1
================================================================================
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 30, 1997
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
--- ---
================================================================================
2
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 30, 1997 and June 30, 1996
Statement of Operations for the thirteen week periods ended
March 30, 1997 and March 28, 1996
Statement of Operations for the thirty-nine week periods ended
March 30, 1997 and March 28, 1996
Statement of Changes in Stockholder's Equity for the thirty-nine
week period ended March 30, 1997
Statement of Cash Flows for the thirty-nine week periods ended
March 30, 1997 and March 28, 1996
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
-2-
3
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
(UNAUDITED)
MARCH 30, JUNE 30,
1997 1996
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 3,722,535 $ 3,301,627
Accounts receivable - trade 1,619,874 1,675,584
Inventory 1,700,118 1,443,811
Prepaid expenses 1,418,522 1,175,309
Income tax receivable 208,979 155,789
Current deferred tax benefit 75,663 81,360
Current portion of notes receivable 569,052 198,085
Other receivables 6,841 33,899
----------- -----------
Total current assets 9,321,584 8,065,464
----------- -----------
Property and equipment, net of accumulated depreciation 6,760,554 8,325,726
Construction in progress, net of construction deposits received from franchisees 92,882 29,258
----------- -----------
6,853,436 8,354,984
----------- -----------
Other assets
Deferred loan costs, net of accumulated amortization
of $1,893,400 and $1,464,100, respectively 2,179,658 2,608,958
Notes receivable, net of current portion 174,593 19,963
Deferred tax benefit 1,419,143 1,419,143
Deposits 59,872 61,386
Accrued straight-line minimum rent receivable for subleases to franchisees 1,311,279 1,300,872
----------- -----------
5,144,545 5,410,322
----------- -----------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $2,886,651 and $2,233,851, respectively 32,065,674 32,718,474
----------- -----------
$53,385,239 $54,549,244
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 246,496 $ 832,044
Sales taxes payable 100,371 129,974
Accrued interest payable 910,764 1,996,681
Accrued expenses 869,477 839,479
Income taxes payable 556,117 225,564
Deposits 764,888 738,542
Dividends payable 125,000 125,000
----------- -----------
Total current liabilities 3,573,113 4,887,284
----------- -----------
Capital lease obligations, net 47,846 67,036
----------- -----------
Accrued straight-line minimum rent payable 2,136,903 2,176,523
----------- -----------
Long-term debt 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 (6,208,686) (6,417,662)
----------- -----------
7,627,377 7,418,401
----------- -----------
$53,385,239 $54,549,244
=========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
4
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 ENDED WEEK PERIOD ENDED
MARCH 30, 1997 MARCH 28, 1996
----------------- -----------------
Revenue:
Cookie and beverage sales $5,125,142 $5,870,501
Batter sales to franchisees 2,625,017 2,270,970
Franchise royalties 1,110,424 993,627
Franchise sales - existing and new stores 75,461 255,560
Other - net 14,254 48,695
---------- ----------
Total revenue 8,950,298 9,439,353
---------- ----------
Operating expenses:
Cost of sales 4,445,005 4,814,354
Retail store occupancy 1,657,977 1,943,636
Other retail store expenses 244,210 383,958
Selling, general and administrative expenses 1,780,420 1,791,027
---------- ----------
Total operating expenses 8,127,612 8,932,975
---------- ----------
Other (income) expenses, net
Interest income (83,967) (11,413)
Interest expense 1,089,823 1,104,094
Amortization of deferred loan costs 143,100 143,100
---------- ----------
Total other expenses, net 1,148,956 1,235,781
---------- ----------
Loss before taxes (326,270) (729,403)
State and federal income tax benefit (41,295) (76,532)
---------- ----------
Net loss $ (284,975) $ (652,871)
========== ==========
The accompanying notes are an integral part of these financial statements.
-4-
5
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 ENDED WEEK PERIOD ENDED
MARCH 30, 1997 MARCH 28, 1996
------------------ -----------------
Revenue:
Cookie and beverage sales $17,318,815 $18,810,465
Batter sales to franchisees 8,291,293 7,402,308
Franchise royalties 3,578,976 3,262,625
Franchise sales - existing and new stores 958,737 713,136
Other - net (15,119) 113,649
----------- -----------
Total revenue 30,132,702 30,302,183
----------- -----------
Operating expenses:
Cost of sales 13,887,717 14,646,713
Retail store occupancy 5,055,984 5,486,893
Other retail store expenses 752,515 1,011,801
Selling, general and administrative expenses 5,167,766 5,106,674
----------- -----------
Total operating expenses 24,863,982 26,252,081
----------- -----------
Other (income) expenses, net
Interest income (176,243) (35,783)
Interest expense 3,270,438 3,312,472
Amortization of deferred loan costs 429,300 429,300
----------- -----------
Total other expenses, net 3,523,495 3,705,989
----------- -----------
Income before taxes 1,745,225 344,113
State and federal income tax expense 911,249 507,196
----------- -----------
Net income (loss) $ 833,976 $ (163,083)
=========== ===========
The accompanying notes are an integral part of these financial statements.
-5-
6
\
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 30, 1997
------------------------------------------------------
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
----------- ---------- ------------ -----------
Balance at June 30, 1996 $13,500,000 $336,063 $(6,417,662) $7,418,401
Dividends -- -- (625,000) (625,000)
Current period net income -- -- 833,976 833,976
----------- -------- ----------- ----------
Balance at March 30, 1997 $13,500,000 $336,063 $(6,208,686) $7,627,377
=========== ======== =========== ==========
The accompanying notes are an integral part of these financial statements.
-6-
7
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 30, 1997 MARCH 28, 1996
------------------- --------------------
Cash flows from operating activities:
Net income (loss) $ 833,976 $ (163,083)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 1,332,618 1,309,468
Amortization of cost in excess of fair value of net assets acquired (goodwill) 652,800 651,951
Amortization of deferred loan costs 429,300 429,300
Net gain on sales and disposals of property and equipment (409,334) (259,276)
Net (decrease) increase in accrued straight-line minimum rent
receivable and payable (50,027) 62,501
Changes in assets and liabilities:
Increase in accounts receivable (40,482) (427,315)
Increase in inventory (233,307) (198,625)
(Increase) decrease in prepaid expenses (243,213) 1,008,399
Increase in income tax receivable (53,190) (8,256)
Decrease in current deferred tax benefit 5,697 135,787
Decrease in other receivables 27,058 125,809
Decrease in deferred tax benefit 0 371,036
Decrease (increase) in deposits 1,514 (6,927)
Decrease in accounts payable (585,548) (304,231)
Decrease in sales taxes payable (29,603) (9,878)
Decrease in accrued interest payable (1,085,917) (1,051,246)
Increase (decrease) in accrued expenses 29,998 (1,275,810)
Increase in income taxes payable 330,553 0
Increase (decrease) in deposits 26,346 (42,552)
----------- -----------
Net cash provided by operating activities 939,239 347,052
----------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment, including net change in construction
in progress, net of construction deposits received from franchisees (611,480) (1,534,532)
Proceeds from sales and disposals of property and equipment 284,181 494,917
Acceptance of notes receivable (2,224) 0
Proceeds from collection of notes receivable 455,382 444,073
----------- -----------
Net cash provided by (used for) investing activities 125,859 (595,542)
----------- -----------
Cash flows from financing activities:
Principal repayments under capital lease obligations (19,190) (11,970)
Dividends paid (625,000) (827,900)
----------- -----------
Net cash used for financing activities (644,190) (839,870)
----------- -----------
Net increase (decrease) in cash and cash equivalents during period 420,908 (1,088,360)
----------- -----------
Cash and cash equivalents, beginning of period 3,301,627 4,251,780
----------- -----------
Cash and cash equivalents, end of period $ 3,722,535 $ 3,163,420
=========== ===========
The accompanying notes are an integral part of these financial statements.
-7-
8
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 30, 1997 MARCH 28, 1996
------------------- -------------------
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $4,356,355 $4,363,718
========== ==========
State and federal income taxes $ 634,045 $ 13,751
========== ==========
Cash paid during the thirty-nine week period ended March 30, 1997 for state and
federal income taxes represents payments made by Great American Cookie Company,
Inc. (the 'Company') to governmental authorities and to Cookies USA, Inc.
('Cookies USA'), the sole stockholder of the Company, pursuant to a tax
sharing agreement between the two companies. The companies file consolidated
federal and state tax returns. In accordance with the tax sharing agreement,
the Company will pay Cookies USA an amount equal to federal and state income
tax liabilities calculated on a separate basis for the Company. (See the
Company's Form 10-K for the fiscal year ended June 30, 1996 for additional
information.)
Supplemental disclosures of non-cash investing and financing activities:
During the thirty-nine weeks ended March 30, 1997, notes receivable with face
amounts totaling $932,894 were received from unrelated franchisees in
connection with the sale of 6 Company-operated stores. During the thirty-nine
weeks ended March 28, 1996, notes receivable with face amounts totaling
$296,363 were received from unrelated franchisees in connection with the sale
of 2 Company-operated stores.
The accompanying notes are an integral part of these financial statements.
-8-
9
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Great American Cookie Company, Inc. (the "Company") 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.
The accompanying financial statements of Great American Cookie Company,
Inc. for the thirteen weeks ended and for the thirty-nine weeks ended
March 30, 1997 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 30,
1996. Earnings per share is not presented, as the Company is
wholly-owned.
2. NOTES RECEIVABLE
Notes receivable consist of the following:
MARCH 30, JUNE 30,
1997 1996
-------- ---------
Notes receivable $743,645 $218,048
Less: current portion 569,052 198,085
-------- --------
Notes receivable, net of current portion $174,593 $ 19,963
======== ========
Notes receivable are due from various franchisees and principally result
from the sale of existing Company stores to franchisees. Each note for the
sale of a store is guaranteed by the purchaser and collateralized by the
assets sold. Most notes are due in monthly installments of principal and
interest, with the interest rates ranging from 9% to 12.5% per annum.
-9-
10
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 30, JUNE 30,
1997 1996
----------- ------------
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 7,104,749 7,724,036
Furniture, fixtures, and equipment 3,182,400 3,227,210
Vehicles 12,779 12,779
----------- -----------
11,300,723 11,964,820
Less: accumulated depreciation (4,540,169) (3,639,094)
----------- -----------
Property and equipment, net $ 6,760,554 $ 8,325,726
=========== ===========
4. LONG-TERM DEBT
Notes payable as of March 30, 1997 and June 30, 1996 represent notes
issued in connection with the acquisition of the Company on December 10,
1993. 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. $40,000,000
===========
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.
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 and
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. If a violation of a covenant occurs, the holders of at least
25% in principal amount of the then outstanding Notes may declare all
outstanding Notes to be due and payable immediately.
-10-
11
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 30, 1997 compared to the results of operations for the thirteen weeks
ended March 28, 1996 and for the thirty-nine weeks ended March 30, 1997
compared to the thirty-nine weeks ended March 28, 1996 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 is not stated.
THIRTEEN WEEKS ENDED MARCH 30, 1997 (THIRD QUARTER OF FISCAL 1997) COMPARED TO
THIRTEEN WEEKS ENDED MARCH 28, 1996 (THIRD QUARTER OF FISCAL 1996)
Company and Franchise Store Activity
As of March 30, 1997 there were 98 Company-operated stores and 229
franchised stores in operation. The store activity for the third quarter of
fiscal 1997 and third quarter of fiscal 1996 is summarized as follows:
THIRD QUARTER THIRD QUARTER
OF FISCAL 1997 OF FISCAL 1996
-------------------- --------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- --------- ----------
Stores open as of beginning of the quarter 98 232 111 225
Stores opened (including relocations) 1 3 2 3
Stores closed (including relocations) (3) (4) (4) (5)
Stores sold to franchisees 0 0 (1) 1
Stores acquired from franchisees 2 (2) 1 (1)
--- ---- --- ----
Stores open as of the end of the quarter 98 229 109 223
Satellite locations as of the end of the quarter 9 30 11 36
--- ---- --- ----
Total outlets as of the end of the quarter 107 259 120 259
=== === === ===
The above activity results in 1,261 Company-operated equivalent store
weeks and 2,973 franchisee-operated equivalent store weeks during the thirteen
week period ended March 30, 1997 compared to 1,438 Company-operated equivalent
store weeks and 2,872 franchisee-operated equivalent store weeks during the
thirteen week period ended March 28, 1996.
Total Revenue
Total revenue decreased $489,000 or approximately 5.2% during the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. Each of
the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores decreased
$745,000, or approximately 12.7%, during the third quarter of fiscal
1997 compared to the third quarter of fiscal 1996. The decrease in
revenue from Company-operated retail stores was attributable to (a) a
12.3% decrease in Company-operated equivalent store weeks and (b) a
0.4% decrease in the average retail sales volume for Company-operated
stores. On a comparable store basis, for those stores which were
Company-operated in both fiscal 1997 and 1996, sales volumes increased
0.9% during the quarter. The average retail sales volume decreased at
the same time that comparable store sales volumes increased due to
some stores not being Company-operated in both fiscal 1997 and 1996,
including those Company stores with higher than average sales volumes
which were sold to franchisees in fiscal 1997 and 1996.
-11-
12
- Batter sales to franchisees increased $354,000, or approximately
15.6%, during the third quarter of fiscal 1997 compared to the third
quarter of fiscal 1996. The increase in batter sales to franchisees
was primarily attributable to (a) a 12.1% increase in the volume of
batter sold per franchisee-operated equivalent store week and (b) a
3.5% increase in franchisee-operated equivalent store weeks.
- Franchise royalties increased $117,000, or approximately 11.8%, during
the third quarter of fiscal 1997 compared to the third quarter of
fiscal 1996. The increase in franchise royalties was attributable to
(a) an increase in the average retail sales volume per
franchisee-operated store of 8.2% and (b) a 3.5% increase in
franchisee-operated equivalent store weeks. On a comparable store
basis, for those stores which were franchisee-operated in fiscal 1997
and 1996, management estimates franchisees' sales volumes increased
6.3% during the quarter.
- Revenue from franchise sales decreased $180,000, or approximately
70.5%, during the third quarter of fiscal 1997 compared to the third
quarter of fiscal 1996. Revenue from selling existing and new stores
to franchisees is summarized as follows (rounded):
THIRD QUARTER THIRD QUARTER
FISCAL 1997 FISCAL 1996
------------ -------------
Number of licenses sold to franchisees
- existing stores 0 1
- new stores 3 3
Cash and notes from sale of existing stores $ 0 $ 250,000
Less: net book value of existing stores sold 0 (70,000)
---------- ---------
Revenue from sale of existing stores 0 180,000
---------- ---------
Revenue from license fees for new stores 75,000 75,000
Revenue from other fees 0 0
---------- ---------
Revenue from license fees
for new stores and other fees 75,000 75,000
---------- ---------
Total revenue from sale of existing
and new stores to franchisees $ 75,000 $ 255,000
========== =========
- Other revenue decreased $34,000, or approximately 70.7%, during
the third quarter of fiscal 1997 compared to the third quarter of
fiscal 1996. The decrease in other revenue is primarily attributable
to (a) a decrease in construction assistance revenue for construction
assistance performed by the Company for the franchisees and (b) an
increase in sales discounts related to an increase in batter sales to
franchisees.
Cost of Sales
Cost of sales decreased $369,000, or approximately 7.7%, during the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. The
decrease in cost of sales was primarily attributable to (a) a decline in cookie
and beverage sales due to less Company-operated retail stores, (b) an
improvement in wholesale batter margins, and (c) an improvement in retail
margins offset by (d) an increase in batter sales to franchisees.
-12-
13
Retail Store Occupancy
Retail store occupancy costs decreased $286,000, or approximately 14.7%,
during the third quarter of fiscal 1997 compared to the third quarter of fiscal
1996. The decrease was primarily attributable to (a) a decrease in rent, CAM,
and utilities expense primarily as a result of a 12.3% decrease in
Company-operated equivalent store weeks and (b) a decrease in repairs and
maintenance costs.
Other Retail Store Expenses
Other retail store expenses decreased $140,000, or approximately 36.4%,
during the third quarter of fiscal 1997 compared to the third quarter of fiscal
1996. The decrease in other retail store expenses was primarily attributable to
(a) a decrease in operating supplies expense within Company-operated stores in
fiscal 1997 compared to fiscal 1996, in which additional costs related to the
rollout of a new cookie merchandising program were incurred and (b) a 12.3%
decrease in Company-operated equivalent store weeks.
Selling, General and Administrative
Selling, general and administrative expenses decreased $11,000, or
approximately 0.6%, during the third quarter of fiscal 1997 compared to the
third quarter of fiscal 1996. This decrease was primarily attributable to (a) a
decrease in travel, insurance, and professional service costs offset by (b) an
increase in marketing costs.
Other Expenses, Net
Other expenses, net, decreased $87,000, or approximately 7.0%, during the
third quarter of fiscal 1997 compared to the third quarter of fiscal 1996. The
decrease was primarily attributable to an increase in interest income.
Net Loss
Net loss decreased $368,000, or approximately 56.4%, for the third quarter
of fiscal 1997 compared to the third quarter of fiscal 1996. The decrease in
net loss was primarily attributable to (a) a 62.5% increase in operating income
and (b) a 7.0% decrease in other expenses, net offset by (c) a 46.0% decrease
in state and federal income tax benefit.
-13-
14
THIRTY-NINE WEEKS ENDED MARCH 30, 1997 (FISCAL 1997 YEAR-TO-DATE) COMPARED TO
THIRTY-NINE WEEKS ENDED MARCH 28, 1996 (FISCAL 1996 YEAR-TO-DATE)
Company and Franchise Store Activity
As of March 30, 1997 there were 98 Company-operated stores and 229
franchised stores in operation. The store activity for fiscal 1997 year-to-date
and for fiscal 1996 year-to-date is summarized as follows:
FISCAL 1997 FISCAL 1996
YEAR-TO-DATE YEAR-TO-DATE
-------------------- --------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
Stores open as of beginning of the fiscal year 104 225 108 215
Stores opened (including relocations) 1 8 11 11
Stores closed (including relocations) (4) (7) (6) (7)
Stores sold to franchisees 8 8 (6) 6
Stores acquired from franchisees 5 (5) 2 (2)
--- ---- --- ---
Stores open as of the end of the quarter 98 229 109 223
Satellite locations as of the end of the quarter 9 30 11 36
--- ---- --- ---
Total outlets as of the end of the quarter 107 259 120 259
=== ==== === ===
The above activity results in 3,917 Company-operated equivalent store
weeks and 8,880 franchisee-operated equivalent store weeks during the
thirty-nine week period ended March 30, 1997 compared to 4,268 Company-operated
equivalent store weeks and 8,603 franchisee-operated equivalent store weeks
during the thirty-nine week period ended March 28, 1996.
Total Revenue
Total revenue decreased $169,000 or approximately 0.6% during the
thirty-nine weeks ended March 30, 1997 compared to the thirty-nine weeks ended
March 28, 1996. Each of the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores decreased
$1,492,000, or approximately 7.9%, during the thirty-nine weeks ended
March 30, 1997 compared to the thirty-nine weeks ended March 28,
1996. The decrease in revenue from Company-operated retail stores was
attributable to (a) a 8.2% decrease in Company-operated equivalent
store weeks offset by (b) a 0.3% increase in the average retail sales
volume for Company-operated stores. On a comparable store basis, for
those stores which were Company-operated in both fiscal 1997 and
1996, sales volumes increased 2.5%.
- Batter sales to franchisees increased $889,000, or approximately
12.0%, during the thirty-nine weeks ended March 30, 1997, compared to
the thirty-nine weeks ended March 28, 1996. The increase in batter
sales to franchisees was primarily attributable to (a) a 8.8% increase
in the volume of batter sold per franchisee-operated equivalent store
week and (b) a 3.2% increase in franchisee-operated equivalent store
weeks.
- Franchise royalties increased $316,000, or approximately 9.7%, during
the thirty-nine weeks ended March 30, 1997 compared to the thirty-nine
weeks ended March 28, 1996. The increase in franchise royalties was
attributable to (a) an increase in the average retail sales volume per
franchisee-operated store of 6.5% and (b) a 3.2% increase in
franchisee-operated equivalent store weeks. On a comparable store
basis, for those stores which were franchisee-operated in fiscal 1997
and 1996, management estimates franchisees' sales volumes increased
4.8%.
-14-
15
- Revenue from franchise sales increased $246,000, or approximately
34.4%, during the thirty-nine weeks ended March 30, 1997 compared to
the thirty-nine weeks ended March 28, 1996. Revenue from selling
existing and new stores to franchisees is summarized as follows
(rounded):
FISCAL 1997 FISCAL 1996
----------- -----------
Number of licenses sold to franchisees
- existing stores 8 6
- new stores 8 9
Cash and notes from sale of existing stores $1,327,000 $1,051,000
Less: net book value of existing stores sold (574,000) (574,000)
---------- ----------
Revenue from sale of existing stores 753,000 477,000
---------- ----------
Revenue from license fees for new stores 200,000 225,000
Revenue from other fees 6,000 11,000
---------- ----------
Revenue from license fees
for new stores and other fees 206,000 236,000
---------- ----------
Total revenue from sale of existing
and new stores to franchisees $ 959,000 $ 713,000
========== ==========
- Other revenue decreased $129,000, or approximately 113.0%, during the
thirty-nine weeks ended March 30, 1997 compared to the thirty-nine
weeks ended March 28, 1996. The decrease in other revenue is primarily
attributable to (a) a decrease in sales of miscellaneous supplies to
franchise stores and (b) a decrease in construction assistance revenue
for construction assistance performed by the Company for the
franchisees.
Cost of Sales
Cost of sales decreased $759,000, or approximately 5.2%, during the
thirty-nine weeks ended March 30, 1997 compared to the thirty-nine weeks ended
March 28, 1996. The decrease in cost of sales was primarily attributable to (a)
a decline in cookie and beverage sales due to less Company-operated retail
stores, (b) a decrease in the cost of packaging and freight for Company-operated
retail stores, and (c) an improvement in wholesale batter margins as a result of
a price increase enacted in October 1996 offset by (d) an increase in batter
sales to franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased $431,000, or approximately 7.9%,
during the thirty-nine weeks ended March 30, 1997 compared to the thirty-nine
weeks ended March 28, 1996. The decrease was primarily attributable to (a) a
decrease in rent as a result of a decrease in Company-operated equivalent store
weeks and (b) a decrease in repairs and maintenance costs.
Other Retail Store Expenses
Other retail store expenses decreased $259,000, or approximately 25.6%,
during the thirty-nine weeks ended March 30, 1997 compared to the thirty-nine
weeks ended March 28, 1996. The decrease in other retail store expenses was
primarily attributable to (a) a decrease in operating supplies expense within
Company-operated stores in fiscal 1997 due to (1) the opening of 7 less Company
stores in fiscal 1997 year-to-date versus fiscal 1996 year-to-date and (2)
additional costs incurred in fiscal 1996 related to the rollout of a new cookie
merchandising program and (b) a 8.2% decrease in Company-operated equivalent
store weeks.
-15-
16
Selling, General and Administrative
Selling, general and administrative expenses increased $61,000, or
approximately 1.2%, during the thirty-nine weeks ended March 30, 1997 compared
to the thirty-nine weeks ended March 28, 1996. This increase was primarily
attributable to (a) an increase in marketing costs and professional service fees
offset by (b) a decrease in travel and insurance costs and (c) a decrease in
various home office expenditures.
Other Expenses, Net
Other expenses, net, decreased $182,000, or approximately 4.9%, during the
thirty-nine weeks ended March 30, 1997 compared to the thirty-nine weeks ended
March 28, 1996. The decrease was primarily attributable to an increase in
interest income.
Net Income
Net income increased $997,000, or approximately 611.0%, for the
thirty-nine weeks ended March 30, 1997 compared to the thirty-nine weeks ended
March 28, 1996. The increase in net income was primarily attributable to a
30.1% increase in operating income, (b) a 4.9% decrease in other expenses, net
offset by (c) a 79.7% increase in state and federal income tax expense.
-16-
17
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 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 30, 1997 MARCH 28, 1996 MARCH 30, 1997 MARCH 28, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- ---------------- ----------------
Net income (loss) $ (285) $ (653) $ 834 $ (163)
Add:
Depreciation 439 506 1,333 1,309
Amortization of goodwill 218 218 653 652
Interest expense,
net of interest income 1,006 1,093 3,094 3,277
Amortization of debt
issue costs 143 143 429 429
Provision for income taxes (42) (77) 911 507
------ ------ ------ ------
EBITDA 1,479 1,230 7,254 6,011
Add:
Other non-cash items 73 108 120 182
Interest income 84 11 176 36
------ ------ ------ ------
Adjusted EBITDA $1,636 $1,349 $7,550 $6,229
====== ====== ====== ======
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 30, 1997 and as of
June 30, 1996 was $5.8 million and $3.2 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 two Company-operated stores, including relocations, during
fiscal 1997, requiring aggregate expenditures of approximately $300,000 for
store opening costs. The Company anticipates that its capital expenditures 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.
-17-
18
During the thirteen week period ended March 30, 1997, the Company incurred
total capital expenditures of approximately $218,000, including a net increase
in construction in progress of $25,000. Total fiscal year-to-date capital
expenditures are approximately $611,000, which includes a net increase in
construction in progress of $64,000. The Company estimates that to adequately
maintain the Atlanta batter production facility and existing Company-operated
retail units, approximately $300,000 to $400,000 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, and taxes. The Company
expects to pay dividends and tax payments 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 30, 1997 the Company neither declared nor paid dividends to Cookies USA.
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 30, 1997 the Company had a cash balance of approximately $3,773,000. 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.
Notwithstanding this, 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 historically inflation has materially
affected earnings. Most of the leases for the Company's stores contain rental
escalation clauses based upon cost increases incurred by lessors, and many of
the Company's employees are paid hourly rates related to the federal minimum
wage. The federal minimum wage increased from $4.25 to $4.75 on October 1, 1996
and will increase from $4.75 to $5.15 on September 1, 1997. These increases may
negatively impact the Company's payroll costs in the short-term, but management
believes such impact can be negated in the long-term through increased
efficiencies in its operations and, as necessary, through retail price
increases. Historically, 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 evaluating the Company's goodwill for possible impairment, 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 impairment 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 30, 1997.
-18-
19
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to claims and legal actions in
the ordinary course of its business. The Company is not a party to any
litigation that would have a material adverse effect on the Company or its
business and is not aware that such litigation is threatened.
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 30, 1997.
-19-
20
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, 1997 By: /s/David B. Barr
--------------------------------------
David B. Barr, President,
Chief Financial Officer, and Treasurer
(Principal Financial Officer)
-20-