S&P Rts Mrs. Fields' Original Cookies Sr Nts;Afms Rtgs

Business Wire, August 18, 1998

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 8/18/98-- Standard & Poor's today assigned its single-'B'-plus rating to Mrs. Fields' Original Cookies Inc.'s 10 1/8% series C senior notes due 2004 and its single-'B'-minus rating to Mrs. Fields' Holding Co. Inc.'s $55 million 14% senior secured discount dotes due 2005.

In addition, Standard & Poor's affirmed its single-'B'-plus corporate credit rating and single-'B'-minus senior note rating on the company. The outlook is stable.

The holding company's debt is rated lower because it is structurally subordinated to the debt at the operating company. The rating affirmation follows the company's announcement that its plans to acquire Great American Cookie Company Inc. and two of its largest franchises for $74 million. The company also plans a tender offer for all of Great American's senior notes due 2001. The transactions will be financed with a combination of debt and cash on hand.

Standard & Poor's plans to withdraw its single-'B'-minus rating on Great American's $41.6 million senior secured notes upon closing of the tender offer.

Mrs. Fields' ratings reflect the company's high degree of financial leverage, its dependence on mall traffic to support cookie sales and the risks associated with the integration of Great American Cookie's mall-based retail network, which will increase the number of systemwide retail outlets to more than 1,340 from about 1,000 prior to the acquisition. These risks are partially offset by the company's solid market position in the baked-on premises cookie and pretzel businesses.

The Salt Lake City, Utah-based company operates the largest retail cookie network and second-largest retail pretzel network in the U.S., with more than 760 of the company's 1,340 stores operated under licensee or franchise agreements. Cookie stores operate under the "Mrs. Fields'" and "Original Cookie" banners and pretzel units under the "Pretzel Time" and "Hot Sam" nameplates.

The current management team at Mrs. Fields' was installed in 1994 after a period of substantial operational and financial troubles. The firm's profitability levels and market position have improved significantly as a result of the closing or franchising unprofitable and smaller stores, reducing expenses and refocusing merchandising efforts. The planned acquisition of Great American Cookie Co. will strengthen the company's market position, particularly in the Southeast where a significant portion of Great American stores are located, and should eventually result in synergistic savings and improvement in operating margins.

Following the merger, the combined company will have slightly higher leverage than prior to the acquisition. Standard & Poor's expects the combined company to have pro forma lease-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage near 2.4 times (x), down from approximately 2.7x last year. The $55 million senior discount notes issued by the holding company, however, do not pay cash dividends. Therefore, "cash interest" coverage will not be substantially affected by the transaction. The company has also negotiated a $15 million revolving bank line, which will provide adequate near-term financial flexibility.

OUTLOOK: STABLE

Mrs. Fields' ratings are supported by positive operating trends, lack of principal amortization over the next several years, and its strong market position in the snack retailing business. However, the firm remains highly leveraged with lease-adjusted debt to EBITDA of more than 4x at closing. Furthermore, the company's vulnerability to changes in the volume of mall traffic as well as the risks associated with its acquisition strategy, make a rating increase unlikely over the next two years, Standard & Poor's said.--CreditWire

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