MRS FIELDS ORIGINAL COOKIES INC - 10-Q Quarterly Report

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

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

FORM 10-Q

ý		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2003
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 333-45179

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

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

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

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

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Yes o No ý

The registrant had 400 shares of common stock, $0.01 par value, outstanding at May 1, 2003.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

*PART 1—FINANCIAL INFORMATION*
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 29, 2003 and December 28, 2002
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the 13 Weeks Ended March 29, 2003 and March 30, 2002
	Condensed Consolidated Statements of Cash Flows for the 13 Weeks Ended March 29, 2003 and March 30, 2002
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures
*PART II—OTHER INFORMATION*
Item 1.	Legal Proceedings
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signatures
Certifications

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(Dollars in thousands)

ASSETS

			March 29, 2003			December 28, 2002
CURRENT ASSETS:
	Cash and cash equivalents		$	2,057		$	2,667
	Accounts receivable, net of allowance for doubtful accounts of $140 and $124, respectively			1,600			2,434
	Amounts due from franchisees and licensees, net of allowance for doubtful accounts of $973 and $953, respectively			3,367			4,493
	Amounts due from affiliates			34			—
	Inventories			3,329			2,998
	Prepaid rent and other			1,241			671
	Assets held for sale			300			—

		Total current assets		11,928			13,263

PROPERTY AND EQUIPMENT, at cost:
	Leasehold improvements			32,548			32,701
	Equipment and fixtures			26,744			27,737
	Land			240			240

				59,532			60,678
	Less accumulated depreciation and amortization			(43,698	)		(43,227	)

		Net property and equipment		15,834			17,451

GOODWILL, net				64,115			64,115
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $8,137 and $7,936, respectively				10,366			10,619
DEFERRED LOAN COSTS, net of accumulated amortization of $12,214 and $11,516, respectively				4,600			4,292
AMOUNTS DUE FROM AFFILIATES				1,500			1,500
OTHER ASSETS				354			349

			$	108,697		$	111,589

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

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

LIABILITIES AND STOCKHOLDER'S DEFICIT

			March 29, 2003			December 28, 2002
CURRENT LIABILITIES:
	Bank borrowings under line of credit		$	5,702		$	972
	Current portion of long-term debt			1,596			1,718
	Current portion of capital lease obligations			314			373
	Accounts payable			8,497			12,243
	Accrued liabilities			3,812			4,051
	Current portion of store closure reserve			678			678
	Accrued salaries, wages and benefits			3,907			3,946
	Accrued interest payable			4,675			1,099
	Sales taxes payable			623			983
	Amounts due to affiliates			2,487			6,575
	Current portion of deferred revenue			710			13

		Total current liabilities		33,001			32,651
LONG-TERM DEBT, net of current portion and discount				139,939			140,236
CAPITAL LEASE OBLIGATIONS, net of current portion				158			203
STORE CLOSURE RESERVE, net of current portion				1,025			1,232
DEFERRED REVENUE, net of current portion				4,853			3,869

		Total liabilities		178,976			178,191

STOCKHOLDER'S DEFICIT:
	Common stock, $.01 par value; 1,000 shares authorized, 400 shares outstanding			—			—
	Additional paid-in capital			64,575			64,575
	Deferred stock compensation			(447	)		(493	)
	Accumulated deficit			(134,276	)		(130,549	)
	Accumulated other comprehensive loss			(131	)		(135	)

		Total stockholder's deficit		(70,279	)		(66,602	)

COMMITMENTS AND CONTINGENCIES
			$	108,697		$	111,589

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)
(Dollars in thousands)

			13 Weeks Ended
			March 29, 2003			March 30, 2002
						(see Note 1)
REVENUES:
	Net store and food sales		$	21,581		$	30,742
	Franchising and licensing			7,493			8,860
	Mail order			2,810			2,254
	Management fee revenue			2,600			3,290
	Other operating revenue			19			133

		Total revenues		34,503			45,279

OPERATING COSTS AND EXPENSES:
	Selling and store occupancy costs			14,262			19,261
	Cost of sales—store and food			5,077			7,393
	Franchising and licensing			2,215			2,564
	Mail order			2,076			1,619
	General and administrative			7,004			7,849
	Stock compensation expense			46			—
	Store closure provision			71			—
	Depreciation			1,562			2,425
	Amortization—intangibles			247			275
	Other operating (income) expense, net			(157	)		345

	Total operating costs and expenses			32,403			41,731

		Income from operations		2,100			3,548
Interest expense, net				(4,457	)		(4,417	)

Loss before provision for income taxes, minority interest and cumulative effect of accounting change				(2,357	)		(869	)
Provision for income taxes				(123	)		(78	)

Loss before minority interest and cumulative effect of accounting change				(2,480	)		(947	)
Minority interest				—			6

Loss before cumulative effect of accounting change				(2,480	)		(941	)
Loss from cumulative effect of accounting change				—			(39,111	)

		Net loss	$	(2,480	)	$	(40,052	)

COMPREHENSIVE LOSS:
	Net loss		$	(2,480	)	$	(40,052	)
	Foreign currency translation adjustment			4			(44	)

		Comprehensive loss	$	(2,476	)	$	(40,096	)

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(Dollars in thousands)

				13 Weeks Ended
				March 29, 2003			March 30, 2002
							(see Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(2,480	)	$	(40,052	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Loss from cumulative effect of accounting change			—			39,111
		Depreciation and amortization			1,809			2,700
		Amortization of deferred loan costs and accretion of loan discount			726			610
		Stock compensation expense			46			—
		(Gain) loss on disposition of assets			(173	)		337
		Minority interest			—			(6	)
		Changes in assets and liabilities:
			Accounts receivable		834			6
			Amounts due from franchisees and licensees		1,126			809
			Amounts due to/from affiliates		(5,369	)		(2,622	)
			Inventories		(331	)		279
			Prepaid rent and other		(570	)		(1,824	)
			Other assets		6			1,780
			Accounts payable		(3,746	)		(9,826	)
			Accrued liabilities		(239	)		(504	)
			Store closure reserve		(207	)		(559	)
			Accrued salaries, wages and benefits		(39	)		(72	)
			Accrued interest payable		3,576			3,599
			Sales taxes payable		(360	)		(375	)
			Deferred revenue		1,681			(257	)

			Net cash used in operating activities		(3,710	)		(6,866	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment				(423	)		(1,158	)
	Proceeds from sale of property and equipment				346			1,898

			Net cash (used in) provided by investing activities		(77	)		740

CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings under line of credit				4,730			4,509
	Payment of debt financing costs				(1,006	)		—
	Principal payments on long-term debt				(447	)		(390	)
	Principal payments on capital lease obligations				(104	)		(244	)

			Net cash provided by financing activities		3,173			3,875

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH					4			(44	)

NET DECREASE IN CASH AND CASH EQUIVALENTS					(610	)		(2,295	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					2,667			3,503

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	2,057		$	1,208

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for interest			$	154		$	217

	Cash paid for income taxes			$	196		$	71

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS' ORIGINAL COOKIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Mrs. Fields' Original Cookies, Inc. and subsidiaries ("Mrs. Fields" or the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and, accordingly, do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position of Mrs. Fields as of March 29, 2003 and December 28, 2002, and the results of its operations and its cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 28, 2002 contained in Mrs. Fields' Annual Report on Form 10-K.

The results of operations for the 13 weeks ended March 29, 2003 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending January 3, 2004. Loss per share information is not presented as Mrs. Fields is wholly owned by Mrs. Fields' Holding Company, Inc. ("Mrs. Fields' Holding") and, therefore, its shares are not publicly traded. Mrs. Fields' Holding is a wholly owned subsidiary of Mrs. Fields Famous Brands, Inc. ("MFFB").

The results of operations and cash flows for the 13 weeks ended March 30, 2002 have been restated to reflect the transitional provisions of the cumulative effect of a change in accounting principle. The Company completed its analysis of the impact of Statement of Financial Accounting Standards No. 142, ("SFAS 142") in the third quarter of 2002 and, in accordance with the requirements of SFAS 142, recorded the resultant cumulative effect of a change in accounting principle of $39.1 million effective as of the beginning of fiscal 2002.

(2) RECLASSIFICATIONS

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

(3) RELATED PARTY TRANSACTIONS

The Company is party to various related party transactions with its parent company, Mrs. Fields' Holding, and with TCBY Holding Company, Inc., a wholly owned subsidiary of MFFB ("TCBY Holding"), and its subsidiaries (collectively, "TCBY"). The intercompany balance due to Mrs. Fields' Holding is principally the amount due under an Assignment and Assumption Agreement entered into on December 29, 2001 for the assignment of 20 Pretzel Time stores formerly owned and operated by Mrs. Fields' Holding.

Amounts receivable from TCBY represent amounts receivable under a management agreement, with the retention amount receivable classified as long-term. The amounts due to TCBY represent amounts due for excess royalties paid by TCBY under a license agreement to sell Mrs. Fields branded ice cream.

Amounts receivable from Riverport Equipment and Distribution Company, a subsidiary of TCBY ("Riverport"), are from the sale of equipment from the Company's closed stores.

Amounts due to MFFB represent amounts due under the Amended and Restated Tax Allocation Agreement among the Company, MFFB, Mrs. Fields' Holding, TCBY Holding and all of their respective subsidiaries.

Amounts due to/from affiliates as of March 29, 2003 and December 28, 2002 are as follows (in thousands):

		March 29, 2003		December 28, 2002
Amounts due from affiliates:
	Riverport	$	34	$	—
	TCBY—retention amount, long-term		1,500		1,500

		$	1,534	$	1,500

Amounts due to affiliates:
	Mrs. Fields' Holding—note payable	$	564	$	554
	Mrs. Fields' Holding		273		273
	Riverport		—		183
	TCBY		152		321
	MFFB—tax sharing		1,498		5,244

		$	2,487	$	6,575

(4) STORE CLOSURE RESERVE

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

Management periodically reassesses the remaining store closure reserves based on all available relevant data. Reserves for closed stores that are settled on terms more favorable than were originally estimated and expensed through the store closure provision are reversed through the store closure provision in the statement of operations. As of March 29, 2003, the remaining store closure reserve was $1.7 million.

Consolidated Analysis

The following table presents a summary of the activity in the store closure reserve during the 13 weeks ended March 29, 2003 and March 30, 2002 (in thousands):

	Mrs. Fields, Inc. and Original Cookie Co						H&M						Pretzel Time						Great American					Pretzelmaker						Consolidated
	Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Business Combination			Company Owned Stores Unrelated to Acquisition			Business Combination			Company Owned Stores Unrelated to Acquisition			Business Combination			Company Owned Stores Unrelated to Acquisition		Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Business Combination and Subsequent Adjustments			Company Owned Stores Unrelated to Acquisition			Total Business Combinations and Company Owned Stores
Balance, December 28, 2002	$	376		$	849		$	240		$	2		$	23		$	25		$	348		$	—	$	47		$	—		$	1,034		$	876		$	1,910
Additional reserves for continuing company owned and franchised stores targeted for closure, for the 13 weeks ended March 29, 2003		—			31			—			—			—			56			—			—		—			—			—			87			87
Reversal during the 13 weeks ended March 29, 2003		(16	)		—			—			—			—			—			—			—		—			—			(16	)		—			(16	)
Utilization for the 13 weeks ended March 29, 2003		(84	)		(115	)		(12	)		—			(17	)		(25	)		(18	)		—		(7	)		—			(138	)		(140	)		(278	)

Balance, March 29, 2003	$	276		$	765		$	228		$	2		$	6		$	56		$	330		$	—	$	40		$	—		$	880		$	823		$	1,703

Balance, December 29, 2001	$	515		$	1,348		$	286		$	113		$	32		$	89		$	549		$	—	$	75		$	32		$	1,457		$	1,582		$	3,039
Utilization for the 13 weeks ended March 30, 2002		(121	)		(184	)		(12	)		(90	)		(5	)		—			(131	)		—		(8	)		(8	)		(277	)		(282	)		(559	)

Balance, March 30, 2002	$	394		$	1,164		$	274		$	23		$	27		$	89		$	418		$	—	$	67		$	24		$	1,180		$	1,300		$	2,480