10-Q 1 a2056863z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: JUNE 30, 2001 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: 333-67393 MRS. FIELDS' HOLDING COMPANY, INC. (Exact name of registrant specified in its charter) DELAWARE 87-0563475 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation or 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) N/A ----- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ yes / / no The registrant had 3,497,221 shares of common stock, $0.001 par value, outstanding at August 14, 2001. MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of June 30, 2001 and December 30, 2000 ............................................ 3 Condensed Consolidated Statements of Operations for the 13 Weeks Ended June 30, 2001 and July 1, 2000 ............................. 5 Condensed Consolidated Statements of Operations for the 26 Weeks Ended June 30, 2001 and July 1, 2000 ............................. 6 Condensed Consolidated Statements of Cash Flows for the 26 Weeks Ended June 30, 2001 and July 1, 2000 ............................. 7 Notes to Condensed Consolidated Financial Statements ............... 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 14 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk .......... 20 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings .................................................. 21 ITEM 6. Exhibits and Reports on Form 8-K ................................... 21

2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. 3 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' DEFICIT

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. 4 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 5 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 6 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 7 MRS. FIELDS' HOLDING COMPANY, 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' Holding Company, Inc. and subsidiaries ("Mrs. Fields' Holding" or the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q, and accordingly, do not include all of the information and footnotes required by accounting principles generally accepted in the United States. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position of Mrs. Fields' Holding as of June 30, 2001 and December 30, 2000, and the results of its operations and its cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 30, 2000 contained in Mrs. Fields' Holding's annual report on Form 10-K. The results of operations for the 13 and 26 weeks ended June 30, 2001 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending December 29, 2001. Mrs. Fields' Holding is a majority owned subsidiary of Capricorn Investors II, L.P. ("Capricorn"). Mrs. Fields' Holding is a holding company and does not have any material operations other than ownership of all of the capital stock of Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields") and the operation of 20 Pretzel Time stores recently acquired from a franchisee. (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) STORE CLOSURE RESERVE Mrs. Fields' Holding's management reviews the historical and projected operating performance of its stores on a periodic basis to identify under- performing stores for impairment of net property investment or for targeted closing. The Company's policy is to recognize a loss for that portion of the net property investment determined to be impaired. Additionally, when a store is identified for targeted closing, either as part of a business combination or ongoing operations, the Company's policy is to record a reserve for the costs of closing the store, which are predominately estimated lease termination costs. Lease termination costs include both one-time settlement payments and continued contractual payments over the term of the original lease agreement where no settlement can be resolved with the landlord. As a result, although the exit plans were completed by the end of fiscal year 2000, a portion of the store closure reserve will remain until all cash payments have been made. The Company does not accrue for future expected operating losses. If and when a reserve that was established as part of purchase accounting is not fully utilized, the Company reduces the reserve to zero and goodwill is adjusted for the corresponding amount. As of June 30, 2001, the remaining store closure reserve was $2.9 million. 8 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) The following table presents a summary of the activity in the store closure reserve during the 26 weeks ended June 30, 2001 and July 1, 2000:

9 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following table presents a summary of activity for stores originally identified to be closed or franchised in connection with the applicable business combination for the 26 weeks ended July 1, 2000. All such stores were closed, franchised or removed from the store closure plan during fiscal 2000.

The following table presents a summary of activity for stores Mrs. Fields' Holding identified to be closed or franchised that were not originally identified to be closed or franchised in connection with a business combination for the 26 weeks ended July 1, 2000. All such stores were closed, franchised, or removed from the store closure plan in fiscal 2000.

(4) TCBY MANAGEMENT AGREEMENT In connection with the acquisition of TCBY Enterprises, Inc. (together with its parent company and its parent company's subsidiaries, "TCBY") on June 1, 2000, by Capricorn Investors III, L.P., an affiliate of Capricorn Investors II, L.P. ("Capricorn"), the majority owner of Mrs. Fields' Holding Company, entered into a Management Agreement (the "TCBY Management Agreement") with TCBY, pursuant to which the corporate and administrative functions of TCBY were transferred to the Company. The Company also oversees the sale of new TCBY franchises and monitors the activities of TCBY franchisees. Under the TCBY Management Agreement, the Company has agreed to manage and operate TCBY's business and pay specified operating and other costs of TCBY in exchange for an annual management fee of $12.4 million in fiscal 2001. The management fee is paid by TCBY semi-monthly and adjusted annually. In accordance with the terms and conditions of the TCBY Management Agreement, Mrs. Fields' Holding and TCBY will share costs savings obtained through the joint purchase of ingredients, supplies and services and Mrs. Fields' Holding is eligible to receive a portion of certain costs savings that may result from efficiencies introduced into the manufacturing process for TCBY's yogurt and ice cream by Mrs. Fields' Holding. The Company will also be entitled to receive a fee of approximately $2.5 million from TCBY for reimbursement of expenses incurred on behalf of TCBY and one-time transition costs incurred in the transfer of management functions of TCBY from Little Rock, Arkansas to Salt Lake City, Utah, if TCBY is successful in selling its existing dairy processing plant for net proceeds sufficient to retire debt associated with the plant or upon sufficient cash being available from the excess working capital of the dairy processing plant. 10 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Amounts due from affiliates is comprised of amounts due from TCBY under the Management Agreement and various marketing expenditures incurred on behalf of TCBY's advertising fund. During the 26 weeks ended June 30, 2001, the Company capitalized $60,000 of franchise fees paid to TCBY as intangible assets in connection with the roll out of TCBY products in 12 company-owned stores. (5) PREFERRED STOCK ISSUANCE AND DEBT EXTINGUISHMENT In March 2001, the Company issued 14,723 shares of 16.5% Cumulative Preferred Stock due 2006 (the "Preferred Stock") at a price of $1,000 per share for net proceeds of approximately $14.5 million in a private offering (the "Offering"). In connection with the Offering, the Company issued 110,201 shares of common stock, which have been recorded as a discount to the Preferred Stock based upon the relative fair values of the respective securities. Dividends are cumulative and payable in arrears on January 30, April 30, July 30 and October 30 of each year. Dividends accrue at 16.5% per annum of the liquidation preference and are payable through an increase in the liquidation preference. The Preferred Stock matures on June 1, 2006 and will entitle the holder to cash of $2,222 per preferred share, which will be the liquidation preference then in effect, plus accumulated dividends. The Company's ability to retire such shares at maturity is subject to its having sufficient funds available, as well as its compliance with the Company's Indenture related to the Notes, and may be restricted under other debt arrangements of the Company in effect at the time of maturity. The net proceeds from the Offering were used to repurchase approximately $27.1 million principal amount of the Company's 14% Senior Secured Discounts Notes for approximately $14.5 million. Approximately $11.5 million of the principal amount repurchased was purchased from the Company's majority stockholder, who had recently acquired the notes from a third party. The balance of the notes were purchased directly from a third party. The terms upon which the notes were repurchased were substantially identical for both the Company's majority stockholder and the third party. The Company recorded a $5.3 million extraordinary gain on the retirement of all of the notes repurchased, net of the write-off of the related debt issuance costs and original issue discount, during the 26 weeks ended June 30, 2001. (6) REPORTABLE SEGMENTS Management evaluates performance at Mrs. Fields' Holding using two reportable operating segments; namely, (1) company-owned stores and related activity and (2) franchising and licensing activity. The segments are determined by revenue source; direct sales or royalties and license fees. The company-owned stores segment consists of both cookie and pretzel stores owned and operated by Mrs. Fields' Holding and sales from its catalog / e-tailing business. The franchising and licensing segment consists of cookie and pretzel stores, which are owned and operated by third parties who pay Mrs. Fields' Holding an initial franchise fee and monthly royalties based on a percentage of gross sales, sales of cookie dough manufactured by the Company to its franchisees and other licensing activity not related to cookie or pretzel stores. Sales and transfers between segments are eliminated in consolidation. Mrs. Fields' Holding evaluates the performance of each segment based on contribution margin. Contribution margin is computed as the difference between the revenues generated by a reportable segment and the selling and store occupancy costs and cost of sales related to that reportable segment. It is used as a measure of the operating performance of an operating segment. Mrs. Fields' Holding does not allocate any revenue generated from the TCBY management fee, general and administrative expense, other income (expense), interest expense, or depreciation and amortization of assets to its reportable operating segments. Mrs. Fields' Holding does not separate the costs incurred while performing activities for the TCBY management agreement from costs of operating Mrs. Fields' Holding, as most of Mrs. Fields' Holding's employees support both companies. Therefore the activity for managing TCBY is not reported as a separate segment. 11 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Segment revenue and contribution margin are presented in the following table (dollars in thousands).

The reconciliation of contribution margin to net loss is as follows (dollars in thousands):

(1) EBITDA consists of earnings before depreciation, amortization, interest, income taxes, minority interest and other income or expense. EBITDA is not intended to represent cash flows from operations as defined by accounting principles generally accepted in the United States and should not be considered as an alternative to net income (loss) as an indicator of operating performance or to cash flows as a measure of liquidity. EBITDA has been included in this presentation because it is one of the indicators by which Mrs. Fields' Holding assesses its financial performance and its capacity to service its debt. 12 MRS. FIELDS' HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Geographic segment information is as follows (dollars in thousands):

Revenues from international franchising and licensing are generated from Canada and Australia with no other countries having material representation. Revenues from international company-owned stores and income from foreign operations are immaterial. One customer who manufactures and sells ready-to-eat cookies, under our registered trademarks, accounted for 81.8 percent, or $2.3 million, of the licensing and other revenue during the 26 weeks ended June 30, 2001. No customers accounted for more than 10 percent of Mrs. Fields' Holding's total revenues or individual segment's revenues during the 26 weeks ended July 1, 2000. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Mrs. Fields' Holding Company, Inc. ("Mrs. Fields' Holding"), is a majority owned subsidiary of Capricorn Investors II, L.P. ("Capricorn"). Mrs. Fields' Holding is a holding company and does not have any material operations other than ownership of all of the capital stock of Mrs. Fields' Original Cookies, Inc. ("Mrs. Fields") and the operation of 20 Pretzel Time stores held in three subsidiaries; namely, Peachtree Pretzel Time, Inc., Sunshine Pretzel Time, Inc. and DMBC, Inc. Mrs. Fields has eight wholly owned operating subsidiaries; namely, Great American Cookie Company, Inc., The Mrs. Fields' Brand, Inc., Pretzel Time, Inc., Pretzelmaker Holdings, Inc., Mrs. Fields' Cookies Australia, Mrs. Fields' Cookies (Canada), H&M Canada, and Pretzelmaker of Canada; and three partially owned subsidiaries. Mrs. Fields' Holding, primarily through its Mrs. Fields subsidiary, operates and franchises retail stores, which sell freshly baked cookies, brownies, pretzels and other food products through six specialty retail chains. As of June 30, 2001, Mrs. Fields' Holding owned and operated 150 Mrs. Fields Cookies stores, 56 Original Cookie Company stores, 91 Great American Cookies stores, 39 Hot Sam Pretzels stores, 92 Pretzel Time stores and 6 Pretzelmaker stores in the United States. Additionally, Mrs. Fields' Holding has franchised or licensed 830 stores in the United States and 117 stores in several other countries. Capricorn Investors III, L.P., an affiliate of Capricorn Investors II, L.P., Mrs. Fields' Holding's majority stockholder, acquired TCBY Enterprises, Inc. ("TCBY"), a retail snack food company in 2000. In connection with the acquisition, Mrs. Fields' Holding entered into a Management Agreement (the "TCBY Management Agreement") with TCBY Holding Company, Inc., the parent company of TCBY, and TCBY Systems, LLC, a wholly owned subsidiary of TCBY, pursuant to which the corporate and administrative functions of TCBY were transferred to Mrs. Fields' Holding. Under the TCBY Management Agreement, Mrs. Fields' Holding has agreed to manage and operate TCBY's business, and pay specified operating and other costs of TCBY (including specified costs associated with expenses incurred on behalf of TCBY and the transfer of the management function from Little Rock, Arkansas to Salt Lake City, Utah), in exchange for a management fee paid by TCBY semi-monthly. Revenue generated from the management fee is reported under the caption "Management fee revenue" is accompanying condensed consolidated the statements of operations. Mrs. Fields' Holding's business follows seasonal trends and is also affected by climate and weather conditions, which in turn affects mall traffic. Because Mrs. Fields' Holding's stores are heavily concentrated in shopping malls, Mrs. Fields' Holding's sales performance is significantly dependent on the performance of those malls. Consumer traffic in the mall is lower in 2001 than that experienced in 2000 with retailers attracting 8 percent to 12 percent fewer shoppers in June 2001 compared with prior year levels. Mrs. Fields' Holding typically experiences its highest revenues in the fourth quarter of the calendar year due to the holiday season. 14 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain information relating to the operations of Mrs. Fields' Holding and percentage changes from period to period. Data in the table reflect the consolidated results of Mrs. Fields' Holding for the 13 and 26 weeks ended June 30, 2001 and July 1, 2000 (dollars in thousands).

13 WEEKS ENDED JUNE 30, 2001 COMPARED TO THE 13 WEEKS ENDED JULY 1, 2000 As of June 30, 2001, there were 434 Company-owned stores and 947 franchised or licensed stores in operation. The store activity for the 13 weeks ended June 30, 2001 and July 1, 2000 is summarized as follows:

REVENUES NET STORE AND FOOD SALES. Total net store sales decreased $555,000, or 1.7 percent, from $32.6 million to $32.1 million for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. Sales decreased 5.0 percent for mall stores that had been open one year or more when compared to the same prior year period. Mail order sales for the 13 weeks ended June 30, 2001 increased $585,000, or 34.1 percent, compared to the 13 weeks ended July 1, 2000. FRANCHISING REVENUES. Franchising revenues decreased $298,000, or 4.9 percent, from $6.1 million to $5.8 million for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. Franchising revenues were 15 negatively impacted primarily by lower initial franchise fees in the current period and 20, or 2.1 percent, fewer franchised stores open at June 30, 2001. Sales of cookie dough to Great American franchisees were flat during the current quarter when compared to the prior year period. MANAGEMENT FEE REVENUE. The Company received management fee revenue of $2.9 million during the current quarter to manage TCBY, which was acquired by an affiliate of the Company on June 1, 2000. The management fee revenue during the 13 weeks ended July 1, 2000 was $1.3 million, representing one month of management fee income. LICENSING AND OTHER REVENUES. Licensing revenues increased $92,000 from $201,000 to $293,000 for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. The increase was the result of royalties received under licensing agreements of branded products. OPERATING COSTS AND EXPENSES SELLING AND STORE OCCUPANCY COSTS. Total selling and store occupancy costs increased $120,000, or 0.7 percent, from $18.4 million to $18.5 million for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. The increase is principally attributable to increased labor costs. COST OF SALES. Total cost of sales decreased $222,000, or 2.0 percent, from $11.0 million to $10.8 million for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. Cost of sales as a percent of net store and food sales remained consistent at 33.8 percent for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. STORE CLOSURE BENEFIT. Store closure benefit was comparable for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $1.0 million, or 16.1 percent, from $6.3 million to $7.3 million for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. The increase in general and administrative expenses was primarily attributable to costs associated with managing TCBY under the management agreement discussed above. The Company expects general and administrative costs to continue at the current level as it manages and operates TCBY's business. However, these increased costs will be offset by the management fee revenue received from TCBY. DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense increased by $239,000, or 3.8 percent, from $6.3 million to $6.6 million for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. The increase is primarily due to the the acquisition of 20 stores from a franchisee in late 2000. TOTAL OTHER. Interest expense for the 13 weeks ended June 30, 2001, decreased by $1.0 million, or 16.5 percent, compared to the prior year period. This was due to the early extinguishment of debt in March 2001 and to lower interest rates incurred under the Company's line of credit. Interest income for the 13 weeks ended June 30, 2001 was comparable to the 13 weeks ended July 1, 2000. Total other decreased by $530,000, from $78,000 of income to $423,000 of expense for the 13 weeks ended June 30, 2001 compared to the 13 weeks ended July 1, 2000. The decrease is primarily attributable to $725,000 in expense related to accretion of the preferred stock during the 13 weeks ended June 30, 2001. There was no preferred stock accretion during the 13 weeks ended July 1, 2000. 16 26 WEEKS ENDED JUNE 30, 2001 COMPARED TO THE 26 WEEKS ENDED JULY 1, 2000 As of June 30, 2001, there were 434 Company-owned stores and 947 franchised or licensed stores in operation. The store activity for the 26 weeks ended June 30, 2001 and July 1, 2000 is summarized as follows:

REVENUES NET STORE AND FOOD SALES: Total net store sales decreased $1.0 million, or 1.6 percent from $66.4 million to $65.4 million for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. The decrease was due to having 6, or 14.0 percent, fewer stores open at the beginning of the period for fiscal year 2001 compared to the fiscal period in 2000. Also sales decreased 4.5 percent for mall stores that had been open one year or more when compared to the same prior year period. Mail order sales for the 26 weeks ended June 30, 2001 increased $1.2 million, or 38.2 percent, compared to the 26 weeks ended July 1, 2000. FRANCHISING REVENUES. Franchising revenues decreased $517,000 or 4.3 percent, from $12.0 million to $11.5 million for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. Franchising revenues were negatively impacted primarily by lower initial franchise fees in the current period and 20, or 2.1 percent, fewer franchised stores open at June 30, 2001. Sales of cookie dough to Great American franchises were flat during the current period when compared to the prior year period. MANAGEMENT FEE REVENUE. The Company received management fee revenue of $6.3 million during the 26 weeks ended June 30, 2001 to manage TCBY, which was acquired by an affiliate of the Company on June 1, 2000. The management fee revenue during the 26 week ended July 1, 2000 was $1.3 million representing one month of management fee income. LICENSING AND OTHER REVENUES. Licensing revenues increased $2.1 million, from $361,000 to $2.5 million for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. During the 26 weeks ended June 30, 2001, the Company received $950,000 for the sale of certain recipes and royalty revenues of $1.4 million under an agreement with a national manufacturer of cookies for the sale of cookies branded under the Mrs. Fields name and sold through specific retail channels and geographic locations. The remaining increase was the result of royalties under other licensing agreements of branded products. OPERATING COSTS AND EXPENSES SELLING AND STORE OCCUPANCY COSTS. Total selling and store occupancy costs increased $264,000, or 0.7 percent, from $36.7 million to $36.9 million for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. The increase is attributable to increased labor costs. COST OF SALES. Total cost of sales decreased $509,000, or 2.3 percent, from $22.0 million to $21.5 million for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. Cost of sales of net store and food sales increased 0.3 percent from 33.1 percent to 32.8 percent for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. This increase was principally due to a change in the product mix, including smoothies and other products that have higher cost margins. STORE CLOSURE BENEFIT. Store closure benefit was comparable for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $3.3 million, or 28.8 percent, from $11.5 million to $14.8 million for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 2000. The increase in general and administrative expenses was primarily attributable to costs associated with managing TCBY under the management agreement discussed above. The Company expects general and administrative costs to continue at the current level as it manages and operates TCBY's business. However, these increased costs will be offset by the management fee revenue received from TCBY. 17 DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense for the 26 weeks ended June 30, 2001 was comparable to the 26 weeks ended July 1, 2000. TOTAL OTHER. Interest expense for the 26 weeks ended June 30, 2001 decreased $1.2 million, or 9.9 percent, compared to the prior period. This was due to early extinguishment of debt in March 2001 and lower interest rates incurred under the Company's line of credit. Interest income for the 26 weeks ended June 30, 2001 was comparable to the 26 weeks ended July 1, 2000. Total other expense decreased by $372,000, from $12,388 to $12,016 for the 26 weeks ended June 30, 2001 compared to the 26 weeks ended July 1, 1000. The decrease is primarily attributable to $913,000 of accretion on the preferred stock issued during the 26 weeks ended June 30, 2001. There was no preferred stock expense during the 26 weeks ended July 1, 2000. EXTRAORDINARY ITEM. The company recognized an extraordinary gain in the amount of $5.3 million during the 26 weeks ended June 30, 2001 in connection with the early extinguishment of debt. LIQUIDITY AND CAPITAL RESOURCES GENERAL Mrs. Fields' Holding's principal sources of liquidity are cash flows from operating activities, cash on hand and available borrowings under Mrs. Fields' Holding's existing revolving credit facility. As of June 30, 2001, Mrs. Fields' Holding had $2.4 million of cash and cash equivalents on hand and approximately $4.1 million additional borrowings available under its revolving credit facility. Mrs. Fields' Holding expects to use its existing cash, cash flows from operating activities and its credit facility to provide working capital, finance capital expenditures and to meet debt service requirements, including the December 1, 2001 interest payment of approximately $7.0 million on its long term debt. Based on current operations, Mrs. Fields' Holding believes that its sources of liquidity will be adequate to meet its anticipated requirements for working capital, capital expenditures, scheduled debt service requirements and other general corporate purposes on both a short and long-term basis. There can be no assurance, however, that Mrs. Fields' Holding's business will continue to generate cash flows at or above current levels. JUNE 30, 2001 COMPARED TO DECEMBER 30, 2000 As of June 30, 2001, Mrs. Fields' Holding had liquid assets (cash and cash equivalents and receivables) of $10.9 million, a decrease of 17.0 percent, or $3.0 million, from December 30, 2000 when liquid assets were $13.9 million. Cash decreased $2.3 million, or 49.2 percent, to $2.4 million at June 30, 2001 from $4.7 million at December 30, 2000. Mrs. Fields' Holding's working capital deficit increased by $1.3 million, or 15.9 percent, to a deficit of $9.9 million at June 30, 2001 from a deficit of $8.6 million at December 30, 2000. The increase is due to a $616,000 decrease in current assets, primarily balances due from franchisees and licensees and cash offset by an increase in prepaid rent, compared to a $1.2 million increase in current liabilities, primarily bank overdraft and borrowings under the line of credit less a decrease in accounts payable. Long-term assets decreased $9.2 million, or 5.4 percent, to $162.5 million at June 30, 2001 from $171.7 million at December 30, 2000. This decrease was primarily the result of scheduled depreciation and amortization of property and equipment, goodwill and deferred loan costs and the retirement of loan cost due to the extinguishment of debt. Mrs. Fields' Holding's operating activities utilized cash of $13.5 million for the 26 weeks ended June 30, 2001, primarily from the payment of expenses incurred during the busy holiday season in December 2000, but not paid until January. Mrs. Fields' Holding utilized $4.8 million of cash in investing activities during the 26 weeks ended June 30, 2001, primarily for capital expenditures relating to store remodels and renovations. Mrs. Fields' Holding generated $5.9 million in cash from financing activities during the 26 weeks ended June 30, 2001, primarily due to the reduction in long-term debt and issuance of common and preferred stock. The specialty cookie and pretzel businesses do not require the maintenance of significant receivables or inventories; however, the increase in Mrs. Fields' franchise and license business does require the Company to carry a receivable from our franchisees and licensees. Mrs. Fields' Holding 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, 18 which are key to generating current sales, reduce Mrs. Fields' Holding's working capital. During the 26 weeks ended June 30, 2001 and July 1, 2000, Mrs. Fields' Holding expended cash of $5.2 million and $2.5 million, respectively, for capital assets. The Company expects to expend a total of approximately $14.0 million for capital assets in 2001. Management anticipates that these expenditures will be funded with cash generated from operating activities and short-term borrowings under its credit facility as needed. INFLATION The impact of inflation on the earnings of the business has not been significant in recent years. Most of Mrs. Fields' Holding's leases contain escalation clauses (however, such leases are accounted for on a straight-line basis as required by accounting principles generally accepted in the United States, which minimizes fluctuations in operating income) and many of Mrs. Fields' Holding's employees are paid hourly wages at the Federal minimum wage level. Minimum wage increases will negatively impact Mrs. Fields' Holding's payroll costs in the short term, but management believes such impact can be offset in the long term through operational efficiency gains and, if necessary, through product price increases. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, became effective for the Company's fiscal year beginning 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivative instruments as either assets or liabilities in the condensed consolidated balance sheet and measure those instruments at fair value. The Company adopted SFAS No. 133, as amended, during the first quarter of fiscal 2001. The adoption did not have a material impact on the Company's results of operations, financial position or liquidity. In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS No. 141 will have a significant impact on its financial statements In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which changes the accounting treatment as it applies to goodwill and other intangibles assets after the assets have been initially recognized in the financial statements. These changes include non-amortization of goodwill over a pre-determinable, finite life; rather the goodwill and intangibles would have indefinite useful lives. The statement requires annual assessment for any impairment of the carrying value of the assets based upon an estimation of the fair value of the reporting unit to which the assets pertain. The effective date of this statement is for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 for its fiscal year beginning December 30, 2001. Upon adoption of SFAS No. 142, the Company will stop amortization of goodwill that resulted from business combinations initiated prior to the adoption of SFAS No. 141. The Company will evaluate goodwill under the SFAS No. 142 transitional impairment test. Any transitional impairment loss will be recognized as a change in accounting principle. However, the Company does not expect any transitional impairment loss to be recognized. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no significant changes in market risks since the end of the Company's December 30, 2000 year. For more information, please read the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 30, 2000. 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' Holding's future financial performance, including growth in net sales and earnings, cash flows from operating activities, capital expenditures, the ability to refinance indebtedness. These forward-looking statements are subject to risks, uncertainties and assumptions, including the following: o Our ability to continue integrating the businesses of companies acquired with Mrs. Fields' Holding and to realize the expected ongoing benefits and cost savings from our acquisitions; o Our ability to meet our debt and interest obligations, 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' Holding, 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; and o Changes in mall customer traffic. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of business, Mrs. Fields' Holding is involved in routine litigation, including franchise disputes. Mrs. Fields' Holding is not a party to any legal proceedings which, in the opinion of management of Mrs. Fields' Holding, after consultation with legal counsel, is material to Mrs. Fields' Holding's business, financial condition or results of operations beyond amounts provided for in the accompanying financial statements. Mrs. Fields' Holding's stores and products are subject to regulation by numerous governmental authorities, including, without limitation, federal, state and local laws and regulations governing health, sanitation, environmental protection, safety and hiring and employment practices. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) FORMS 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MRS. FIELDS' HOLDING COMPANY, INC. /s/ LARRY A. HODGES AUGUST 14, 2001 ----------------------------------------- --------------- LARRY A. HODGES, PRESIDENT AND CEO DATE /s/ SANDRA M. BUFFA AUGUST 14, 2001 ----------------------------------------- --------------- SANDRA M. BUFFA, SR. VICE PRESIDENT, CFO DATE AND TREASURER (CHIEF FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER) 21

MRS FIELDS HOLDING CO INC 10-Q