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UNITED STATES
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 SEPTEMBER 28, 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
--- ---
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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 September 28, 1997 and June 29, 1997
Statement of Operations for the thirteen week periods ended
September 28, 1997 and September 29, 1996
Statement of Changes in Stockholder's Equity for the thirteen
week period ended September 28, 1997
Statement of Cash Flows for the thirteen week periods ended
September 28, 1997 and September 29, 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
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 28, JUNE 29,
1997 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,072,331 $ 4,883,991
Accounts receivable - trade 1,544,026 1,701,587
Inventory 1,549,835 1,291,907
Prepaid expenses 1,179,783 1,227,378
Current deferred tax benefit 4,578 4,578
Current portion of notes receivable 506,240 867,207
Other receivables 1,680 8,548
------------ ------------
Total current assets 9,858,473 9,985,196
------------ ------------
Property and equipment, net of accumulated depreciation 5,916,265 6,304,591
Construction in progress, net of construction deposits received from franchisees 137,713 91,759
------------ ------------
6,053,978 6,396,350
------------ ------------
Other assets:
Deferred loan costs, net of accumulated amortization
of $2,193,900 and $2,049,700, respectively 1,905,869 2,050,069
Notes receivable, net of current portion 345,338 302,512
Deferred tax benefit 1,293,006 1,293,006
Deposits 49,645 49,615
Accrued straight-line minimum rent receivable for subleases to franchisees 1,333,218 1,266,701
------------ ------------
4,927,076 4,961,903
------------ ------------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $3,321,951 and $3,104,351, respectively 31,630,374 31,847,974
------------ ------------
$ 52,469,901 $ 53,191,423
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities :
Accounts payable $ 730,984 $ 376,035
Sales taxes payable 107,637 105,065
Accrued interest payable 906,544 1,993,750
Accrued expenses 774,393 1,040,067
Deposits 736,888 673,277
Dividends payable 0 125,000
------------ ------------
Total current liabilities 3,256,446 4,313,194
------------ ------------
Capital lease obligations, net 55,851 62,214
------------ ------------
Accrued straight-line minimum rent payable 2,171,538 2,113,057
------------ ------------
Long-term debt 40,000,000 40,000,000
------------ ------------
Commitments and contingencies
Stockholders 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 (6,849,997) (7,133,105)
------------ ------------
6,986,066 6,702,958
------------ ------------
$ 52,469,901 $ 53,191,423
============ ============
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 ENDED WEEK PERIOD ENDED
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ ------------------
Revenue:
Cookie and beverage sales $ 4,991,659 $ 5,823,952
Batter sales to franchisees 2,710,589 2,422,004
Franchise royalties 1,232,086 1,098,734
Franchise sales - existing and new stores 790,367 785,308
Other - net (7,672) (29,154)
------------ ------------
Total revenue 9,717,029 10,100,844
------------ ------------
Operating expenses:
Cost of sales 4,251,537 4,578,432
Retail store occupancy 1,560,408 1,748,064
Other retail store expenses 234,001 249,003
Selling, general and administrative expenses 1,915,592 1,820,711
------------ ------------
Total operating expenses 7,961,538 8,396,210
------------ ------------
Other (income) expenses, net:
Interest income (68,279) (32,830)
Interest expense 1,089,578 1,090,370
Amortization of deferred loan costs 144,200 143,100
------------ ------------
Total other expenses, net 1,165,499 1,200,640
------------ ------------
Income before taxes 589,992 503,994
State and federal income tax expense 306,884 274,206
------------ ------------
Net income $ 283,108 $ 229,788
============ ============
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 THIRTEEN WEEK PERIOD ENDED SEPTEMBER 28, 1997
-------------------------------------------------------------
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
----------- -------- ----------- ----------
Balance at June 29, 1997 $13,500,000 $336,063 $(7,133,105) $6,702,958
Current period net income -- -- 283,108 283,108
----------- -------- ----------- ----------
$13,500,000 $336,063 $(6,849,997) $6,986,066
=========== ======== =========== ==========
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 THIRTEEN FOR THE THIRTEEN
WEEK PERIOD WEEK PERIOD
ENDED ENDED
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ ------------------
Cash flows from operating activities :
Net income $ 283,108 $ 229,788
Adjustments to reconcile net income to net cash (used for) provided by
operating activities :
Depreciation 420,728 461,385
Amortization of cost in excess of fair value of net assets acquired (goodwill) 217,600 217,600
Amortization of deferred loan costs 144,200 143,100
Net gain on sales and disposals of property and equipment (451,801) (564,497)
Net decrease in accrued straight-line minimum rent
receivable and payable (8,036) (32,196)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 157,561 (25,046)
Increase in inventory (257,928) (119,282)
Decrease in prepaid expenses 47,595 1,135,536
Decrease (increase) in other receivables 6,868 (17,834)
(Increase) decrease in deposits (30) 385
Increase (decrease) in accounts payable 354,949 (579,659)
Increase (decrease) in sales taxes payable 2,572 (10,962)
Decrease in accrued interest payable (1,087,206) (1,086,211)
(Decrease) increase in accrued expenses (265,674) 219,023
Increase in deposits 63,611 54,291
----------- -----------
Net cash (used for) provided by operating activities (371,883) 25,421
----------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment, including net change in construction
in progress, net of construction deposits received from franchisees (599,055) (142,679)
Proceeds from sales and disposals of property and equipment 872,500 159,523
Proceeds from collection of notes receivable 418,141 7,845
----------- -----------
Net cash provided by investing activities 691,586 24,689
----------- -----------
Cash flows from financing activities:
Principal repayments under capital lease obligations (6,363) (4,795)
Dividends paid (125,000) 0
----------- -----------
Net cash used for financing activities (131,363) (4,795)
----------- -----------
Net increase in cash and cash equivalents during period 188,340 45,315
----------- -----------
Cash and cash equivalents, beginning of period 4,883,991 3,301,627
----------- -----------
Cash and cash equivalents, end of period $ 5,072,331 $ 3,346,942
=========== ===========
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 (CONTINUED)
(UNAUDITED)
FOR THE THIRTEEN FOR THE THIRTEEN
WEEK PERIOD WEEK PERIOD
ENDED ENDED
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ ------------------
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $2,176,784 $2,176,581
========== ==========
State and federal income taxes $ 496,750 $ 250,750
========== ==========
Supplemental disclosures of non-cash investing and financing activities:
During the thirteen weeks ended September 28, 1997, a note receivable in the
amount of $100,000 was received from an unrelated franchisee in connection with
the sale of 2 Company-operated stores.
During the thirteen weeks ended September 29, 1996, notes receivable with face
amounts totaling $842,752 were received from unrelated franchisees in connection
with the sale of 4 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. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Great American Cookie Company, Inc. is an operator and franchisor of
mall-based specialty retail cookie outlets and manufacturer of cookie
batter which is distributed to Company-operated retail stores and sold
to franchised retail stores.
The accompanying financial statements of Great American Cookie Company,
Inc. (the "Company" or Great American Cookies) for the thirteen weeks
ended September 28, 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 29, 1997. Earnings per share is not presented, as the Company is
wholly-owned.
Certain fiscal year 1997 accounts have been reclassified to conform to
the fiscal year 1998 presentation.
2. NOTES RECEIVABLE
Notes receivable consist of the following:
SEPTEMBER 28, JUNE 29,
1997 1997
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Notes receivable $851,578 $1,169,719
Less: current portion 506,240 867,207
-------- ----------
Notes receivable, net of current portion $345,338 $ 302,512
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Notes receivable are due from various franchisees and principally
result from the sale of existing Company-operated stores to
franchisees. Each note originating from the sale of a store is
guaranteed by the purchaser and collateralized by the assets sold.
Short-term notes generally carry an interest rate of 15% per annum and
are intended to serve as interim financing until the franchisee can
secure long-term financing from a third party lender. Notes classified
as non-current are generally due in monthly installments of principal
and interest, with the interest rates ranging from 9% to 12.5% per
annum.
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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:
SEPTEMBER 28, JUNE 29,
1997 1997
------------- ------------
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 6,534,519 6,829,757
Furniture, fixtures, and equipment 3,168,226 3,228,241
------------ ------------
10,703,540 11,058,793
Less: accumulated depreciation (4,787,275) (4,754,202)
------------ ------------
Property and equipment net $ 5,916,265 $ 6,304,591
============ ============
4. LONG-TERM DEBT
Notes payable as of September 28, 1997 and June 29, 1997 represent
notes issued on December 10, 1993. Notes payable are described as
follows:
10.875% senior secured notes payable due January 15, 2001,
Series B. 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.
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GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENT
5. LITIGATION
On September 12, 1997, nine Great American Cookies franchisees
filed a lawsuit against the Company and certain other parties alleging
certain anticipatory breaches of contract and violations of certain
state, franchise and unfair trade practice laws. These allegations were
made as a result of discussions held between Cookies USA and Mrs.
Fields Original Cookies, Inc. (Mrs. Fields) regarding the possibility
of Mrs. Fields acquiring all of the outstanding shares of Common Stock
of Cookies USA, the sole stockholder of Great American Cookies. As of
November 12, 1997, no agreement with Mrs. Fields has been reached. The
Company believes that the claims of the plaintiffs are without merit
and intends to vigorously defend itself against the claims. It has
agreed with the plaintiffs to extend the due date of the Companys
response to the plaintiffs lawsuit until December 2, 1997, so that
negotiations among the parties may continue. Nevertheless, this action
is at its earliest stages, and it is not possible at this time to
determine the outcome of the lawsuit or the effect of its resolution on
the Companys financial position or operating results.
In addition, from time to time, the Company is subject to
claims and legal actions in the ordinary course of its business. Such
claims or legal actions would not have a material adverse effect on the
Company or its business, and the Company is not aware that any other
litigation is threatened.
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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
September 28, 1997 compared to the results of operations for the thirteen weeks
ended September 29, 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.
The forward-looking statements contained in this section (Item 2)
represent the Companys expectations or beliefs concerning future events,
including statements regarding unit growth and cash requirements. The Company
cautions that a number of important factors could, individually or in the
aggregate, cause actual results to differ materially from those stated in the
forward-looking statements including, without limitation, the following:
consumer spending trends and habits, mall traffic trends, increased competition
among snack retailers, economic conditions in the regions where the Company and
its franchisees operate stores, the ability to identify and secure suitable
locations for new stores, the availability of experienced management and hourly
employees, and the laws and regulations affecting labor and employee benefit
costs.
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997 (FIRST QUARTER OF FISCAL 1998) COMPARED
TO THIRTEEN WEEKS ENDED SEPTEMBER 29, 1996 (FIRST QUARTER OF FISCAL 1997)
Company and Franchise Store Activity
As of September 28, 1997 there were 84 Company-operated stores and 241
franchised stores in operation. The store activity for the first quarter of
fiscal 1998 and first quarter of fiscal 1997 is summarized as follows:
FIRST QUARTER FIRST QUARTER
OF FISCAL 1998 OF FISCAL 1997
-------------- --------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
Stores open as of beginning of the quarter 91 233 104 225
Stores opened (including relocations) 2 3 0 2
Stores closed (including relocations) 0 (4) 0 (1)
Stores sold to franchisees (9) 9 (5) 5
Stores acquired from franchisees 0 0 2 (2)
---- ---- ---- ----
Stores open as of the end of the quarter 84 241 101 229
Satellite locations as of the end of the quarter 8 31 10 29
---- ---- ---- ----
Total outlets as of the end of the quarter 92 272 111 258
==== ==== ==== ====
The above activity results in 1,164 Company-operated equivalent store
weeks and 3,066 franchisee-operated equivalent store weeks during the thirteen
week period ended September 28, 1997 compared to 1,358 Company-operated
equivalent store weeks and 2,919 franchisee-operated equivalent store weeks
during the thirteen week period ended September 29, 1996.
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Total Revenue
Total revenue decreased approximately $384,000, or 3.8%, during the
first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. Each
of the Companys revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores
decreased approximately $832,000, or 14.3%, during the first
quarter of fiscal 1998 compared to the first quarter of fiscal
1997. The decrease in revenue from Company-operated retail
stores was entirely attributable to a 14.3% decrease in
Company-operated equivalent store weeks, as average retail
sales volume was virtually unchanged from quarter to quarter.
On a comparable store basis, for those stores which were
Company-operated during the first quarter of both fiscal 1998
and 1997, sales volumes decreased 1.2% during the quarter.
- Batter sales to franchisees increased approximately $289,000,
or 11.9%, during the first quarter of fiscal 1998 compared to
the first quarter of fiscal 1997. The increase in batter sales
to franchisees was primarily attributable to (a) a 6.9%
increase in the average volume of batter sold per
franchisee-operated equivalent store week and (b) an
approximately 5.0% increase in franchisee-operated equivalent
store weeks.
- Franchise royalties increased approximately $133,000, or
12.1%, during the first quarter of fiscal 1998 compared to the
first quarter of fiscal 1997. The increase in franchise
royalties was attributable to (a) an increase in the average
retail sales volume per franchisee-operated equivalent store
week of 7.1% and (b) an approximately 5.0% increase in
franchisee-operated equivalent store weeks. On a comparable
store basis, for those stores which were franchisee-operated
during the first quarter of both fiscal 1998 and 1997,
management estimates franchisees retail sales volumes
increased 4.3% during the quarter.
- Revenue from franchise sales increased approximately $5,000,
or 0.6%, during the first quarter of fiscal 1998 compared to
the first quarter of fiscal 1997. Revenue from selling
existing and new stores to franchisees is summarized as
follows (rounded):
FIRST QUARTER FIRST QUARTER
FISCAL 1998 FISCAL 1997
------------- -------------
Number of licenses sold to franchisees
- existing stores 9 5
- new stores 2 2
Cash and notes from sale of existing stores $1,195,000 $1,127,000
Less: net book value of existing stores sold (466,000) (397,000)
---------- ----------
Revenue from sale of existing stores 729,000 730,000
---------- ----------
Revenue from license fees for new stores 50,000 50,000
Revenue from other fees 11,000 5,000
---------- ----------
Revenue from license fees
for new stores and other fees 61,000 55,000
---------- ----------
Total revenue from sale of existing
and new stores to franchisees $ 790,000 $ 785,000
========== ==========
- Other revenue increased approximately $21,000, or 73.7%,
during the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997. The increase in other revenue is
primarily attributable to (a) an increase in sales of
miscellaneous items to franchisees and (b) an increase in
construction assistance revenue, offset by (c) an increase in
sales discounts as a result of increased batter sales to
franchisees.
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Cost of Sales
Cost of sales decreased approximately $327,000, or 7.1%, during the
first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The
decrease in cost of sales was primarily attributable to (a) a reduction in
Company-operated retail store sales volume due to a 14.3% decrease in
Company-operated equivalent store weeks and (b) an improvement in wholesale
batter margins due to a decrease in overhead costs, offset by (c) an increase in
batter sales to franchisees and (d) a decline in retail beverage margins.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $188,000, or
10.7%, during the first quarter of fiscal 1998 compared to the first quarter of
fiscal 1997. The decrease was primarily attributable to a 14.3% decrease in
Company-operated equivalent store weeks.
Other Retail Store Expenses
Other retail store expenses decreased approximately $15,000, or 6.0%,
during the first quarter of fiscal 1998 compared to the first quarter of fiscal
1997. The decrease in other retail store expenses was primarily attributable to
decreases in supplies expense and bank charges as a result of operating an
average of 14 fewer Company stores during the first quarter of fiscal 1998
versus the first quarter of fiscal 1997.
Selling, General and Administrative
Selling, general and administrative expenses increased approximately
$95,000, or 5.2%, during the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997. This increase was primarily attributable to (a) an
increase in training expenses due to a one-time purchase of materials related to
the rollout of the Companys new training program, (b) an increase in
administrative costs related to the start-up of a gift certificate program, a
worldwide web site, and public relations initiatives, and (c) an increase in
workers compensation and health insurance expenses, offset by (d) a decrease in
professional service fees, (e) a decrease in local store and point of sale
marketing costs, and (f) a decrease in travel expenses.
Other Expenses, Net
Other expenses, net, decreased approximately $35,000, or 2.9%, during
the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997.
The decrease was primarily attributable to an increase in interest income.
Net Income
Net income increased approximately $53,000, or 23.2%, for the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The
increase in net income was attributable to (a) an 3.0% increase in operating
income and (b) a 2.9% decrease in other expenses, net, offset by (c) an 11.9%
increase in state and federal income tax expense.
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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 or disposal of fixed assets and accrual of lease
expense in excess of cash paid. EBITDA and Adjusted EBITDA are calculated as
follows (000's omitted):
FOR THE FOR THE
THIRTEEN WEEK THIRTEEN WEEK
PERIOD ENDED PERIOD ENDED
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
(UNAUDITED) (UNAUDITED)
------------------ ------------------
Net income $ 283 $ 230
Add:
Depreciation 421 461
Amortization of goodwill 218 218
Interest expense, net of interest income 1,021 1,058
Amortization of debt issue costs 144 143
Provision for income taxes 307 274
------ ------
EBITDA 2,394 2,384
Add:
Other non-cash items 44 19
Interest income 68 33
------ ------
Adjusted EBITDA $2,506 $2,436
====== ======
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of September 28, 1997 was approximately $6,602,000,
a 16.4% increase compared to the working capital balance at the end of the prior
quarter (June 29, 1997) of approximately $5,672,000. The increase in working
capital is primarily due to cash and notes received from the sale of 9
Company-operated stores during the quarter totaling $1,195,000. Additionally,
the Companys cash balance at September 28, 1997, increased approximately
$188,000, or 3.9%, compared to the balance at June 29, 1997.
The Company requires capital primarily to meet debt service obligations
on its Senior Secured Notes (See Note 4 of the financial statements), for the
development of new stores, and for the remodel of its existing Company-operated
stores. The Companys principal sources of liquidity are cash flow from
operations and the sale of Company-operated retail units to franchisees.
The Companys Senior Secured Notes require semi-annual interest payments
of approximately $2,175,000 on January 15 and July 15 until the year 2001. Based
on the terms of the Senior Secured Notes, the Company will not have any
mandatory debt amortization requirements until the year 2001. 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
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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 the above, the
Company's liquidity is dependent upon its ability to sell both existing and new
stores to franchisees.
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 2 Company-operated stores during fiscal 1998, requiring
aggregate expenditures of approximately $260,000 for store opening costs. The
Company anticipates that such costs will be funded with cash flow from
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 September 28, 1997, the Company
incurred total capital expenditures of approximately $599,000, including a net
increase in construction in progress of $46,000. 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.
The Company is a 100% subsidiary of Cookies USA, Inc. (Cookies USA) and
the sole operating unit of the consolidated entity. As of September 28, 1997,
Cookies USA had outstanding debt consisting of $10 million of Subordinated
Notes. Additionally, as of September 28, 1997, Cookies USA had outstanding
securities and accrued dividends consisting of $12,896,158 of Senior Preferred
Stock, $2,975,428 of Junior Class A Preferred Stock, $892,628 of Junior Class B
Preferred Stock and $250,000 of 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. During the thirteen week period ended September
28, 1997 the Company paid $125,000 of dividends to Cookies USA, all of which
were declared and accrued prior to fiscal 1998.
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. However, many of the Companys employees are paid
hourly rates related to the federal minimum wage, which increased from $4.75 to
$5.15 on September 1, 1997. The minimum wage increase may negatively impact the
Companys payroll costs in the short-term, but management believes this 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 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 of December 10, 1993. 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 from
continuing operations over the remaining amortization period. No impairment is
indicated as of September 28, 1997.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 12, 1997, nine Great American Cookies franchisees filed a
lawsuit against the Company and certain other parties alleging certain
anticipatory breaches of contract and violations of certain state, franchise and
unfair trade practice laws. These allegations were made as a result of
discussions held between Cookies USA and Mrs. Fields Original Cookies, Inc.
(Mrs. Fields) regarding the possibility of Mrs. Fields acquiring all of the
outstanding shares of Common Stock of Cookies USA, the sole stockholder of Great
American Cookies. As of November 12, 1997, no agreement with Mrs. Fields has
been reached. The Company believes that the claims of the plaintiffs are without
merit and intends to vigorously defend itself against the claims. It has agreed
with the plaintiffs to extend the due date of the Companys response to the
plaintiffs lawsuit until December 2, 1997, so that negotiations among the
parties may continue. Nevertheless, this action is at its earliest stages, and
it is not possible at this time to determine the outcome of the lawsuit or the
effect of its resolution on the Companys financial position or operating
results.
In addition, from time to time, the Company is subject to claims and
legal actions in the ordinary course of its business. Such claims or legal
actions would not have a material adverse effect on the Company or its business,
and the Company is not aware that any other 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 September 28, 1997.
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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: November 12, 1997 By: /s/ David B. Barr
------------------------------------------
David B. Barr, President,
Chief Financial Officer, and Treasurer
(Principal Financial Officer)
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