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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 29, 1998
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 29, 1998 and June 29, 1997
Statement of Operations for the thirteen week periods ended
March 29, 1998 and March 30, 1997
Statement of Operations for the thirty-nine week periods ended
March 29, 1998 and March 30, 1997
Statement of Changes in Stockholder's Equity for the
thirty-nine week period ended March 29, 1998
Statement of Cash Flows for the thirty-nine week periods ended
March 29, 1998 and March 30, 1997
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 29, JUNE 29,
1998 1997
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 6,542,083 $ 4,883,991
Accounts receivable - trade 1,647,800 1,701,587
Inventory 1,575,497 1,291,907
Prepaid expenses 1,261,707 1,227,378
Current deferred tax benefit 4,578 4,578
Current portion of notes receivable 156,505 867,207
Other receivables 7,487 8,548
------------- -------------
Total current assets 11,195,657 9,985,196
------------- -------------
Property and equipment, net of accumulated depreciation 5,493,546 6,304,591
Construction in progress, net of construction deposits received from franchisees 159,253 91,759
------------- -------------
5,652,799 6,396,350
------------- -------------
Other assets
Deferred loan costs, net of accumulated amortization
of $2,482,000 and $2,049,000, respectively 1,618,169 2,050,069
Notes receivable, net of current portion 293,467 302,512
Deferred tax benefit 1,293,006 1,293,006
Deposits 48,624 49,615
Accrued straight-line minimum rent receivable for subleases to franchisees 1,384,182 1,266,701
------------- -------------
4,637,448 4,961,903
------------- -------------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $3,757,151 and $3,104,351, respectively 31,195,174 31,847,974
------------- -------------
$ 52,681,078 $ 53,191,423
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 429,671 $ 376,035
Sales taxes payable 95,496 105,065
Accrued interest payable 906,544 1,993,750
Accrued expenses 1,185,022 1,040,067
Deposits 746,315 673,277
Dividends payable 0 125,000
------------- -------------
Total current liabilities 3,363,048 4,313,194
------------- -------------
Capital lease obligations, net 42,806 62,214
------------- -------------
Accrued straight-line minimum rent payable 2,185,914 2,113,057
------------- -------------
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 (6,746,753) (7,133,105)
------------- -------------
7,089,310 6,702,958
------------- -------------
$ 52,681,078 $ 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
MARCH 29, 1998 MARCH 30, 1997
----------------- -----------------
Revenue:
Cookie and beverage sales $ 4,359,440 $ 5,125,142
Batter sales to franchisees 2,844,836 2,625,017
Franchise royalties 1,251,134 1,110,424
Franchise sales - existing and new stores 0 75,461
Other - net 38,157 14,254
----------------- -----------------
Total revenue 8,493,567 8,950,298
----------------- -----------------
Operating expenses:
Cost of sales 4,155,554 4,445,005
Retail store occupancy 1,374,869 1,657,977
Other retail store expenses 203,792 244,210
Selling, general and administrative expenses 1,764,692 1,780,420
----------------- -----------------
Total operating expenses 7,498,907 8,127,612
----------------- -----------------
Other (income) expenses, net:
Interest income (93,583) (83,967)
Interest expense 1,088,812 1,089,823
Amortization of deferred loan costs 144,000 143,100
----------------- -----------------
Total other expenses, net 1,139,229 1,148,956
----------------- -----------------
Loss before taxes (144,569) (326,270)
State and federal income tax expense (benefit) 27,752 (41,295)
----------------- -----------------
Net loss $ (172,321) $ (284,975)
================= =================
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 ENDED WEEK PERIOD ENDED
MARCH 29, 1998 MARCH 30, 1997
------------------- --------------------
Revenue:
Cookie and beverage sales $ 14,741,370 $ 17,318,815
Batter sales to franchisees 8,984,383 8,291,293
Franchise royalties 4,025,973 3,578,976
Franchise sales - existing and new stores 903,097 958,737
Other - net 107,729 (15,119)
------------ ------------
Total revenue 28,762,552 30,132,702
------------ ------------
Operating expenses:
Cost of sales 12,971,643 13,887,717
Retail store occupancy 4,395,742 5,055,984
Other retail store expenses 690,538 752,515
Selling, general and administrative expenses 5,216,870 5,167,766
------------ ------------
Total operating expenses 23,274,793 24,863,982
------------ ------------
Other (income) expenses, net:
Interest income (242,526) (176,243)
Interest expense 3,267,284 3,270,438
Amortization of deferred loan costs 432,300 429,300
------------ ------------
Total other expenses, net 3,457,058 3,523,495
------------ ------------
Income before taxes 2,030,701 1,745,225
State and federal income tax expense 1,019,349 911,249
------------ ------------
Net income $ 1,011,352 $ 833,976
============ ============
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 29, 1998
---------------------------------------------------------------
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
------------ ----------- ------------ ------------
Balance as of June 29, 1997 $ 13,500,000 $ 336,063 $ (7,133,105) $ 6,702,958
Dividends -- -- (625,000) (625,000)
Current period net income -- -- 1,011,352 1,011,352
------------ ----------- ------------ ------------
Balance as of March 29, 1998 $ 13,500,000 $ 336,063 $ (6,746,753) $ 7,089,310
============ =========== ============ ============
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 29, 1998 MARCH 30, 1997
------------------- -------------------
Cash flows from operating activities:
Net income $ 1,011,352 $ 833,976
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,154,283 1,332,618
Amortization of cost in excess of fair value of net assets acquired 652,800 652,800
(goodwill)
Amortization of deferred loan costs 431,900 429,300
Net gain on sales and disposals of property and equipment (355,355) (409,334)
Net (decrease) in accrued straight-line minimum rent
Receivable and payable (44,624) (50,027)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 53,787 (40,482)
(Increase) in inventory (283,590) (233,307)
(Increase) in prepaid expenses (34,329) (243,213)
(Increase) in income tax receivable 0 (53,190)
Decrease in current deferred tax benefit 0 5,697
Decrease in other receivables 1,061 27,058
Decrease in deposits 991 1,514
Increase (decrease) in accounts payable 53,636 (585,548)
(Decrease) in sales taxes payable (9,569) (29,603)
(Decrease) in accrued interest payable (1,087,206) (1,085,917)
Increase in accrued expenses 144,955 360,551
Increase in deposits 73,038 26,346
------------- -------------
Net cash provided by operating activities 1,763,130 939,239
------------- -------------
Cash flows from investing activities:
Acquisitions of property and equipment, including net change in construction
in progress, net of construction deposits received from franchisees (1,172,942) (611,480)
Proceeds from sales and disposals of property and equipment 915,379 284,181
Acceptance of notes receivable 0 (2,224)
Proceeds from collection of notes receivable 921,933 455,382
------------- -------------
Net cash provided by investing activities 664,370 125,859
------------- -------------
Cash flows from financing activities:
Principal repayments under capital lease obligations (19,408) (19,190)
Dividends paid (750,000) (625,000)
------------- -------------
Net cash used for financing activities (769,408) (644,190)
------------- -------------
Net increase in cash and cash equivalents during period 1,658,092 420,908
------------- -------------
Cash and cash equivalents, beginning of period 4,883,991 3,301,627
------------- -------------
Cash and cash equivalents, end of period $ 6,542,083 $ 3,722,535
============= =============
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 THIRTY-NINE FOR THE THIRTY-NINE
WEEK PERIOD WEEK PERIOD
ENDED ENDED
MARCH 29, 1998 MARCH 30, 1997
------------------- -------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,354,490 $ 4,356,355
============ ============
State and federal income taxes $ 895,968 $ 634,045
============ ============
Cash paid during the thirty-nine week period ended March 29, 1998 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 29, 1997 for additional information.)
Supplemental disclosures of non-cash investing and financing activities:
During the thirty-nine weeks ended March 29, 1998, notes receivable with face
amounts totaling $202,186 were received from unrelated franchisees in connection
with the sale of 3 Company-operated stores.
During the thirty-nine weeks ended March 29, 1998, notes receivable with face
amounts totaling $932,894 were received from unrelated franchisees in connection
with the sale of 6 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 a manufacturer of cookie
batter which is sold to Company-operated and franchised retail stores.
The accompanying financial statements of Great American Cookie Company,
Inc. (the "Company" or "Great American Cookies") for the thirteen weeks
ended and for the thirty-nine weeks ended March 29, 1998 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.
2. NOTES RECEIVABLE
Notes receivable consist of the following:
MARCH 29, JUNE 29,
1998 1997
----------- -----------
Notes receivable $ 449,972 $ 1,169,719
Less: current portion 156,505 867,207
----------- -----------
Notes receivable, net of current portion $ 293,467 $ 302,512
=========== ===========
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 10% to 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:
MARCH 29, JUNE 29,
1998 1997
------------- ------------
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 6,542,776 6,829,757
Furniture, fixtures, and equipment 3,149,286 3,228,241
------------ ------------
10,692,857 11,058,793
Less: accumulated depreciation (5,199,311) (4,754,202)
------------ ------------
Property and equipment, net $ 5,493,546 $ 6,304,591
============ ============
4. LONG-TERM DEBT
Notes payable as of March 29, 1998 and June 29, 1997 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
============
Certain tangible and intangible assets secure the Notes, 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 STATEMENTS
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 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 May 13, 1998, no agreement with Mrs.
Fields has been reached. The Company has not responded to the lawsuit
because the plaintiffs have agreed to extend the time to do so in order
that discussions among all of the parties may continue. Nevertheless,
the Company believes that the claims of the plaintiffs are without
merit and intends to vigorously defend itself against the claims if
necessary. 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 Company's 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
March 29, 1998 compared to the results of operations for the thirteen weeks
ended March 30, 1997 and for the thirty-nine weeks ended March 29, 1998 compared
to the thirty-nine weeks ended March 30, 1997 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 Company's 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 MARCH 29, 1998 (THIRD QUARTER OF FISCAL 1998) COMPARED TO
THIRTEEN WEEKS ENDED MARCH 30, 1997 (THIRD QUARTER OF FISCAL 1997)
Company and Franchise Store Activity
As of March 29, 1998 there were 80 Company-operated stores and 243
franchised stores in operation. The store activity for the third quarter of
fiscal 1998 and third quarter of fiscal 1997 is summarized as follows:
THIRD QUARTER THIRD QUARTER
OF FISCAL 1998 OF FISCAL 1997
-------------- --------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
Stores open as of beginning of the quarter 80 246 98 232
Stores opened (including relocations) 1 0 1 3
Stores closed (including relocations) (1) (3) (3) (4)
Stores sold to franchisees 0 0 0 0
Stores acquired from franchisees 0 0 2 (2)
-------- ---------- -------- ----------
Stores open as of the end of the quarter 80 243 98 229
Satellite locations as of the end of the quarter 6 34 9 30
-------- ---------- -------- ----------
Total outlets as of the end of the quarter 86 277 107 259
======== ========== ======== ==========
The above activity results in 1,033 Company-operated equivalent store
weeks and 3,168 franchisee-operated equivalent store weeks during the thirteen
week period ended March 29, 1998 compared to 1,261 Company-operated equivalent
store weeks and 2,973 franchisee-operated equivalent store weeks during the
thirteen week period ended March 30, 1997.
Total Revenue
Total revenue decreased approximately $457,000, or 5.1%, during the
third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. Each
of the Company's revenue sources is discussed below:
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- Cookie and beverage sales at Company-operated retail stores
decreased approximately $765,000, or 14.9%, during the third
quarter of fiscal 1998 compared to the third quarter of fiscal
1997. The decrease in revenue from Company-operated retail
stores was attributable to (a) a 18.1% decrease in
Company-operated equivalent store weeks offset by (b) a 3.2%
increase in the average retail sales volume per
Company-operated store. On a comparable store basis, for those
stores that were Company-operated in both fiscal 1998 and
1997, sales volumes increased 2.3% during the quarter. The
average retail sales volume increased more than comparable
store sales volumes due to the Company's portfolio of stores
improving as a result of closing nine "underperforming"
Company-operated stores during the third and fourth quarters
of fiscal 1997.
- Batter sales to franchisees increased approximately $220,000,
or 8.4%, during the third quarter of fiscal 1998 compared to
the third quarter of fiscal 1997. The increase in batter sales
to franchisees was attributable to (a) a 6.6% increase in
franchisee-operated equivalent store weeks and (b) a 1.8%
increase in the volume of batter sold per franchisee-operated
equivalent store week.
- Franchise royalties increased approximately $141,000, or
12.7%, during the third quarter of fiscal 1998 compared to the
third quarter of fiscal 1997. The increase in franchise
royalties was attributable to (a) a 6.6% increase in
franchisee-operated equivalent store weeks and (b) a 6.1%
increase in the average retail sales volume per
franchisee-operated store. On a comparable store basis, for
those stores which were franchisee-operated in fiscal 1998 and
1997, management estimates that franchisees' sales volumes
increased 3.8% during the quarter.
- Revenue from franchise sales decreased approximately $75,000,
or 100.0%, during the third quarter of fiscal 1998 compared to
the third quarter of fiscal 1997. Revenue from the sale of
existing and new stores to franchisees is summarized as
follows (rounded):
THIRD QUARTER THIRD QUARTER
FISCAL 1998 FISCAL 1997
------------- -------------
Number of licenses sold to franchisees
- existing stores 0 0
- new stores 0 3
Cash and notes from sale of existing stores $ 0 $ 0
Less: net book value of existing stores sold 0 0
------------ ------------
Revenue from sale of existing stores 0 0
------------ ------------
Revenue from license fees for new stores 0 75,000
Revenue from other fees 0 0
------------ ------------
Revenue from license fees
for new stores and other fees 0 75,000
------------ ------------
Total revenue from sale of existing
and new stores to franchisees $ 0 $ 75,000
============ ============
- Other revenue increased approximately $24,000, or 167.7%,
during the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997. The increase in other revenue is
primarily attributable to (a) an increase in sales of
miscellaneous supplies to franchise stores, offset by (b) an
increase in sales discounts as a result of increased batter
sales to franchisees.
-13-
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Cost of Sales
Cost of sales decreased approximately $289,000, or 6.5%, during the
third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. The
decrease in cost of sales was primarily attributable to (a) a decline in cookie
and beverage sales due to fewer Company-operated retail stores offset by (b) an
increase in batter sales to franchisees and (c) a decline in Company-operated
retail store margins.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $283,000, or
17.1%, during the third quarter of fiscal 1998 compared to the third quarter of
fiscal 1997. The decrease was primarily attributable to (a) a decrease in rent,
CAM, and utilities expense as a result of a 18.1% 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 approximately $40,000, or 16.6%,
during the third quarter of fiscal 1998 compared to the third quarter of fiscal
1997. The decrease in other retail store expenses was primarily attributable to
an 18.1% decrease in Company-operated equivalent store weeks.
Selling, General and Administrative
Selling, general and administrative expenses decreased approximately
$16,000, or 0.88%, during the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997. This decrease was primarily attributable to (a) a
decrease in marketing expenditures and data processing costs.
Other Expenses, Net
Other expenses, net, decreased approximately $10,000, or 0.9%, during
the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997.
The decrease was primarily attributable to an increase in interest income.
Net Loss
Net loss decreased approximately $113,000, or 39.5%, for the third
quarter of fiscal 1998 compared to the third quarter of fiscal 1997. The
decrease in net loss was primarily attributable to (a) an 20.9% increase in
operating income offset by (b) a 167.2% increase in state and federal income tax
expense.
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THIRTY-NINE WEEKS ENDED MARCH 29, 1998 (FISCAL 1998 YEAR-TO-DATE) COMPARED TO
THIRTY-NINE WEEKS ENDED MARCH 30, 1997 (FISCAL 1997 YEAR-TO-DATE)
Company and Franchise Store Activity
As of March 29, 1998 there were 80 Company-operated stores and 243
franchised stores in operation. The store activity for fiscal 1998 year-to-date
and for fiscal 1997 year-to-date is summarized as follows:
THIRD QUARTER THIRD QUARTER
OF FISCAL 1998 OF FISCAL 1997
-------------- --------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
Stores open as of beginning of the fiscal year 91 233 104 225
Stores opened (including relocations) 3 6 1 8
Stores closed (including relocations) (2) (8) (4) (7)
Stores sold to franchisees (12) 12 (8) 8
Stores acquired from franchisees 0 0 5 (5)
-------- ---------- -------- ----------
Stores open as of the end of the quarter 80 243 98 229
Satellite locations as of the end of the quarter 6 34 9 30
-------- ---------- -------- ----------
Total outlets as of the end of the quarter 86 277 107 259
======== ========== ======== ==========
The above activity results in 3,261 Company-operated equivalent store
weeks and 9,397 franchisee-operated equivalent store weeks during the
thirty-nine week period ended March 29, 1998 compared to 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.
Total Revenue
Total revenue decreased $1,370,000, or approximately 4.6%, during the
thirty-nine weeks ended March 29, 1998 compared to the thirty-nine weeks ended
March 30, 1997. Each of the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores
decreased approximately $2,577,000, or 14.9%, during the
thirty-nine weeks ended March 29, 1998 compared to the
thirty-nine weeks ended March 30, 1997. The decrease in
revenue from Company-operated retail stores was attributable
to (a) a 16.7% decrease in Company-operated equivalent store
weeks offset by (b) a 1.9% increase in the average retail
sales volume per Company-operated store. On a comparable store
basis, for those stores that were Company-operated in both
fiscal 1998 year-to-date and fiscal 1997 year-to-date, sales
volumes increased 0.4%. The average retail sales volume
increased more than comparable store sales volumes due to the
Company's portfolio of stores improving as a result of closing
nine "underperforming" Company-operated stores during the
third and fourth quarters of fiscal 1997.
- Batter sales to franchisees increased approximately $693,000,
or 8.4%, during the thirty-nine weeks ended March 29, 1998,
compared to the thirty-nine weeks ended March 30, 1997. The
increase in batter sales to franchisees was attributable to
(a) a 5.8% increase in franchisee-operated equivalent store
weeks and (b) a 2.5% increase in the volume of batter sold per
franchisee-operated equivalent store week
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- Franchise royalties increased approximately $447,000, or
12.5%, during the thirty-nine weeks ended March 29, 1998
compared to the thirty-nine weeks ended March 30, 1997. The
increase in franchise royalties was attributable to (a) an
increase in the average retail sales volume per
franchisee-operated store of 6.7% and (b) a 5.8% increase in
franchisee-operated equivalent store weeks. On a comparable
store basis, for those stores which were franchisee-operated
in fiscal 1998 year-to-date and fiscal 1997 year-to-date,
management estimates that franchisees' sales volumes increased
4.6%.
- Revenue from franchise sales decreased approximately $56,000,
or 5.8%, during the thirty-nine weeks ended March 29, 1998
compared to the thirty-nine weeks ended March 30, 1997.
Revenue from the sale of existing and new stores to
franchisees is summarized as follows (rounded):
THIRD QUARTER THIRD QUARTER
FISCAL 1998 FISCAL 1997
------------- -------------
Number of licenses sold to franchisees
- existing stores 12 8
- new stores 4 8
Cash and notes from sale of existing stores $ 1,415,000 $ 1,327,000
Less: net book value of existing stores sold (625,000) (574,000)
------------ ------------
Revenue from sale of existing stores 790,000 753,000
------------ ------------
Revenue from license fees for new stores 100,000 200,000
Revenue from other fees 13,000 6,000
------------ ------------
Revenue from license fees
for new stores and other fees 113,000 206,000
------------ ------------
Total revenue from sale of existing
and new stores to franchisees $ 903,000 $ 959,000
============ ============
- Other revenue increased approximately $122,000, or 812.5%,
during the thirty-nine weeks ended March 29, 1998 compared to
the thirty-nine weeks ended March 30, 1997. The increase in
other revenue is primarily attributable to (a) an increase in
sales of miscellaneous supplies to franchise stores and (b) an
increase in construction assistance revenue for construction
assistance performed by the Company on behalf of the
franchisees.
Cost of Sales
Cost of sales decreased approximately $916,000, or 6.6%, during the
thirty-nine weeks ended March 29, 1998 compared to the thirty-nine weeks ended
March 30, 1997. The decrease in cost of sales was primarily attributable to (a)
a decline in cookie and beverage sales due to fewer Company-operated retail
stores offset by (b) an increase in batter sales to franchisees and (c) a
decline in Company-operated retail store margins.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $660,000, or
13.0%, during the thirty-nine weeks ended March 29, 1998 compared to the
thirty-nine weeks ended March 30, 1997. The decrease was primarily attributable
to a decrease in rent, CAM and utilities expense as a result of a 16.7% decrease
in Company-operated equivalent store weeks.
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Other Retail Store Expenses
Other retail store expenses decreased approximately $62,000, or 8.3%,
during the thirty-nine weeks ended March 29, 1998 compared to the thirty-nine
weeks ended March 30, 1997. The decrease in other retail store expenses was
primarily attributable to (a) a 16.7% decrease in Company-operated equivalent
store weeks offset by (b) an increase in both local store and point-of-sale
marketing costs for Company-operated stores.
Selling, General and Administrative
Selling, general and administrative expenses increased approximately
$49,000, or 1.0%, during the thirty-nine weeks ended March 29, 1998 compared to
the thirty-nine weeks ended March 30, 1997. This increase was primarily
attributable to (a) an increase in marketing expenditures, (b) an increase in
the cost of training materials related to the rollout of a new training program,
and (c) increases in the cost of health insurance for support center personnel,
offset by (d) a decrease in legal and professional fees, (e) a decrease in
salaries and benefits at the support center, and (f) a decrease in franchise
sales advertising.
Other Expenses, Net
Other expenses, net, decreased $66,000, or approximately 1.9%, during
the thirty-nine weeks ended March 29, 1998 compared to the thirty-nine weeks
ended March 30, 1997. The decrease was primarily attributable to an increase in
interest income.
Net Income
Net income increased $177,000, or approximately 21.3%, for the
thirty-nine weeks ended March 29, 1998 compared to the thirty-nine weeks ended
March 30, 1997. The increase in net income was primarily attributable to a 4.1%
increase in operating income offset by (b) 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 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 FOR THE FOR THE
THIRTEEN WEEK THIRTEEN WEEK THIRTY-NINE WEEK THIRTY-NINE WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
MARCH 29, 1998 MARCH 30, 1997 MARCH 29, 1998 MARCH 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- --------------- ----------------
Net income (loss) $ (173) $ (285) $ 1,011 $ 834
Add:
Depreciation 346 439 1,154 1,333
Amortization of goodwill 218 218 653 653
Interest expense,
net of interest income 995 1,006 3,025 3,094
Amortization of debt issue costs 144 143 432 429
Provision for income taxes 28 (42) 1,019 911
-------- -------- -------- --------
EBITDA 1,558 1,479 7,294 7,254
Add:
Other non-cash items 17 73 123 120
Interest income 94 84 243 176
-------- -------- -------- --------
Adjusted EBITDA $ 1,669 $ 1,636 $ 7,660 $ 7,550
======== ======== ======== ========
Liquidity and Capital Resources
Working capital as of March 29, 1998 was approximately $7,833,000, a
$2,161,000, or 38.1%, increase compared to the working capital balance at the
end of the previous fiscal year (June 29, 1997). The increase in working capital
is primarily due to cash and short-term notes received from the sale of 12
Company-operated stores during the first two quarters of fiscal 1998 totaling
$1,315,000.
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 Company-operated stores and for the remodel of its existing
Company-operated stores. The Company's principal sources of liquidity are cash
flow from operations and the sale of Company-operated retail units to
franchisees.
The Company's 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 batter operations, and royalties from franchisees, the Company
will be able to meet its debt service requirements as well as its
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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 5 Company-operated stores during fiscal 1998, requiring
aggregate expenditures of approximately $650,000, in addition to remodeling 5
Company-operated stores which will require estimated expenditures of
approximately $600,000. 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 thirty-nine week period ended March 29, 1998, the Company
incurred total capital expenditures of approximately $1,173,000, including a net
increase in construction in progress of approximately $67,000. 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 March 29, 1998,
Cookies USA had outstanding debt consisting of $10 million of Subordinated
Notes. Additionally, as of March 29, 1998, Cookies USA had outstanding
securities and accrued dividends consisting of $13,211,158 of Senior Preferred
Stock, $3,037,928 of Junior Class A Preferred Stock, $911,378 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 and taxes,
incurred by Cookies USA. 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 thirty-nine week period ended March
29, 1998, the Company declared $625,000 and paid $750,000 of dividends to
Cookies USA. During the third quarter of fiscal 1998, the Company neither
declared nor paid any dividends.
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 Company's employees are paid hourly
rates related to the federal minimum wage. Future minimum wage 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. 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 29, 1998.
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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
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 May
13, 1998, no agreement with Mrs. Fields has been reached. The Company has not
responded to the lawsuit because the plaintiffs have agreed to extend the time
to do so in order that discussions among all of the parties may continue.
Nevertheless, the Company believes that the claims of the plaintiffs are without
merit and intends to vigorously defend itself against the claims if necessary.
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
Company's 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 March 29, 1998.
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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, 1998 By: /s/ David B. Barr
--------------------------------------
David B. Barr, President,
Chief Financial Officer, and Treasurer
(Principal Financial Officer)
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