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The firm has struggled for years to pay just the interest expense, never mind the principal of their outstanding debts. Despite selling its most profitable brands Pretzelmaker and Pretzel Time last year and The Great American Cookie to NexCen Brands earlier this year in order to receive much needed cash, the company still finds itself not able to pay $10.25 million in interest that comes due in September.
In an interview with Blue MauMau, Michael Ward, Chief Legal Officer and Executive Vice President for Mrs. Fields Cookies, states that the company has been cooking up a recipe for some time to reduce what it owes in high-interest debt. “We are executing a strategic plan that we went through a year ago,” Ward declares. “Mrs. Fields was always a highly leveraged company. There always needed to be in the whole history of the company an event that would bring down the company's high debt.”
If 98% of debt holders do not agree to the terms of the restructure, then the company will need to file Chapter 11. As it stands currently, 78% of note holders have agreed that they will go along with the restructure if 98% of total bondholders jump in. (Details of the restructure offer to bondholders are here.)
The company is taking considerable risk with its plan. Either its note holders are willing to take the loss or Mrs. Field's must seek protection in filing Chapter 11. And it is difficult to predict how the firm would emerge from a bankruptcy process, despite any plans it might have to package parts of the company.
One analyst in the financial sector observes, “What is so scary about such a high level of material debt is that if a company doesn’t perform well enough after taking it on, then it has no excess capacity to revise the game plan and try another tack, at least not without resorting to draconian measures such as what we are seeing here.”
There is a considerable upside if Mrs. Fields can get its note holders to forgive and restructure its sizable debt.
Stephen Russo, President and Chief Executive Officer of Mrs. Fields, commented, “By significantly de-levering our capital structure from over $195 million of debt to only $50 million of new debt, the restructuring will greatly improve our near-term liquidity and allow us to execute our growth business plan. Once the restructuring is completed, we will be positioned to realize the substantial value of the Mrs. Fields brands through continued growth in our branded retail and gifting segments as well as our renewed commitment to upgrading and expanding the Mrs. Fields store base in our franchising segment.”
Mr. Russo adds, “We will have considerably more cash flow flexibility to pay our vendors, and we fully expect that all vendor payments will be made in full during the restructuring and thereafter. Moreover, we will have cash available to invest in the growth of our business and the development of our brands.”
Mrs. Field’s Financial Condition: Wanting to Show Itself In the Best Light
Company income statements show continuous net profit losses for years (see 2005 – 2007 10k statement, pdf) or from 2000 to 2002. Last year Mrs. Fields had a good year, having only $1.9 million in net loss.
Mr. Ward, a 17-year veteran of the company, interjects that net profits are unimportant for a company like Mrs. Fields. “When you have bond debt you never are paying off the principal. You are only making interest payments. You remain highly leveraged so it is always that [focus on the] EBITDA line. It has always been frustrating to hear [others say] ‘Mrs. Fields you are losing money.’ That’s only true if the person does not understand our business model. We measure our success according to EBITDA. We have always paid our bills and met obligations. It’s been a good company from that point of view.”
EBITDA is a non-GAAP method that tracks earnings before interest, tax, depreciation and amortization expenses have been subtracted out. Mrs. Field’s EBITDA for 2007 was $18 million but such a large EBITDA is still insufficient to service Mrs. Field’s $21 million in interest expense on debt. (See table below for detail.)
|EBITDA||18 M||15.7 M|
|Benefit / Loss||($3.0)||($5.2)|
Note: Estimated contribution of EBITDA to pay high debt interests calculated based on 2007 annual 10k financial statement (pdf, see pg. 27)
“EBITDA first came into common use with leveraged buyouts in the '80s, where it was used to indicate the ability of a company to service debt,” according to Investopedia, an online encyclopedia of investment terms owned by Forbes media.
Investopedia warns, “EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.”
Ward tongue-in-cheek concludes, “All of us highly leveraged companies only want you to look at EBITDA.”
Bruce Schaeffer, an attorney with over 30 years of experience in dealing with tax, mergers and valuations of franchise chains, disagrees. Schaeffer says, “When you are a well run and highly leveraged company, it means you are getting a higher percentage return on your invested capital than you are paying for the cost of money. There is no correlation that says if a company is highly leveraged that it cannot show profits. Rubbish.”
Mr. Schaeffer is not alone in thinking that Mrs. Field’s standard of having itself and others focus on EBITDA is insufficient to represent the cost of service on its sizeable debt.
Joe Dunbar, president of Dunbar Associates and a restaurant financial analyst, thinks the company’s viewpoint has led it to be fiscally negligent. “If we took the term ‘just look at EBITDA’ and put it in a different light, you could say that Mrs. Field’s negligently ignored their debt load,” he observes.
Mrs. Fields Brands Halts New Franchise Sales, No Renewal of State Franchise Registration
As of March Mrs. Fields Brands has elected to not renew its franchise registration. And with a lapse in registration by the company, registration states will not allow Mrs. Fields to solicit or sell a franchises until a new registration is complete.
The company already has disclosure documents in the new format that the federal government will require beginning July 1. “These are sitting on my office shelf waiting to be submitted,” states Ward.
Ward declares. “For whatever good it is, this was a well thought out plan that the company is executing against.” He continues, “The Company voluntarily chose when state registrations expired not to re-register and to halt franchising until the refinancing issue is settled. There’s no question that we will be back out there in the market sometime this year. We will have good clean financials and operating structures in the market this year.”
“This is a plan we have been executing against for some time,” emphasizes Ward. “This will be a stronger, more focused company when this deal is completed.”