1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-76306
GREAT AMERICAN COOKIE COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1295221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4685 FREDERICK DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 696-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 X No
--- ---
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
INDEX
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of March 28, 1996 and June 29, 1995
Statement of Operations for the thirteen week periods
ended March 28, 1996 and March 30, 1995
Statement of Operations for the thirty-nine week periods
ended March 28, 1996 and March 30, 1995
Statement of Changes in Stockholder's Equity for the
thirty-nine week period ended March 28, 1996
Statement of Cash Flows for the thirty-nine week periods
ended March 28, 1996 and March 30, 1995
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II . OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
(UNAUDITED)
MARCH 28, JUNE 29,
1996 1995
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 3,163,420 $ 4,251,780
Accounts receivable - trade 1,590,440 1,343,426
Inventory 1,502,799 1,304,174
Prepaid expenses 66,934 1,075,333
Income tax receivable 155,839 147,583
Current deferred tax benefit 121,000 256,787
Current portion of notes receivable 128,085 277,795
Other receivables 36,590 162,399
----------- -----------
Total current assets 6,765,107 8,819,277
----------- -----------
Property and equipment, net of accumulated depreciation (Note 3) 8,936,913 9,101,235
Construction in progress, net of construction deposits received from franchisees (9,135) 15,682
----------- -----------
8,927,778 9,116,917
----------- -----------
Other assets
Deferred loan costs, net of accumulated amortization
of $1,321,000 and $891,700, respectively 2,752,058 3,181,358
Notes receivable, net of current portion 94,219 92,219
Deferred tax benefit 994,000 1,365,036
Deposits 61,686 54,759
Accrued straight-line minimum rent receivable for subleases to franchisees 1,307,431 1,157,948
----------- -----------
5,209,394 5,851,320
----------- -----------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $2,016,151 and $1,364,200, respectively 32,936,174 33,588,125
----------- -----------
$53,838,453 $57,375,639
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable 989,448 1,293,679
Sales taxes payable 118,212 128,090
Accrued interest payable 945,430 1,996,676
Accrued expenses 660,404 1,936,214
Deposits 717,960 760,512
Dividends payable 312,500 390,400
----------- -----------
Total current liabilities 3,743,954 6,505,571
----------- -----------
Capital lease obligations, net 71,668 83,638
----------- -----------
Accrued straight-line minimum rent payable 2,159,598 1,947,614
----------- -----------
Long-term debt (Note 4) 40,000,000 40,000,000
----------- -----------
Commitments and contingencies
Stockholder's equity
Common stock, no par value, 2,000 shares authorized;
210 shares issued and outstanding 13,500,000 13,500,000
Additional paid-in capital 336,063 336,063
Accumulated deficit (5,972,830) (4,997,247)
----------- -----------
7,863,233 8,838,816
----------- -----------
$53,838,453 $57,375,639
=========== ===========
The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THIRTEEN FOR THE THIRTEEN
WEEK PERIOD WEEK PERIOD
ENDED ENDED
MARCH 28, 1996 MARCH 30, 1995
-------------- --------------
Revenue:
Cookie and beverage sales $5,870,501 $ 6,375,074
Batter sales to franchisees 2,270,970 2,034,204
Franchise royalties 993,627 908,703
Franchise sales - existing and new stores 255,560 159,338
Other - net 48,695 65,188
---------- -----------
Total revenue 9,439,353 9,542,507
---------- -----------
Operating expenses:
Cost of sales 4,814,354 5,081,414
Retail store occupancy 1,943,636 1,934,878
Other retail store expenses 383,958 450,965
Selling, general and administrative expenses 1,791,027 1,961,358
---------- -----------
Total operating expenses 8,932,975 9,428,615
---------- -----------
Other (income) expenses, net:
Interest (income) (11,413) (21,460)
Interest expense 1,104,094 1,099,756
Amortization of deferred loan costs 143,100 143,100
---------- -----------
Total other (income) expenses, net 1,235,781 1,221,396
---------- -----------
Loss before non-recurring litigation charge and taxes (729,403) (1,107,504)
Non-recurring litigation charge 0 439,000
---------- -----------
Loss before taxes (729,403) (1,546,504)
State and federal income tax expense (benefit) (76,532) (649,000)
---------- -----------
Net loss $ (652,871) $ (897,504)
========== ===========
The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THIRTY-NINE FOR THE THIRTY-NINE
WEEK PERIOD WEEK PERIOD
ENDED ENDED
MARCH 28, 1996 MARCH 30, 1995
-------------- --------------
Revenue:
Cookie and beverage sales $18,810,465 $20,261,498
Batter sales to franchisees 7,402,308 7,004,625
Franchise royalties 3,262,625 3,027,345
Franchise sales - existing and new stores 713,136 514,879
Other - net 113,649 141,521
----------- -----------
Total revenue 30,302,183 30,949,868
----------- -----------
Operating expenses:
Cost of sales 14,646,713 15,065,560
Retail store occupancy 5,486,893 5,510,430
Other retail store expenses 1,011,801 1,201,820
Selling, general and administrative expenses 5,106,674 5,223,168
----------- -----------
Total operating expenses 26,252,081 27,000,978
----------- -----------
Other (income) expenses, net:
Interest (income) (35,783) (80,120)
Interest expense 3,312,472 3,266,122
Amortization of deferred loan costs 429,300 432,000
----------- -----------
Total other (income) expenses, net 3,705,989 3,618,002
----------- -----------
Income before non-recurring litigation charge and taxes 344,113 330,888
Non-recurring litigation charge 0 439,000
----------- -----------
Income (loss) before taxes 344,113 (108,112)
State and federal income tax expense 507,196 251,000
----------- -----------
Net loss $ (163,083) $ (359,112)
=========== ===========
The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
FOR THE THIRTY-NINE WEEK PERIOD ENDED MARCH 26, 1996
----------------------------------------------------
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- --------
Balance at June 29, 1995 $13,500,000 $336,063 $(4,997,247) $8,838,816
Current period net loss - - (163,083) (163,083)
Dividends declared - - (812,500) (812,500)
----------- -------- ----------- ----------
$13,500,000 $336,063 $(5,972,830) $7,863,233
=========== ======== =========== ==========
The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THIRTY-NINE FOR THE THIRTY-NINE
WEEK PERIOD WEEK PERIOD
ENDED ENDED
MARCH 28, 1996 MARCH 30, 1995
-------------- --------------
Cash flows from operating activities
Net loss $ (163,083) $ (359,112)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 1,309,468 1,233,993
Amortization of cost in excess of fair value of net assets acquired (goodwill) 651,951 657,600
Amortization of deferred loan costs 429,300 432,000
Net gain on sales and disposals of property and equipment (259,276) (90,379)
Net increase in accrued straight-line minimum rent
receivable and payable 62,501 83,918
Changes in assets and liabilities
(Increase) decrease in accounts receivable (427,315) 22,930
Increase in inventory (198,625) (131,269)
(Increase) decrease in prepaid expenses 1,008,399 (169,506)
Increase in income tax receivable (8,256) 0
Decrease in current deferred tax benefit 135,787 150,000
Decrease (increase) in other receivables 125,809 (39,059)
Decrease in deferred tax benefit 371,036 100,410
(Increase) decrease in other assets (6,927) 6,089
Decrease in accounts payable (304,231) (214,675)
Decrease in sales taxes payable (9,878) (11,999)
Decrease in accrued interest payable (1,051,246) (1,514,358)
(Decrease) increase in accrued expenses (1,275,810) 226,057
Decrease in deposits (42,552) (26,604)
----------- -----------
Net cash provided by operating activities 347,052 356,036
----------- -----------
Cash flows from investing activities
Acquisitions of property and equipment, including net increase in construction
in progress, net of construction deposits received from franchisees (1,534,532) (3,877,028)
Proceeds from sales and disposals of property and equipment 494,917 966,738
Acceptance of notes receivable 0 (59,300)
Proceeds from collection of notes receivable 444,073 0
----------- -----------
Net cash used for investing activities (595,542) (2,969,590)
----------- -----------
Cash flows from financing activities
Payment of acquisition related expenses 0 (118,842)
Payment of deferred loan costs 0 (33,397)
Principal repayments under capital lease obligations (11,970) 0
Dividends paid (827,900) (1,077,900)
----------- -----------
Net cash used for financing activities (839,870) (1,230,139)
----------- -----------
Net decrease in cash and cash equivalents during period (1,088,360) (3,843,693)
----------- -----------
Cash and cash equivalents, beginning of period 4,251,780 6,184,712
----------- -----------
Cash and cash equivalents, end of period $ 3,163,420 $ 2,341,019
=========== ===========
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE THIRTY-NINE FOR THE THIRTY-NINE
WEEK PERIOD WEEK PERIOD
ENDED ENDED
MARCH 28, 1996 MARCH 30, 1995
-------------- --------------
Supplemental disclosure of cash flow information:
- - -------------------------------------------------
Cash paid during the period for:
Interest $4,363,718 $4,780,480
========== ==========
State and federal income taxes $ 13,751 $ 42,043
========== ==========
Supplemental disclosures of noncash investing and financing activities:
During the thirty-nine weeks ended March 28, 1996, notes receivable with face
amounts of $177,919 and $118,444 were received from unrelated franchisees in
connection with the sale of Company-operated stores.
The accompanying notes are an integral part of these financial statements.
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Great American Cookie Company,
Inc. (the "Company") for the thirteen weeks ended and for the thirty-nine
weeks ended March 28, 1996 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position of the Company, and the results of
its operations and its cash flows for the periods presented. However,
these results are not necessarily indicative of the results for any other
interim period or the full year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Management believes that the
disclosures included in the accompanying interim financial statements and
footnotes are adequate to make the information not misleading, but should
be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended June 29,
1995. Earnings per share is not presented, as the Company is
wholly-owned.
2. DESCRIPTION OF BUSINESS AND ACQUISITION
Great American Cookie Company, Inc. is an operator and franchisor of
mall-based specialty retail cookie outlets and manufacturer of cookie
batter which is sold to Company-operated and franchised retail stores.
On December 10, 1993, the Company was acquired by Cookies USA, Inc.
("Cookies USA") in several transactions. Immediately following the
acquisition, the Company changed its name from The Original Great American
Chocolate Chip Cookie Company, Inc. to Great American Cookie Company, Inc.
The acquisition was recorded in the accounts of the Company using the
purchase method of accounting with "push-down" accounting. Due to the 22%
interest retained by the selling stockholders of the Company via their
common and convertible preferred stock interests in Cookies USA, the
Company did not recognize an increase in the carrying value of 22% of the
underlying assets of the Company and the assets of Georgia Cookies, Inc.,
TOGA Leasing and Sunbelt Investments.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 28, JUNE 29,
1996 1995
----------- -----------
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 8,105,917 7,568,603
Furniture, fixtures, and equipment 3,095,553 2,723,682
Vehicles 12,779 12,779
----------- -----------
12,215,044 11,305,859
Less accumulated depreciation (3,278,131) (2,204,624)
----------- -----------
Property and equipment -- net $ 8,936,913 $ 9,101,235
=========== ===========
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Notes payable as of March 28, 1996 and June 29, 1995 represent notes
issued in connection with the acquisition of the Company on December 10,
1993 (See Note 2). Notes payable are described as follows:
10.875% senior secured notes payable due January 15,
2001, Series B (the "Notes"). Interest accrues daily and
is payable semi-annually on January 15 and July 15.
The Notes are secured by certain tangible and intangible
assets, including but not limited to, the equipment
constituting the Company's batter production
facility, the capital stock of all current and
future subsidiaries of the Company, intellectual
property rights and other intangible assets of the
Company.
$40,000,000
===========
The Company is subject to certain covenants provided for under the debt
offering, including limitations on restricted payments, limitations on
incurrence of indebtedness and issuances of preferred stock, limitations on
asset sales, limitations on liens, limitations on granting liens, restrictions
on subsidiary dividends, maintenance of a fixed charge coverage ratio,
limitations on mergers, consolidations or sale of assets, limitations on
transactions with affiliates, and various reporting requirements to the holders
of the Notes and the Securities and Exchange Commission.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of the results of operations of Great
American Cookie Company, Inc. (the "Company") for the thirteen weeks ended
March 28, 1996 compared to the results of operations for the thirteen weeks
ended March 30, 1995 is below. The factors cited in the following discussion
as contributing to changes in operating results are listed in order of
importance; however, unless otherwise indicated in such discussion, the
quantitative importance of any such factors cannot be determined by management
and are not stated.
THIRTEEN WEEKS ENDED MARCH 28, 1996 (THIRD QUARTER OF FISCAL 1996) COMPARED TO
THIRTEEN WEEKS ENDED MARCH 30, 1995 (THIRD QUARTER OF FISCAL 1995)
Company and Franchise Store Activity
As of March 28, 1996 there were 109 Company-operated stores and 223
franchised stores in operation. The store activity for the third quarter of
fiscal 1996 and third quarter of fiscal 1995 is summarized as follows:
THIRD QUARTER THIRD QUARTER
OF FISCAL 1996 OF FISCAL 1995
---------------------- ---------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
Stores open as of beginning of the quarter 111 225 115 208
Stores opened (including relocations) 2 3 6 3
Stores closed (including relocations) (4) (5) (3) (5)
Stores sold to franchisees (1) 1 (3) 3
Stores acquired from franchisees 1 (1) 1 (1)
--- --- --- ---
Stores open as of the end of the quarter 109 223 116 208
Satellite locations as of the end of the quarter 11 36 15 35
--- --- --- ---
Total outlets as of the end of the quarter 120 259 131 243
=== === === ===
The above activity results in 1,438 Company-operated equivalent store weeks
and 2,872 franchisee-operated equivalent store weeks during the thirteen week
period ended March 28, 1996 compared to 1,531 Company-operated equivalent store
weeks and 2,679 franchisee-operated equivalent store weeks during the thirteen
week period ended March 30, 1995.
Total Revenue
Total revenue decreased $103,000 or approximately 1.1% during the third
quarter of fiscal 1996 compared to the third quarter of fiscal 1995 primarily
attributable to the following factors:
- Cookie and beverage sales at Company-operated retail stores decreased
$505,000 or approximately 8.0% during the third quarter of fiscal 1996
compared to the third quarter of fiscal 1995. The decrease in revenue
from Company-operated retail stores was attributable to (a) an
approximately 6.1% decrease in Company-operated equivalent store weeks,
and (b) a decrease in the average retail sales volume for
Company-operated stores. Specifically, the average retail sales volume
for a Company-operated store decreased 1.9%. On a comparable store
basis, for those stores which were Company-operated in fiscal 1996 and
1995, sales volumes increased 0.9%. The average retail sales volume
decreased while at the same time comparable store sales volumes
increased due to some stores not being Company-operated in both fiscal
1996 and 1995, including those Company stores with higher than average
sales volumes which were sold to franchisees in fiscal 1996 and 1995.
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- Batter sales to franchisees increased $237,000 or approximately 11.6%
during the third quarter of fiscal 1996 compared to the third quarter
of fiscal 1995. The increase in batter sales to franchisees was
primarily attributable to (a) an approximately 7.2% increase in
franchisee-operated equivalent store weeks, and (b) a 4.4% increase in
the volume of batter sold per franchisee-operated equivalent store
week.
- Franchise royalties increased $85,000 or approximately 9.3% during the
third quarter of fiscal 1996 compared to the third quarter of fiscal
1995. The increase in franchise royalties was attributable to (a) an
approximately 7.2% increase in franchisee-operated equivalent store
weeks, and (b) an increase in the average retail sales volume per
franchisee-operated store of 2.1%.
- During the third quarter of fiscal 1996 revenue from franchise sales
increased $96,000 or approximately 60.4%. Revenue from selling
existing and new stores to franchisees is summarized as follows
(rounded):
FISCAL FISCAL
1996 1995
--------- ---------
Number of licenses sold to franchisees
- existing stores 1 3
- new stores 3 2
Cash from sale of existing stores $250,000 $ 685,000
Less: Net book value of existing stores sold (70,000) (580,000)
-------- ---------
Revenue from sale of existing stores 180,000 105,000
-------- ---------
Revenue from license fees for new stores 75,000 50,000
Revenue from other fees 0 4,000
-------- ---------
Revenue from license fees
for new stores and other fees 75,000 54,000
-------- ---------
Total revenue from sale of existing
and new stores to franchisees $255,000 $ 159,000
======== =========
- Other revenue decreased $16,000 or approximately 25.3% during
the third quarter of fiscal 1996 compared to the third quarter
of fiscal 1995. The decrease in other revenue is primarily
attributable to (a) an increase in batter discounts taken by
franchisees (consistent with the increase in batter sales to
franchisees).
Cost of Sales
Cost of sales decreased $267,000 or approximately 5.3% during the third
quarter of fiscal 1996 compared to the third quarter of fiscal 1995. The
decrease in cost of sales was primarily attributable to (a) a decline in retail
cookie and beverage sales in Company-operated stores, (b) an improvement in
retail labor margins, offset by (c) an increase in batter sales to franchisees,
and (d) a decline in wholesale batter margins due to higher ingredient costs.
Retail Store Occupancy
Retail store occupancy costs increased $9,000 or approximately 0.5% during
the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995.
The increase was primarily attributable to (a) an increase in repairs and
maintenance costs within Company-operated retail stores, offset by (b) an
approximately 6.1% decrease in Company-operated equivalent store weeks.
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Other Retail Store Expenses
Other retail store expenses decreased $67,000 or approximately 14.9%
during the third quarter of fiscal 1996 compared to the third quarter of fiscal
1995. The decrease in other retail store expenses was primarily attributable
to a decrease in marketing expenses related to the use of less point-of-sale
promotional materials in Company-operated stores.
Selling, General and Administrative
Selling, general and administrative expenses decreased $170,000 or
approximately 8.7% during the third quarter of fiscal 1996 compared to the
third quarter of fiscal 1995. This decrease was primarily attributable to (a)
a decrease in home office administrative salaries, (b) a decrease in various
home office administrative expenditures, and (c) a decrease in professional
service fees, including legal and accounting services, offset by (d) an
increase in travel costs due to additional reviews of stores by field
supervisors.
Other Expenses, Net
Other expenses, net, increased $14,000 or approximately 1.2% during the
third quarter of fiscal 1996 compared to the third quarter of fiscal 1995. The
increase was attributable to (a) a decrease in interest income, and (b) an
increase in interest expense due to an increase in capital lease obligations.
Non-Recurring Litigation Charge
During the third quarter of fiscal 1995, a non-recurring litigation charge
of $439,000 was recorded to cover a potential forthcoming judgment against the
Company in the Haagen-Burbank lawsuit. In June 1993, the Company won a
judgment for breach of written contract to a lease entered into with a
developer, Haagen-Burbank. On appeal, the Court of Appeals of the State of
California Second Appellate District overturned the jury's verdict and directed
the trial court to determine the amount of attorney fees and costs due to
Haagen-Burbank as the prevailing party in the litigation. Haagen-Burbank had
submitted to the court a request for legal fees totaling $439,000; however, on
April 27, 1995, the trial court entered a judgment of $417,985. On September
15, 1995 the Company paid $395,966 to Haagen-Burbank as settlement of the
judgment against the Company.
Net Loss
Net loss decreased $245,000 or approximately 27.3% for the third quarter
of fiscal 1996 compared to the third quarter of fiscal 1995. The decrease in
net loss was primarily attributable to (a) an approximately 345% increase in
operating income, offset by (b) a 1.2% increase in other expenses, net.
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THIRTY-NINE WEEKS ENDED MARCH 28, 1996 (FISCAL 1996 YEAR-TO-DATE) COMPARED TO
THIRTY-NINE WEEKS ENDED MARCH 30, 1995 (FISCAL 1995 YEAR-TO-DATE)
Company and Franchise Store Activity
As of March 28, 1996 there were 109 Company-operated stores and 223
franchised stores in operation. The store activity for fiscal 1996
year-to-date and for fiscal 1995 year-to-date is summarized as follows:
FISCAL 1996 FISCAL 1995
----------- -----------
YEAR-TO-DATE YEAR-TO-DATE
------------ ------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
Stores open as of beginning of the fiscal year 108 215 111 204
Stores opened (including relocations) 11 11 14 9
Stores closed (including relocations) (6) (7) (5) (9)
Stores sold to franchisees (6) 6 (5) 5
Stores acquired from franchisees 2 (2) 1 (1)
--- --- --- ---
Stores open as of end of the quarter 109 223 116 208
Satellite locations as of the end of the quarter 11 36 15 35
--- --- --- ---
Total outlets as of the end of the quarter 120 259 131 243
=== === === ===
The above activity results in 4,268 Company-operated equivalent store
weeks during the thirty-nine week period ended March 28, 1996 and 4,389
Company-operated equivalent store weeks during the thirty-nine week period
ended March 30, 1995. Based upon thirty-nine operating weeks for franchise
stores, the above activity results in 8,603 and 8,003 franchisee-operated
equivalent store weeks during fiscal 1996 year-to-date and fiscal 1995
year-to-date, respectively.
Total Revenue
Total revenue decreased $648,000 or approximately 2.1% during the
thirty-nine weeks ended March 28, 1996 compared to the thirty-nine weeks ended
March 30, 1995, primarily attributable to the following:
- Cookie and beverage sales at Company-operated retail stores decreased
$1,451,000 or approximately 7.2% during the thirty-nine weeks ended
March 28, 1996 compared to the thirty-nine weeks ended March 30, 1995.
The decrease in revenue from Company-operated retail stores was
primarily attributable to (a) a decrease in the average retail sales
volume for Company-operated stores and (b) an approximately 2.8%
decrease in Company-operated equivalent store weeks. Specifically, the
average retail sales volume for Company-operated stores decreased
approximately 4.4% per equivalent store week. On a comparable store
basis, for those stores which were Company-operated in fiscal 1996 and
1995, sales volumes decreased 2.8%.
- Batter sales to franchisees increased $398,000 or approximately 5.7%
during the thirty-nine weeks ended March 28, 1996 compared to the
thirty-nine weeks ended March 30, 1995. The increase in batter sales
to franchisees was primarily attributable to (a) an increase of
approximately 7.5% in franchisee-operated equivalent store weeks offset
by (b) a 1.8% decrease in the volume of batter sold per
franchisee-operated equivalent store week.
- Franchise royalties increased $235,000 or approximately 7.8% during the
thirty-nine week period ended March 28, 1996 compared to the
thirty-nine week period ended March 30, 1995. The increase in
royalties primarily resulted from (a) an approximately 7.5% increase in
franchisee-operated equivalent store weeks and (b) an increase in the
average franchisee-operated equivalent store sales volume of 0.3%.
-14-
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- Fiscal 1996 year-to-date revenue from franchise sales increased
$198,000 or approximately 38.5%. Revenue from selling existing and new
stores to franchisees is summarized below (rounded):
FISCAL FISCAL
1996 1995
---------- ---------
Number of licenses sold to franchisees
- existing stores 6 5
- new stores 9 8
Cash from sale of existing stores $1,051,000 $ 910,000
Less: Net book value of existing stores sold (574,000) (694,000)
---------- ---------
Revenue from sale of existing stores 477,000 216,000
---------- ---------
Revenue from license fees for new stores 225,000 200,000
Revenue from other fees 11,000 99,000
---------- ---------
Revenue from license fees
for new stores and other fees 236,000 299,000
---------- ---------
Total revenue from sale of existing
and new stores to franchisees $ 713,000 $ 515,000
========== =========
- Other revenue decreased $28,000 or approximately 19.7% during the
thirty-nine weeks ended March 28, 1996 compared to the thirty-nine
weeks ended March 30, 1995. The decrease in other revenue is primarily
attributable to (a) an increase in batter discounts taken by
franchisees (consistent with the increase in batter sales to
franchisees) and (b) a decrease in Company-operated equivalent store
weeks, offset by (c) an increase in sales of miscellaneous supplies to
franchise stores.
Cost of Sales
Cost of sales decreased $419,000 or approximately 2.8% during the
thirty-nine weeks ended March 28, 1996 compared to the thirty-nine weeks ended
March 30, 1995. The decrease was primarily attributable to (a) a decline in
retail cookie and beverage sales volume in Company-operated stores and (b) an
improvement in wholesale batter margins, offset by (c) an increase in retail
store packaging costs.
Retail Store Occupancy
Retail store occupancy costs decreased $24,000 or approximately 0.4%
during the thirty-nine weeks ended March 28, 1996 compared to the thirty-nine
weeks ended March 30, 1995. The decrease in retail store occupancy costs was
primarily attributable to (a) an approximately 2.8% decrease in
Company-operated store weeks, offset by (b) an increase in repairs and
maintenance expense within Company-operated retail stores.
Other Retail Store Expenses
Other retail store expenses decreased $190,000 or approximately 15.8%
during the thirty-nine week period ended March 28, 1996, compared to the
thirty-nine week period ended March 30, 1995. The decrease in other retail
store expenses was primarily attributable to (a) a decrease in marketing
expenses related to the use of less point-of-sale promotional materials in
Company-operated stores, and (b) a decrease in bank charges and supplies
expense as a result of cost containment efforts.
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Selling, General and Administrative
Selling, general and administrative expenses decreased $116,000 or
approximately 2.2% during the thirty-nine weeks ended March 28, 1996 compared
to the thirty-nine weeks ended March 30, 1995. The decrease in selling,
general, and administrative expenses was primarily attributable to (a) a
decrease in professional service fees, including legal and accounting services,
(b) a decrease in the expenses related to store closings and (c) a decrease in
various home office administrative expenditures, offset by (d) an increase in
travel costs due to additional review of stores by field supervisors.
Other Expenses, Net
Other expenses, net increased $88,000 or approximately 2.4% during the
thirty-nine weeks ended March 28, 1996 compared to the thirty-nine weeks ended
March 30, 1995. The increase was primarily attributable to (a) a decrease in
interest income, and (b) an increase in interest expense due to an increase in
capital lease obligations.
Non-Recurring Litigation Charge
During the third quarter of fiscal 1995, a non-recurring litigation charge
of $439,000 was recorded to cover a potential forthcoming judgment against the
Company in the Haagen-Burbank lawsuit. In June 1993, the Company won a
judgment for breach of written contract to a lease entered into with a
developer, Haagen-Burbank. On appeal, the Court of Appeals of the State of
California Second Appellate District overturned the jury's verdict and directed
the trial court to determine the amount of attorney fees and costs due to
Haagen-Burbank as the prevailing party in the litigation. Haagen-Burbank had
submitted to the court a request for legal fees totalling $439,000; however, on
April 27, 1995, the trial court entered a judgment of $417,985. On September
15, 1995 the Company paid $395,966 to Haagen- Burbank as settlement of the
judgment against the Company.
Net Loss
Net loss decreased $196,000 or approximately 54.6% during the thirty-nine
weeks ended March 28, 1996 compared to the thirty-nine weeks ended March 30,
1995. Net loss represented approximately 0.5% of total revenue during the
thirty- nine weeks ended March 28, 1996 compared to approximately 1.2% of total
revenue during the thirty-nine weeks ended March 30, 1995. The decrease in net
loss reflected (a) the increase in operating income, offset by (b) the increase
in other expenses, net.
FIXED CHARGE COVERAGE
Earnings before interest, taxes, depreciation and amortization
("EBITDA") is presented below as management believes that certain investors
find it to be a useful tool for measuring the ability to service debt. EBITDA
does not represent net income or cash flows from operations as these terms are
defined by generally accepted accounting principles and does not necessarily
indicate whether cash flows have been or will be sufficient to fund cash needs.
Adjusted EBITDA includes adjustments to EBITDA used in the indenture for the
10.875% senior secured notes payable due January 15, 2001, Series B to
calculate compliance with the Fixed Charge Coverage Ratio per such indenture,
consisting of adding back interest
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income and the elimination of certain non-cash charges, including losses on the
sale of fixed assets and accrual of lease expense in excess of cash paid.
Unaudited EBITDA and Adjusted EBITDA are calculated as follows (000's omitted):
FOR THE FOR THE FOR THE FOR THE
THIRTEEN WEEK THIRTEEN WEEK THIRTY-NINE WEEK THIRTY-NINE WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
MARCH 28, 1996 MARCH 30, 1995 MARCH 28, 1996 MARCH 30, 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- ---------------- ----------------
Net income $ (653) $ (898) $ (163) $ (359)
Add:
Depreciation 506 444 1,309 1,234
Amortization of goodwill 218 220 652 658
Interest expense, net of interest income 1,093 1,078 3,277 3,186
Amortization of debt issue costs 143 143 429 432
Provision for income taxes (77) (649) 507 251
------ ------ ------ ------
EBITDA 1,230 338 6,011 5,402
Add:
Other noncash items 108 75 182 224
Interest income 11 21 36 80
------ ------ ------ ------
Adjusted EBITDA $1,349 $ 434 $6,229 $5,706
Add:
Non-recurring litigation charge 0 439 0 439
------ ------ ------ ------
Adjusted EBITDA after add-back
of non-recurring litigation charge $1,349 $ 873 $6,229 $6,145
====== ====== ====== ======
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations
and the sale of Company-operated retail units to franchisees.
The working capital balance of the Company as of March 28, 1996 and as of
June 29, 1995 was $3.0 million and $2.3 million, respectively. The specialty
retail cookie business does not require the maintenance of significant
receivables or inventories; therefore, it is not unusual for the Company's
working capital balance to be less than $5 million.
The Company continually invests in its business through the addition of
new Company-operated stores. These store additions are reflected as long-term
assets and not as part of working capital. The Company anticipates that it
will build approximately eleven Company-operated stores during fiscal 1996,
including three relocations of existing stores, requiring aggregate
expenditures of approximately $1.4 million for capital expenditures and store
opening costs. The Company anticipates that such costs will be funded with
cash generated by operations and the sale of existing Company-operated stores
to franchisees, including initial license fees. The number of Company-operated
stores to be opened may be greater or less than anticipated depending upon a
number of factors including the Company's ability to obtain locations on
acceptable lease terms and/or the Company's ability to identify potential
franchisees and to license such locations to franchisees before construction
and store opening costs are incurred. The Company's future liquidity is
dependent upon its ability to sell stores to franchisees.
During the thirteen week period ended March 28, 1996, the Company opened 2
Company-operated stores, including 1 store relocation within the same mall,
requiring capital expenditures of approximately $189,000. The Company incurred
total capital expenditures for the third quarter of fiscal 1996 of
approximately $271,000, including a net decrease in construction in progress of
$7,000. During the thirty-nine week period ended March 28, 1996, the Company
opened 10 Company-operated stores, including 2 store relocations within the
same mall, requiring capital expenditures of $1,230,000. Total fiscal
year-to-date capital expenditures are approximately $1,562,000, which includes
a net decrease in construction-in-
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progress of $25,000. The Company estimates that to adequately maintain the
Atlanta batter production facility and existing Company-operated retail units,
approximately $200,000 to $300,000 of capital expenditures are required
annually.
A portion of the consideration paid in connection with the acquisition of
the Company in December 1993 consisted of Cookies USA Senior Preferred Stock
and the cash provided by the sale by Cookies USA of Subordinated Notes, Junior
Class A Preferred Stock, Junior Class B Preferred Stock, and Common Stock. The
Company is the sole source of any cash to be paid as interest, principal
payments or dividends on such securities or to pay any other expenses,
including management fees, incurred by Cookies USA. The Company expects to pay
dividends to Cookies USA in amounts sufficient to service the cash flow
requirements of Cookies USA to the extent that such payments are permitted by
the terms of the Company's Senior Secured Notes and, if additional indebtedness
is incurred that restricts such payments, by the terms of such additional
indebtedness. During the thirteen week period ended March 28, 1996 the Company
did not pay dividends to Cookies USA; however, during the third quarter of
fiscal 1996, it declared dividends of $62,500 to Cookies USA to be paid in the
future.
After giving effect to the acquisition and the issuance of the Company's
Senior Secured Notes, the Company will not have any mandatory debt amortization
requirements until the year 2001. The Senior Secured Notes require semi-annual
interest payments of approximately $2,175,000 on January 15 and July 15. As of
March 28, 1996 the Company had a cash balance of $3,163,000. The Company
anticipates that additional cash flow will be generated primarily from the sale
of existing retail stores to franchisees so that, with cash generated from
retail store and batter facility operations and royalties from franchisees, the
Company will be able to meet its debt service requirements as well as its
capital expenditure requirements for the foreseeable future. Based upon the
Company's plans to develop additional stores, the Company's liquidity is
dependent upon its ability to sell both existing and new stores to franchisees.
SEASONALITY AND INFLATION
The Company's sales and profitability are subject to slight seasonal
fluctuation and are traditionally higher during the Christmas holiday season
because of various factors such as increased mall traffic and holiday gift
purchases.
The Company does not believe that inflation has materially affected
earnings during the past three years. Many of the Company's employees are paid
hourly rates related to the federal minimum wage. Accordingly,
inflation-related increases in the minimum wage have historically increased the
Company's labor costs. In addition, most of the leases for the Company's
stores contain rental escalation clauses based upon cost increases incurred by
lessors. In most cases, the Company has been able to increase prices
sufficiently to match increases in its operating costs, but there is no
assurance that it will be able to do so in the future.
GOODWILL
In determining the value of the Company, management has considered
potential growth rates in both sales and EBITDA over the next five years.
Management ultimately became comfortable with such value based on potential
growth rates which are lower than those the Company has experienced in the five
years preceding the acquisition. The carrying value of goodwill is evaluated
for indications of possible impairment. The review is based on comparing the
carrying amount to the undiscounted cash flows over the remaining amortization
period. No impairment is indicated as of March 28, 1996.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former employee, whose employment with the Company ceased during
fiscal 1994, had retained counsel and threatened suit claiming that he was
entitled to a severance package, bonuses, and additional compensation. On
December 31, 1995, a settlement and mutual release was executed by the Company
and the former employee.
The Company is subject to other claims and legal action in the
ordinary course of its business. Although the ultimate disposition of these
proceedings are not presently determinable, management does not believe that an
adverse determination in any of these proceedings will have an adverse material
effect upon the financial condition of the Company or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended March 28, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GREAT AMERICAN COOKIE COMPANY, INC.
Date: May 13, 1996 By: /s/ David B. Barr
------------------------------------------
David B. Barr, Executive Vice President
of Operations and Chief Financial Officer
(Authorized Executive Officer and
Principal Financial Officer)