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 October 2, 2004

 

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:  333-115046

 

MRS. FIELDS FAMOUS BRANDS, LLC

(Exact Name of Registrant Specified in Its Charter)

 

 

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  ý  No  o

 

On November 16, 2004, 100 common interests of registrant were outstanding, all of which are held by an affiliate.  There is no established trading market for registrant’s common interests.

 

 

MRS. FIELDS FAMOUS BRANDS, LLC AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of October 2, 2004 and January 3, 2004
	Condensed Consolidated Statements of Income and Comprehensive Income for the 13 Weeks Ended October 2, 2004 and September 27, 2003
	Condensed Consolidated Statements of Income and Comprehensive Income for the 39 Weeks Ended October 2, 2004 and September 27, 2003
	Condensed Consolidated Statements of Cash Flows for the 39 Weeks Ended October 2, 2004 and September 27, 2003
	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 6. Exhibits
Signatures

 

2

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

MRS. FIELDS FAMOUS BRANDS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

 

		October 2, 2004			January 3, 2004
ASSETS:
Cash and cash equivalents		$	13,473		$	1,300
Receivables, net of allowance for doubtful accounts of $1,243 and $1,948, respectively		6,611			9,070
Amounts due from affiliates		23			—
Inventories		2,724			1,962
Prepaid expenses and other		1,599			1,122
Deferred tax asset		1,391			1,535
Total current assets		25,821			14,989
Property and equipment, net		3,515			3,174
Goodwill, net		113,456			113,456
Trademarks and other intangible assets, net		24,101			26,149
Deferred loan costs, net of accumulated amortization of $8,727 and $20,470		8,160			4,222
Other assets		599			612
		$	175,652		$	162,602
LIABILITIES AND MEMBER’S DEFICIT:
Accounts payable		$	3,566		$	6,789
Accrued liabilities		10,808			13,210
Current liabilities of discontinued operations		68			405
Amounts due to affiliates		2,646			3,135
Current portion of capital lease obligations		39			—
Current portion of deferred revenues		2,013			2,289
Total current liabilities		19,140			25,828
Long-term debt		195,747			185,762
Capital lease obligations, net of current portion		445			—
Deferred revenues, net of current portion		1,045			2,019
Deferred tax liability		3,667			4,814
Total liabilities		220,044			218,423
Member’s deficit		(44,277		)	(55,601		)
Deferred stock compensation		—			(75		)
Accumulated other comprehensive loss		(115		)	(145		)
Total member’s deficit		(44,392		)	(55,821		)
COMMITMENTS AND CONTINGENCIES
		$	175,652		$	162,602

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

MRS. FIELDS FAMOUS BRANDS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

		13 Weeks Ended
		October 2, 2004			September 27, 2003
REVENUES:
Franchising		$	14,117		$	15,396
Gifts		3,545			2,605
Licensing		1,353			1,348
Other		79			78
Total revenues		19,094			19,427
OPERATING COSTS AND EXPENSES:
Franchising		4,977			4,549
Gifts		2,881			1,912
Licensing		88			274
General and administrative		2,179			2,633
Stock compensation expense		49			32
Depreciation		288			856
Amortization		708			455
Other operating expenses (income), net		26			(25		)
Total operating costs and expenses		11,196			10,686
Income from operations		7,898			8,741
Interest expense, net		(5,182		)	(6,239		)
Income from continuing operations before provision for income taxes		2,716			2,502
Provision for income taxes		1,346			873
Income from continuing operations		1,370			1,629
Income from discontinued operations (net of income taxes of $13 and $23, respectively)		26			237
Net income		$	1,396		$	1,866
COMPREHENSIVE INCOME:
Net income		$	1,396		$	1,866
Foreign currency translation adjustment		13			(2		)
Comprehensive income		$	1,409		$	1,864

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

MRS. FIELDS FAMOUS BRANDS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

		39 Weeks Ended
		October 2, 2004			September 27, 2003
REVENUES:
Franchising		$	42,350		$	43,168
Gifts		12,843			8,615
Licensing		3,801			4,292
Other		220			318
Total revenues		59,214			56,393
OPERATING COSTS AND EXPENSES:
Franchising		15,497			13,459
Gifts		10,777			6,771
Licensing		417			968
General and administrative		7,544			7,683
Stock compensation expense		75			94
Costs associated with debt refinancing		87			—
Depreciation		928			1,758
Amortization		2,124			1,334
Other operating expenses, net		4			225
Total operating costs and expenses		37,453			32,292
Income from operations		21,761			24,101
Interest expense, net		(19,569		)	(18,475		)
Other income		1,054			—
Income from continuing operations before provision for income taxes		3,246			5,626
Provision for income taxes		1,576			2,162
Income from continuing operations		1,670			3,464
Income from discontinued operations (net of income taxes of $52 and $42, respectively)		84			268
Net income		$	1,754		$	3,732
COMPREHENSIVE INCOME:
Net income		$	1,754		$	3,732
Foreign currency translation adjustment		30			(1		)
Comprehensive income		$	1,784		$	3,731

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

MRS. FIELDS FAMOUS BRANDS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		39 Weeks Ended
		October 2, 2004			September 27, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations		$	1,670		$	3,464
Gain on sale of equity warrants		(1,054		)	—
Depreciation and amortization		3,052			3,092
Amortization of deferred loan costs		3,447			3,418
Stock compensation expense		75			94
Amortization of discount on notes		1,245			439
Non-cash debt increases associated with PIK interest		—			280
Deferred income taxes		(1,003		)	(791		)
Changes in assets and liabilities:
Receivables, net		2,459			2,252
Amounts due to/from affiliates		(512		)	(4,031		)
Inventories		(762		)	(703		)
Prepaid expenses and other		(477		)	(186		)
Other assets		(63		)	(107		)
Accounts payable		(3,223		)	(2,821		)
Accrued liabilities		(2,386		)	7,526
Deferred revenues		(1,250		)	(775		)
Net cash provided by continuing operating activities		1,218			11,151
Net cash (used in) provided by discontinued operating activities		(253		)	442
Net cash provided by operating activities		965			11,593
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equity warrants		1,054			—
Purchase of property and equipment		(595		)	(240		)
Net cash provided by (used in) investing activities		459			(240		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit		(3,452		)	6,107
Principal payments on long-term debt		(98,014		)	(5,050		)
Payment of debt financing costs		(12,179		)	(1,424		)
Proceeds from issuance of Senior Notes		115,000			—
Principal payments on capital lease		(32		)	—
Contribution by parent		17,500			—
Repurchase of stock options in parent		(108		)	—
Distribution to parent under tax sharing agreement and merger costs		—			(76		)
Other activity with parent		(7,996		)	(12,328		)
Net cash provided by (used in) financing activities		10,719			(12,771		)
Effect of foreign exchange rate changes on cash		30			(1		)
Net increase (decrease) in cash and cash equivalents		12,173			(1,419		)
Cash and cash equivalents at beginning of period		1,300			2,900
Cash and cash equivalents at end of period		$	13,473		$	1,481
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest		$	16,498		$	10,019
Cash paid for income taxes		50			245
Cash paid to parent for income taxes		1,450			6,050
Supplemental Disclosure of Noncash Investing and Financing Activities:
Distributions payable to parent under tax sharing agreement		$	—		$	1,866
Assets acquired under capital lease		500			—

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

MRS. FIELDS FAMOUS BRANDS, LLC 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 Famous Brands, LLC 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 for a complete presentation of the financial statements. In the opinion of management, these unaudited 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 October 2, 2004 and January 3, 2004, and the results of their operations and their cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the combined financial statements and notes thereto for the fiscal year ended January 3, 2004 contained in Mrs. Fields’ Registration Statement on Form S-4 (File No. 333-115046), as amended, filed with the Securities and Exchange Commission on April 30, 2004.

 

The Company is an entity that was formed in March 2004 in connection with the reorganization of certain entities and segments that are under the common control of Mrs. Fields’ Companies, Inc. (“MFC”), formerly known as Mrs. Fields’ Famous Brands, Inc. The Company is a wholly-owned subsidiary of Mrs. Fields’ Original Cookies, Inc. (“MFOC”). MFOC is a wholly-owned subsidiary of Mrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-owned subsidiary of MFC. Prior to the reorganization, TCBY Systems, LLC (“TCBY”) was a wholly-owned subsidiary of TCBY Enterprises, LLC (“TCBY Enterprises”), whose parent is also MFC.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of TCBY and the franchising, licensing and gifts segments of MFOC through March 2004. In March 2004, MFC completed a reorganization whereby TCBY and the franchising, licensing and gifts segments of MFOC were contributed to the Company. These financial statements have been prepared to reflect this reorganization as if it had occurred on December 31, 2000 (the beginning of fiscal 2001).

 

The unaudited condensed consolidated financial statements assume that Mrs. Fields, for all periods presented, had existed as a separate legal entity with the following three business segments: franchising, gifts and licensing. The unaudited condensed consolidated financial statements, which through March 2004, have been carved out from the consolidated financial statements of MFOC and TCBY using the historical results of operations and assets and liabilities of these businesses and activities and which exclude the company-owned stores segment of MFOC, reflect the accounting policies adopted by MFOC and TCBY in the preparation of their consolidated financial statements and thus do not necessarily reflect the accounting policies which Mrs. Fields might have adopted had it been an independent company. The historical consolidated financial statements of Mrs. Fields include those accounts specifically attributable to Mrs. Fields, substantially all of the indebtedness of MFOC and TCBY, and allocations of expenses relating to shared services and administrative functions incurred at MFOC.

 

Historically, MFOC has not allocated its various corporate overhead expenses, and common general and administrative expenses to its operating business units. However, an allocation of such expenses has been included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income and comprehensive income. The Company’s general and administrative expenses represent portions of MFOC’s corporate functions such as human resources, legal, accounting and finance, treasury and information technology systems, that have been allocated to Mrs. Fields based on percentage of labor hours devoted by the functional department. These allocated costs are not necessarily indicative of the costs that Mrs. Fields would have incurred had it operated as an independent, stand-alone entity for all periods presented.

 

The Company’s cash balances at January 3, 2004 include cash accounts specifically attributable to Mrs. Fields plus an allocated portion of cash included in MFOC’s centralized cash management systems. Accordingly, the Company’s cash balance at January 3, 2004 may not be representative of what it would have been if Mrs. Fields were an independent company.

 

7

 

The results of operations for the 13 weeks and 39 weeks ended October 2, 2004 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending January 1, 2005.  Income per common interest information is not presented as Mrs. Fields is wholly-owned by MFOC and, therefore, its common interests are not publicly traded.

 

2.     DEBT REFINANCING

 

On March 16, 2004, the Company issued $80.7 million of 9 percent senior secured notes (the “9 percent Senior Secured Notes”) in exchange for $80.7 million of 10 1/8 percent Senior Notes and issued $115.0 million of 11 1/2 percent senior secured notes (the “11 1/2 percent Senior Secured Notes” together with the 9 percent Senior Secured Notes, the “Senior Secured Notes”). The proceeds from the 11 1/2 percent Senior Secured Notes were used to retire the Company’s remaining long-term debt.

 

On August 23, 2004, the Company completed an offer to exchange an aggregate principal amount of up to $80,747,000 of its 9 percent Senior Secured Notes which have been registered under the Securities Act of 1933, as amended, for a like principal amount of its issued and outstanding 9 percent Senior Secured Notes from the registered holders thereof, and an aggregate principal amount of up to $115,000,000 of is 11 1/2 percent Senior Secured Notes which have been registered under the Securities Act of 1933, as amended, for a like principal amount of its issued and outstanding 11 1/2 percent Senior Secured Notes from the registered holders thereof. All of the original Senior Secured Notes were tendered and exchanged as a result of this offer.

 

The Senior Secured Notes will mature March 15, 2011, with interest payable semi-annually. The Senior Secured Notes rank senior in right of payment to all subordinated indebtedness of the Company and rank equal in right of payment with all existing and future senior indebtedness of the Company. The Senior Secured Notes are secured by all of the tangible and intangible assets of the Company and its subsidiaries.

 

The Senior Secured Notes are redeemable at the option of the Company anytime on or after March 15, 2008. Prior to March 15, 2007, the Company may redeem up to 35 percent of the aggregate principal amount of the notes with the net proceeds of certain equity offerings, provided at least 65 percent of the aggregate principal amount of the Senior Secured Notes originally issued remain outstanding. The Senior Secured Notes require the Company to repurchase a portion of the notes at 100 percent of the principal amount, plus accrued and unpaid interest thereon to the date of purchase, with 50 percent of the Company’s “excess cash flow”, as defined in the indenture agreement entered into by the Company in respect of the Senior Secured Notes (the “Indenture”), when the ratio of the Company’s Net Indebtedness to Consolidated EBITDA is above 3.75 to 1.0. In the event of a change in control, as defined in the Indenture, the holders of the Senior Secured Notes will have the right to put the notes to the Company at 101 percent of their principal amount, plus accrued and unpaid interest.

 

The Senior Secured Notes contain certain covenants that limit among other things, the ability of the Company and its subsidiaries to: (i) incur additional indebtedness; (ii) make certain investments or enter into sale and leaseback transactions; (iii) pay dividends, redeem subordinated debt, repurchase the Company’s or its subsidiaries stock or make any other restricted payments as defined in the Indenture; (iv) enter into certain transactions with affiliates; (v) create or incur liens; (vi) transfer or sell assets; (vii) make dividends, distributions or other payments from the Company’s subsidiaries; (viii) consummate a merger, consolidation or sale of all or substantially all of our assets; and (ix) engage in unrelated business.

 

8

 

3.     PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost less accumulated depreciation and amortization.  Equipment, fixtures and leasehold improvements are depreciated or amortized over three to seven years or the lease term, using the straight-line method.  Property and equipment at October 2, 2004 and January 3, 2004 were comprised of the following (in thousands):

 

 

Property and equipment included gross assets acquired under a capital lease and related accumulated depreciation and amortization of $500,000 and $40,000, respectively, at October 2, 2004.  There were no assets acquired under a capital lease as of January 3, 2004.

 

4.     ACCRUED LIABILITIES

 

Accrued liabilities were comprised of the following at October 2, 2004 and January 3, 2004 (in thousands):

 

 

On June 24, 2004, the Company announced a reorganization of its executive management team effective June 28, 2004.  As a result of this reorganization, the Company terminated the employment of two Senior Vice Presidents effective June 28, 2004 and accrued approximately $600,000 related to severance expenses.  As of October 2, 2004, severance payments of $457,000 were due to the two Senior Vice Presidents and included in accrued compensation and benefits.

 

On May 7, 2003, the Board of Directors of MFC accepted the resignation of Larry A. Hodges as its President, Chief Executive Officer and Director of MFC and its subsidiaries, which resignation was effective on May 14, 2003. Pursuant to the terms of a separation agreement, dated August 6, 2003, and a Severance Assumption Agreement dated March 16, 2004, among MFC, MFOC, the Company and Mr. Hodges (the “Separation Agreements”), Mr. Hodges is receiving 28 months of salary as severance, which is being paid semi-monthly through the end of 2004, and the balance will be paid in a lump sum in January 2005. This severance obligation was assumed by the Company concurrently with the completion of the reorganization and refinancing (see Notes 1 and 2). As of October 2, 2004, severance payments of $412,000 were due to Mr. Hodges and included in accrued compensation and benefits.

 

Under the terms of a stockholders’ agreement among MFC and its stockholders, there are put and call rights with respect to the common shares of MFC, including common shares received upon exercise of options. Pursuant to the Separation Agreements, Mr. Hodges and MFC agreed that all of the shares of MFC’s common stock held by Mr. Hodges, would be purchased by MFC for an aggregate purchase price of $449,479. The purchase price is payable in five installments of $74,913 and a sixth installment of $74,914 (in each case, without interest). The installments are payable every 30 days, beginning on April 15, 2004, which was 30 days following the closing date of the reorganization and refinancing (see Notes 1 and 2). This payment obligation to Mr. Hodges was assumed by the Company concurrently with the completion of the reorganization and refinancing (see Notes 1 and 2). As of October 2, 2004, this obligation payable to Mr. Hodges for the purchase of the shares of MFC’s common stock was paid in full.

 

9

 

5.     RELATED PARTY TRANSACTIONS

 

Amounts due to/from affiliates were comprised of the following at October 2, 2004 and January 3, 2004 (in thousands):

 

 

6.     REPORTABLE SEGMENTS

 

Operating segments are components of the Company for which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. This information is reported on the basis that it is used internally for evaluating segment performance. Mrs. Fields has three reportable operating segments: franchising, gifts and licensing. The franchising segment consists of revenues received either directly or indirectly from cookie, yogurt and pretzel stores, which are owned and operated by third parties. These revenues include initial franchise or license fees, royalties based on a percentage of a franchisee’s gross sales, sales of cookie dough that the Company produces, and certain product formulation fees and supplier allowances which are based upon sales to franchisees. The gifts segment includes sales generated from the Company’s mail order gift catalog and web site. The licensing segment consists of other licensing activity from third parties for the sale of products bearing the Company’s brand names. Sales and transfers between segments are eliminated in consolidation.

 

The Company evaluates 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 occupancy expenses, cost of sales and direct general and administrative expenses related to that reportable segment. Contribution margin is used as a measure of the operating performance of an operating segment. The Company does not allocate any indirect general and administrative expenses, other operating income (expense), interest expense, depreciation and amortization or assets to its reportable operating segments.

 

Segment revenue and contribution margin are presented in the following table (in thousands):

 

		Franchising			Gifts			Licensing			Total
13 weeks ended October 2, 2004
Revenue		$	14,117		$	3,545		$	1,353		$	19,015
Contribution margin		9,140			664			1,265			11,069
13 weeks ended September 27, 2003
Revenue		$	15,396		$	2,605		$	1,348		$	19,349
Contribution margin		10,847			693			1,074			12,614
39 weeks ended October 2, 2004
Revenue		$	42,350		$	12,843		$	3,801		$	58,994
Contribution margin		26,853			2,066			3,384			32,303
39 weeks ended September 27, 2003
Revenue		$	43,168		$	8,615		$	4,292		$	56,075
Contribution margin		29,709			1,844			3,324			34,877

 

10

 

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

 

		13 Weeks Ended						39 Weeks Ended
		October 2, 2004			September 27, 2003			October 2, 2004			September 27, 2003
Contribution margin		$	11,069		$	12,614		$	32,303		$	34,877
Other operating revenues		79			78			220			318
General and administrative expenses		(2,179		)	(2,633		)	(7,544		)	(7,683		)
Stock compensation expense		(49		)	(32		)	(75		)	(94		)
Costs associated with debt refinancing		—			—			(87		)	—
Other operating income (expense), net		(26		)	25			(4		)	(225		)
Interest expense, net		(5,182		)	(6,239		)	(19,569		)	(18,475		)
Other income		—			—			1,054			—
Depreciation and amortization		(996		)	(1,311		)	(3,052		)	(3,092		)
Provision for income taxes		(1,346		)	(873		)	(1,576		)	(2,162		)
Income from current operations		1,370			1,629			1,670			3,464
Income from discontinued operations(net of income taxes of $13, $23, $52 and$42, respectively)		26			237			84			268
Net income		$	1,396		$	1,866		$	1,754		$	3,732

 

The fixed assets and inventory of the Company primarily relate to the Company’s Great American Cookie batter facility and the gifts business segment and related activities. Assets relating to franchising and licensing activity are primarily amounts due from franchisees and licensees and goodwill relating to franchising concepts.

 

The Company has one customer that accounted for $825,000 and $3.0 million, or 23.2 percent and 23.3 percent of the revenue of the gifts segment for the 13 weeks and 39 weeks ended October 2, 2004, respectively, and $880,000 and $1.8 million or 33.7 percent and 20.9 percent of the revenue of the gifts segment for the 13 weeks and 39 weeks ended September 27, 2003, respectively. The Company has one licensee that accounted for $854,000 and $2.3 million, or 63.1 percent and 61.5 percent of the revenue of the licensing segment for the 13 weeks and 39 weeks ended October 2, 2004, respectively, and $821,000 and $2.6 million, or 60.9 percent and 61.4 percent of the revenue of the licensing segment for the 13 weeks and 39 weeks ended September 27, 2003, respectively. There were no other customers or licensees that accounted for more than 10.0 percent of Mrs. Fields’ total revenue or any individual segment’s revenue.

 

7.     COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

The Company and its 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.

 

In the ordinary course of business, the Company is involved in routine litigation, including franchise disputes and trademark disputes. The Company is not a party to any legal proceedings (including the matter described below) which, in the opinion of management, after consultation with legal counsel, is material to its business, financial condition or results of operations.

 

As discussed in the Company’s Registration Statement on Form S-4 (File No. 333-115046), as amended, the Company’s indirect subsidiary, TCBY of Ireland, Inc., was the defendant in a recently concluded case captioned Advanced Food Concepts, Ltd. et al. v. William P. Creasman, et al., Case No. 401-CV-00-117JMM, filed in the U.S. District Court for the Eastern District of Arkansas (the “Court”). This complaint was filed in 2001 by two former franchisees against TCBY of Ireland and other corporate and individual defendants, but all defendants have been dismissed with the exception of TCBY of Ireland, Inc., the franchisor party under a Transnational Master License Agreement entered into with certain of the plaintiffs and others. The plaintiffs sought damages in excess of $70 million in connection with TCBY of Ireland’s performance under and termination of the Transnational Master License Agreement. On August 4, 2004, the Court granted TCBY of Ireland’s Motion for Summary Judgment on all remaining counts of the complaint. Plaintiffs have filed a motion for reconsideration, and TCBY of Ireland has responded to it. If plaintiffs’ motion is denied, they may still appeal the court’s ruling. The Company does not have

 

11

 

insurance coverage for this lawsuit because the claims arose prior to the Company’s acquisition of TCBY.  Notwithstanding the excessive claim for damages, the lack of insurance coverage and the risk that TCBY of Ireland’s parent entities might ultimately bear or share in the cost of any significant judgment obtained against it, after consultation with legal counsel, and in light of the favorable summary judgment ruling, management believes it is unlikely that plaintiffs will obtain any judgment against TCBY of Ireland that would be material to our business, financial condition or operations.

 

8.     DISCONTINUED OPERATIONS

 

TCBY transitioned its equipment sales segment (“Riverport”) to a third party equipment and smallwares distributor during the quarter ended March 29, 2003. The distributor purchased certain of Riverport’s inventory at cost, subject to certain slow moving inventory purchase price adjustments. All slow moving inventory purchase price adjustments have been recorded in the accompanying unaudited condensed consolidated financial statements. The segment’s assets that were subject to depreciation and amortization were being periodically expensed over the remaining estimated useful life. The results of operations and financial position of Riverport are classified as discontinued operations in the accompanying unaudited condensed consolidated financial statements.

 

9.     EMPLOYEE STOCK OPTION PLAN

 

Effective as of September 30, 2004, MFC terminated its Employee Stock Option Plan pursuant to the provisions of the plan.  No further options will be granted under the plan.  Valid and outstanding options granted to plan participants prior to termination were unaffected by the termination.  Concurrent with the termination, the Company paid $108,000 for the repurchase of certain stock options from the plan participants.

 

10.  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s domestic subsidiaries other than minor, immaterial subsidiaries. Mrs. Fields Famous Brands, LLC has no independent assets or operations; therefore, supplemental financial information on a condensed consolidating basis of the guarantor subsidiaries is not required. There are no restrictions on the Company’s ability to obtain cash dividends, loans or other distributions of funds from the guarantor subsidiaries, except those imposed by applicable law.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-looking Information

 

This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “continue,” “will,” “may” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, including, but not limited to, economic, competitive and governmental factors outside of our control, that may cause actual results to differ materially from trends, plans or expectations set forth in the forward looking statements.  Factors you should consider that could cause these differences include:

 

•      the availability and adequacy of cash flow to satisfy our obligations, including debt service on our long-term debt and additional funds required for working capital;

 

•      the impact of our current negative member’s deficit on our franchising activities;

 

•      our ability to solicit new franchisees;

 

•      economic, competitive, demographic, business and other pressures, trends and conditions in various markets;

 

•      the seasonal nature of our operations;

 

•      actions taken or failed to be taken by third parties, including by our customers, suppliers, distributors, competitors and shareholders, as well as legislative, regulatory, judicial and other governmental authorities;

 

•      changes in our business strategy or development plans;

 

•      performance by our franchisees and licensees or changes in relationships with our franchisees and licensees;

 

•      difficulties or delays in our developing and introducing anticipated new products or failure of our customers to accept new product offerings;

 

•      adoption of new accounting pronouncements;

 

•      changes in consumer preferences and our ability to adequately anticipate such changes;

 

•      changes in prices of our raw materials;

 

•      changes in personnel or increased labor costs;

 

•      the termination of, or inability to renew on favorable terms, our material agreements;

 

•      changes in customer traffic;

 

•      prevailing interest rates;

 

•      legal proceedings and regulatory matters;

 

•      acts of war or terrorist incidents; and

 

•      all other factors described under “Risk Factors” in our Registration Statement on Form S-4 (File No. 333-115046), as amended.

 

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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.

 

Overview

 

We are one of the largest franchisors in the premium snack-food industry, featuring Mrs. Fields, Great American Cookie Company, TCBY, Pretzel Time and Pretzelmaker as our core brands. Through our franchisees’ retail stores, we are the largest retailer of freshly baked on-premises specialty cookies and brownies in the United States; the largest retailer of soft serve frozen yogurt in the United States; and the second largest retailer of baked on-premises pretzels in the United States. In addition, we operate a profitable gifts business and have entered into key licensing arrangements that leverage awareness of our core brands among our retail customer base. We operate through a network of 2,816 retail concept locations, which are located throughout the United States and in approximately 40 foreign countries.

 

Our business is divided into three primary business segments for financial reporting purposes: franchising, gifts and licensing representing 71.5 percent, 21.7 percent and 6.4 percent of total revenues, respectively, for the 39 weeks ended October 2, 2004.

 

As of October 2, 2004, our store portfolio consisted of 2,268 domestic franchised locations, 325 international franchised locations and 223 licensed locations. By brand, our franchisees’ and licensees’ concept locations are distributed as follows:

 

 

The above table counts each concept location individually. For example, if a physical location had a Mrs. Fields store and a Pretzel Time store together, this would be counted as two concept locations in the table above. If actual physical stores were counted, rather than concept locations, total store counts would be reduced by 301 locations to 2,515.

 

Mrs. Fields Original Cookies, Inc. (“MFOC”), our parent company, and certain of its subsidiaries own approximately 175 franchised and licensed retail concept locations, representing 6.2 percent of the total retail concept locations. During the 39 weeks ended October 2, 2004, we recognized $2.2 million of franchise royalties and $2.4 million of product sales relating to the retail concept locations owned by MFOC. MFOC expects that certain of these retail concept locations may be sold over time to new and current franchisees or will be closed.

 

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During the period from January 3, 2004 to October 2, 2004, our store portfolio has declined from 3,027 concept locations to 2,816 concept locations, as follows:

 

 

Of the 381 permanent closings between January 3, 2004 and October 2, 2004, 42.3 percent related to TCBY brand non-traditional locations, 26.2 percent related to TCBY brand traditional locations, 13.4 percent related to bakery concept locations owned by franchisees other than MFOC and 18.1 percent related to retail concept locations owned by MFOC.

 

Recent Developments

 

Reorganization and Refinancing.  We were formed in March 2004 in connection with the reorganization of certain entities and segments that are under the common control of Mrs. Fields’ Companies, Inc. (“MFC”), formerly known as Mrs. Fields’ Famous Brands, Inc.  We are a wholly-owned subsidiary of MFOC.  MFOC is a wholly-owned subsidiary of Mrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-owned subsidiary of MFC.  Prior to the reorganization, TCBY Systems, LLC (“TCBY”) was a wholly-owned subsidiary of TCBY Enterprises, LLC (“TCBY Enterprises”), whose parent is also MFC.

 

As part of the reorganization described above, we refinanced substantially all of our indebtedness.  We issued $80.7 million of 9 percent senior secured notes (the “9 percent Senior Secured Notes”) in exchange for $80.7 million of 10 1/8 percent senior notes and issued $115.0 million of 11 1/2 percent senior secured notes (the “11 1/2 percent Senior Secured Notes” and together with the 9 percent Senior Secured Notes, the “Senior Secured Notes”).  The proceeds from the 11 1/2 percent Senior Secured Notes were used to retire the Company’s remaining long-term debt.

 

On August 23, 2004, the Company completed an offer to exchange an aggregate principal amount of up to $80,747,000 of its 9 percent Senior Secured Notes which have been registered under the Securities Act of 1933, as amended, for a like principal amount of its issued and outstanding 9 percent Senior Secured Notes from the registered holders thereof, and an aggregate principal amount of up to $115,000,000 of is 11 1/2 percent Senior Secured Notes which have been registered under the Securities Act of 1933, as amended, for a like principal amount of its issued and outstanding 11 1/2 percent Senior Secured Notes from the registered holders thereof. All of the original Senior Secured Notes were tendered and exchanged as a result of this offer.

 

Increase Investment in Brands.  As discussed in our Registration Statement on Form S-4 (File No. 333-115049), as amended, in 2004, we intend to invest $3.0 million in advertising, promotion and brand building ideas. While we believe this investment in our brands will support the initiatives aimed at increasing sales at all franchised locations, we have identified TCBY as the brand that offers our greatest opportunity for building profitable sales in the short term. TCBY locations are not limited to malls, and we believe TCBY’s products are aligned with current health trends, which create a demand for a low-fat, yet satisfying treat.

 

During the 13 weeks and 39 weeks ended October 2, 2004, we incurred expenses of $200,000 and $1.5 million, respectively, related to brand investment initiatives.  There were no such expenses in 2003.  These expenses for brand investment initiatives for the 39 weeks ended October 2, 2004 included increased advertising and promotion of the TCBY brand and its products, including the introduction during the second quarter of several flavors of “low carb” yogurt at most of our TCBY traditional franchised retail stores of approximately $1.2 million and initial expenses relating to the reconcepting of TCBY of approximately $300,000.  We currently anticipate expending an additional $1.5 million in 2004 for brand investment initiatives.

 

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Termination of Stock Option Plan. Effective as of September 30, 2004, MFC terminated its Employee Stock Option Plan pursuant to the provisions of the plan.  No further options will be granted under the plan.  Valid and outstanding options granted to plan participants prior to termination were unaffected by the termination.  Concurrent with the termination, the Company paid $108,000 for the repurchase of certain stock options from the plan participants.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain information relating to the operations of Mrs. Fields and percentage changes from period to period.

 

Statement of Operations Data:

 

		13 Weeks Ended								39 Weeks Ended
		October 2, 2004			September 27, 2003			% Change		October 2, 2004			September 27, 2003			% Change
		(Dollars in Thousands)
REVENUES:
Franchising		$	14,117		$	15,396		(8.3	)	$	42,350		$	43,168		(1.9	)
Gifts		3,545			2,605			36.1		12,843			8,615			49.1
Licensing		1,353			1,348			0.4		3,801			4,292			(11.4	)
Other		79			78			1.3		220			318			(30.8	)
Total revenues		19,094			19,427			(1.7	)	59,214			56,393			5.0
OPERATING COSTS AND EXPENSES:
Franchising		4,977			4,549			9.4		15,497			13,459			15.1
Gifts		2,881			1,912			50.7		10,777			6,771			59.2
Licensing		88			274			(67.9	)	417			968			(56.9	)
General and administrative		2,179			2,633			(17.2	)	7,544			7,683			(1.8	)
Stock compensation expense		49			32			53.1		75			94			(20.2	)
Costs associated with debt refinancing		—			—			NM		87			—			NM
Depreciation		288			856			(66.4	)	928			1,758			(47.2	)
Amortization		708			455			55.6		2,124			1,334			59.2
Other operating expenses (income), net		26			(25		)	NM		4			225			(98.2	)
Total operating costs and expenses		11,196			10,686			4.8		37,453			32,292			16.0
Income from operations		7,898			8,741			(9.6	)	21,761			24,101			(9.7	)
Interest expense, net		(5,182		)	(6,239		)	16.9		(19,569		)	(18,475		)	(5.9	)
Other income		—			—			NM		1,054			—			NM
Income from continuing operations before provision for income		2,716			2,502			8.6		3,246			5,626			(42.3	)
Provision for income taxes		1,346			873			54.2		1,576			2,162			(27.1	)
Income from continuing operations		1,370			1,629			(15.9	)	1,670			3,464			(51.8	)
Income from discontinued operations (net of income taxes of $13, $23, $52 and $42, respectively)		26			237			(89.0	)	84			268			(68.7	)
Net income		$	1,396		$	1,866		(25.2	)	$	1,754		$	3,732		(53.0	)
Cash flows from operating activities		$	(2,538	)	$	5,676				$	965		$	11,593
Cash flows from investing activities		$	(523	)	$	(68	)			$	459		$	(240	)
Cash flows from financing activities		$	(262	)	$	(6,239	)			$	10,719		$	(12,771	)

 

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