-term borrowings under its credit
facility as needed. As of March 31, 1999, the Company had drawn $3,000,000 on
its credit facility leaving $5,700,000 available for future use.
INFLATION
The impact of inflation on the earnings of the business has not been
significant in recent years. Most of Mrs. Fields' leases contain escalation
clauses. However, such leases are accounted for on a straight-line basis as
required by generally accepted accounting principles which minimizes
fluctuations in operating income. 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 $4,740,000 and
unamortized discount of $566,000.
1999 2000 2001 2002 2003 Thereafter Total Fair Value
($ in thousands) As of 1/2/99
Long-term debt, including
current portion (fixed rate) $3,336 $638 $529 $573 $443 $140,000 $145,519 $140,619
Weighted average interest rate 10.58% 9.84% 9.18% 9.17% 9.17% 10.13% 10.12%
Item 8. Financial Statements and Supplementary Data
Mrs. Fields' Original Cookies, Inc. and subsidiaries
Page
Report of Independent Public Accountants................................................................... 27
Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999...................................... 28
Consolidated Statements of Operations for the period from inception (September 18, 1996) to December 28, 1996
and for the years ended January 3, 1998 and January 2, 1999................................................ 30
Consolidated Statements of Stockholder's Equity for the period from inception (September 18, 1996) to
December 28, 1996 and for the years ended January 3, 1998 and January 2, 1999.............................. 31
Consolidated Statements of Cash Flows for the period from inception (September 18, 1996) to December 28, 1996
and for the years ended January 3, 1998 and January 2, 1999................................................ 32
Notes to Consolidated Financial Statements................................................................. 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mrs. Fields' Original Cookies, Inc.:
We have audited the accompanying consolidated balance sheets of Mrs. Fields'
Original Cookies, Inc. (a Delaware corporation) and subsidiaries as of January
3, 1998 and January 2, 1999, and the related consolidated statements of
operations, stockholder's equity and cash flows for the period from inception
(September 18, 1996) to December 28, 1996 and for each of the two years in the
period ended January 2, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mrs.
Fields' Original Cookies, Inc. and subsidiaries as of January 3, 1998 and
January 2, 1999, and the consolidated results of their operations and their cash
flows for the period from inception (September 18, 1996) to December 28, 1996
and for each of the two years in the period ended January 2, 1999 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 1, 1999
MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
January 3, January 2,
1998 1999
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 16,287 $ 4,751
Accounts receivable, net of allowance for doubtful accounts of $32 and $74,
respectively.................................................................... 1,535 3,208
Amounts due from franchisees and licensees, net of allowance for doubtful
accounts of $582 and $1,078, respectively....................................... 2,176 6,003
Inventories........................................................................ 3,100 5,503
Prepaid rent and other............................................................. 2,960 4,017
Deferred income tax assets......................................................... 2,765 861
---------- ---------
Total current assets.......................................................... 28,823 24,343
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PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements............................................................. 21,099 29,914
Equipment and fixtures............................................................. 14,100 17,108
Land . 128 240
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35,327 47,262
Less accumulated depreciation and amortization..................................... (6,125) (15,465)
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Net property and equipment.................................................... 29,202 31,797
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DEFERRED INCOME TAX ASSETS.............................................................. 734 2,638
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GOODWILL, net of accumulated amortization of $4,980 and $11,231, respectively........... 68,501 145,782
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TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of
$1,4