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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 33-76306
GREAT AMERICAN COOKIE COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1295221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4685 FREDERICK DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 696-1700
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X]
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
Great American Cookie Company, Inc. (the "Company" or "Great American
Cookie"), incorporated in 1977 and headquartered in Atlanta, Georgia, is a
leading operator and franchisor of mall-based specialty retail cookie outlets,
including full-size stores and satellite sites, consisting of carts, wagons and
kiosks. As of June 30, 1996, the Company had 368 retail outlets including 115
Company-operated and 253 franchised retail units generating $86.0 million in
estimated system-wide annual sales. The Company derives its operating revenues
principally from (i) the sale of cookies and beverages at Company-operated
stores, (ii) the sale of proprietary batter to franchised stores, and (iii) the
receipt of royalty payments based on gross sales of franchisees. In addition,
the Company generates revenues from initial franchise fees and the sale of
existing Company-operated stores to franchisees.
For the fiscal year ended June 30, 1996, the Company had total revenue of
$40.4 million, a 2.5% decrease from the fiscal year ended June 29, 1995, and
Adjusted EBITDA of $8.3 million, a 9.1% increase from the fiscal year ended
June 29, 1995. Over the last five fiscal years, the Company's total revenue
growth from year to year has ranged from (2.5)% to 9.1% with a compound annual
growth rate of approximately 3.0%. This growth over the past five years has
largely been due to (i) an increase in the number of Company-operated and
franchised outlets from 322 at June 25, 1992 to 368 at June 30, 1996 and (ii)
an increase in average store sales, which have grown at a compound annual
growth rate of approximately 0.2% over the past five fiscal years. Since the
fiscal year ended June 29, 1993, the Company's Adjusted EBITDA has been $9.0
million, $8.2 million, $8.0 million (after add back of non-recurring litigation
charge), and $8.3 million for fiscal years 1993, 1994, 1995 and 1996,
respectively. For a description and additional discussion of Adjusted EBITDA,
see Item 6 - "Selected Financial Data".
BUSINESS STRATEGY
Management believes that the Company's sales growth and profitability over
the past five years reflects the implementation of the following strategies:
SITE SELECTION: Stores are located primarily in high-traffic malls. The
Company spends significant time and resources in selecting its locations with
an emphasis placed on access to mall traffic and control of rent expense.
Management believes that an important factor in its operations is the
containment of store rents. Consequently, the Company has chosen to forego the
acquisition of certain high-volume, high-prestige retail sites in order to
maintain profit margins. The Company plans new store openings of approximately
15 stores per year, consisting primarily of franchised stores, over the next
five years. However, the number of stores that will open will depend upon a
number of factors including the ability to obtain locations on acceptable lease
terms and to sell new and existing stores to franchisees.
FRANCHISE SYSTEM: The Company's franchise system recognizes the
importance of franchisees as both customers of products and vital links in the
distribution of goods and services. Approximately 66% of franchises sold over
the past three fiscal years have been sold to existing franchisees, reflecting,
the Company believes, franchisees' enthusiasm for the Great American Cookie
concept. Management believes that the Company's active support of the franchise
concept has been important to the Company's growth.
STORE MARKETING: The Company seeks to create a dynamic selling
environment in its stores. The Company's strategy emphasizes strong
merchandising of its products and the use of proactive sales techniques,
including the free sampling of products and other techniques intended to
increase the size of customer orders.
ACTIVE MANAGEMENT: Management is dedicated to constantly improving all
aspects of retail store operations. Franchisees and store managers receive
training in the field and at the Company's "Cookie University" prior to the
opening of a new store and in the field on an ongoing basis thereafter.
Regional supervisors regularly visit both Company-operated and franchised
stores to evaluate operations, to introduce new products and techniques and to
ensure that the Company's quality standards are maintained system-wide. The
Company is continually seeking ways to improve its retail operations so as to
better serve the customer.
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SYSTEM AND FRANCHISE OVERVIEW
COMPANY AND FRANCHISED RETAIL OUTLETS
Estimated system-wide retail sales through both Company-operated and
franchised retail units were $86.0 million in fiscal 1996, representing an
increase of approximately 3.9% over fiscal 1995 estimated system-wide retail
sales of $82.8 million. As of June 30, 1996, Great American Cookie had 368
retail units, including 115 Company-operated and 253 franchised units. Of these
368 retail units, 329 were full-size stores and 39 operated as satellite units,
consisting of carts, wagons and kiosks. Over the past five fiscal years, Great
American Cookie has increased its retail units as follows:
<TABLE>
<CAPTION>
Store Openings and Closing(1)
-----------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Co. Fran. Co. Fran. Co. Fran. Co. Fran. Co. Fran.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stores open at
beginning of year........ 98 174 99 186 101 200 111 204 108 215
Stores opened(1).......... 7 14 11 18 15 15 16 11 12 14
Stores closed(1).......... (5) (3) (6) (7) (7) (9) (8) (11) (10) (10)
Stores sold to
franchisees.............. (4) 4 (6) 6 (14) 14 (12) 12 (9) 9
Stores acquired
from franchisees......... 3 (3) 3 (3) 3 (3) 1 (1) 3 (3)
Stores acquired
from Georgia Cookies(2).. - - - - 13 (13) - - - -
-- --- --- --- --- --- --- --- --- ---
Stores open at end
of fiscal year........... 99 186 101 200 111 204 108 215 104 225
== === === === === === === === === ===
Total stores.............. 285 301 315 323 329
Estimated satellite
locations................ 37 32 38 48 39
Total retail units........ 322 333 353 371 368
Net change in retail units 17 11 20 18 (3)
</TABLE>
__________________________________________________
(1) Stores opened and closed include store relocations.
(2) As part of the Acquisition, the Company acquired the stores of Georgia
Cookies, Inc. in conjunction with acquiring the assets of TOGA Leasing and
Sunbelt Investments.
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As of June 30, 1996, the Company's stores were located in 39 states, and
Guam, with a concentration of retail outlets in the Southeastern and
Southcentral United States. As of June 30, 1996, the Company had ten or more
outlets in the following states:
<TABLE>
% OF % OF FISCAL
COMPANY- RETAIL 1996 SYSTEM-
STATE OPERATED FRANCHISED TOTAL OUTLETS WIDE SALES
- ----- -------- ---------- ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Texas........... 2 50 52 14.5 15.4
Georgia......... 21 8 29 7.8 10.2
Florida......... 0 27 27 7.2 7.1
North Carolina.. 1 18 19 5.4 5.2
Louisiana....... 3 14 17 4.6 6.1
New York........ 8 9 17 4.3 3.6
Tennessee....... 1 15 16 4.3 4.1
Virginia........ 8 7 15 4.0 3.4
Ohio............ 8 5 13 3.5 3.0
Alabama......... 0 12 12 3.2 4.1
South Carolina.. 1 11 12 3.2 2.9
Missouri........ 5 6 11 3.2 3.2
Illinois........ 2 8 10 2.7 2.4
Iowa............ 8 2 10 2.7 2.2
</TABLE>
For fiscal 1996, retail sales of Company-operated and franchised units in
the Southeast accounted for approximately 44.1% of estimated system-wide sales.
These Southeastern retail units (Georgia, Florida, North Carolina, Tennessee,
Virginia, Alabama, and South Carolina) represented approximately 39.7% of the
total Company-operated and franchised retail units.
STORES AND UNITS
The typical Great American Cookie store is about 700 square feet with a
minimum of 15 linear feet of counter space. The current cost to build, equip
and open a new store is approximately $139,000, consisting of approximately
$100,000 in construction build-out costs, approximately $30,000 in equipment
purchases, and approximately $9,000 of inventory. The cost of opening a new
store can be significantly higher for some locations.
The retail sales volume in fiscal 1996 stores averaged approximately
$228,000 per store for Company-operated stores, and approximately $276,000 per
store for franchised stores, respectively. Management believes that the higher
sales level in franchised stores reflects better locations of franchised stores
and direct franchisee involvement in store operations.
The Company and franchisees also operate kiosks, carts, and wagons in
certain malls on a year-round basis. Kiosks are approximately 250 square foot
units with self-contained baking ovens. Carts and wagons range in sizes from 30
to 92 square feet. Because of their small size, carts and wagons do not have
baking equipment and are supplied cookie products by a fully equipped store.
STORE LEASING
Great American Cookie has followed a strategy of selling its products
through retail outlets located almost exclusively in high-traffic shopping
malls. The Company believes that the market for suitable locations remains
highly competitive. Although lease rates vary, the Company generally pays rent
of approximately $35,000 per year for locations. Rents can be significantly
higher for certain retail locations.
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Great American Cookie leases all of its Company-operated stores and most
franchised locations, acting as sublessor to its franchisees. This arrangement
gives the franchisee the benefit of the Company's real estate expertise,
negotiating leverage and creditworthiness when dealing with mall landlords, all
of which, the Company believes, result in better lease terms for the
franchisee. The Company also believes that it is better able to manage its
franchise business by being both licensor and sublessor to its franchisees. The
Company generally leases store space for terms of between five and ten years.
The expiration of Company leases for both Company-operated and franchised
stores are spread over several years. The following table shows lease
expirations through calendar year 2001 for Company-operated and franchised
stores leased by the Company and contribution of those stores to estimated
system-wide sales for fiscal 1996:
<TABLE>
<CAPTION>
% OF TOTAL
CALENDAR YEAR SYSTEM-WIDE % OF TOTAL
OF NUMBER OF STORES AS OF FISCAL 1996 1996
LEASE EXPIRATION STORES JUNE 30, 1996 SALES $ SYSTEM-WIDE SALES
- ---------------- ------ ------------- ------- -----------------
<S> <C> <C> <C> <C>
1997 28 8.1 $ 7,115,213 8.3
1998 21 6.0 4,756,949 5.5
1999 48 13.8 12,480,078 14.5
2000 34 9.8 8,925,182 10.4
2001 33 9.5 8,846,513 10.3
</TABLE>
Based on current market conditions, the Company does not expect
significant changes in overall occupancy costs when the above-referenced leases
come up for renewal.
FRANCHISING
Management is actively attempting to sell new stores as well as existing
Company-operated stores to franchisees in order to provide for liquidity and
development of additional stores in the future. Management begins the process
of franchising a new store upon obtaining a lease. If a new store is not
franchised at the time of its scheduled opening, then the Company opens it,
operates it, and holds it in its portfolio of existing stores for sale.
In fiscal 1996, existing Great American Cookie franchisees opened 15
stores, which management believes, reflects existing franchisees' enthusiasm
for the Great American Cookie concept. Additionally, in fiscal 1996 the Company
sold 9 existing Company-operated stores to franchisees of which 3 stores, or
approximately 33%, were purchased by existing franchisees. The selling of
existing Company-operated stores to new franchisees is consistent with
management's strategy to franchise additional locations, to provide a turn-key
experience to new franchisees and to bring new franchisees into the system for
future franchising of new stores.
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As of June 30, 1996, the ratio of franchised to Company-operated units was
approximately 2.2:1. The number of franchised and Company-operated retail units
for each of the last five fiscal years was as follows:
<TABLE>
<CAPTION>
NUMBER OF FRANCHISED VS. COMPANY-OPERATED RETAIL UNITS
------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NUMBER OF RETAIL UNITS:
Franchised................ 210 222 231 251 253
Company-Operated.......... 112 111 122 120 115
----- ----- ----- ----- -----
322 333 353 371 368
===== ===== ===== ===== =====
PERCENTAGE OF RETAIL UNITS:
Franchised................ 65.2% 66.7% 65.4% 67.7% 68.8%
Company-Operated.......... 34.8% 33.3% 34.6% 32.3% 31.2%
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
FRANCHISEE INVESTMENT
Each franchisee pays the Company an initial licensing fee of $25,000 per
store location and is responsible for funding the build-out of the new store
and purchasing initial batter inventory and supplies, at a total cost of
approximately $164,000 (including the initial licensing fee), although the cost
of opening a new store can be significantly higher for franchisees who purchase
existing Company-operated stores and otherwise varies based on individual
operating and location costs. The Company also charges franchisees a fee to
purchase equipment and to provide other assistance in helping the franchisee to
set up operations.
FRANCHISEE PROFILE
Great American Cookie franchisees come from a wide variety of business
backgrounds and bring with them different operating styles and business
objectives. Among the Company's franchisees are full-time store operators,
passive investors, retired professionals and people seeking a second source of
income. As of June 30, 1996, the five largest franchisees operated 74 stores
and 8 satellite units and, the Company estimates, had aggregate retail sales of
$21.7 million, or approximately 25.3% of total estimated system-wide retail
sales.
Over 47% of all franchisees currently operate more than one retail store,
but at the end of fiscal year 1996, no franchisee held licenses to more than
7.5% of the Company's total number of franchised outlets or accounted for more
than 9.5% of total estimated system-wide retail sales.
RETAIL OPERATIONS
STORE OPERATIONS AND MANAGEMENT
The Company stresses the importance of having a full line of fresh-baked
goods for sale at all times. Goods are baked in store ovens throughout the day.
The typical transaction in Company-operated stores is approximately $2.50. Most
stores operate two or three cash registers in order to minimize lines at peak
periods, and, at the end of each day, cash receipts are deposited in a local
bank account.
Stores receive shipments of refrigerated batter from the Company's Atlanta
production facility on a regular basis. Most other supplies (beverages, paper
products, etc.) are ordered from third-party vendors by either the Company or
the franchisee and are shipped directly to the store. In the case of
Company-operated stores, all bills are paid by the main office, with store
maintenance handled by local contractors in each market.
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New franchisees and store managers are required to attend a one-week
training program at the Company's Atlanta training facility, known as "Cookie
University". In addition, training courses are available throughout the year to
all Company and franchisee personnel.
Once opened, each store has an on-site management team. The store manager
is responsible for hiring, training and motivating store personnel. Each
manager of a Company-operated store is eligible for year-end salary increases
and bonuses based upon the performance of his or her store, including sales,
profits and store appearance. The Company believes store managers are a
critical component in creating an effective retail environment, and the Company
has an ongoing program to improve the quality and effectiveness of its store
managers.
Great American Cookie monitors all Company-operated and franchised outlets
with a regionally-based staff of field supervisors. In addition to monitoring
store operations in their districts, the field staff is responsible for
introducing new products and processes to the stores, ensuring proper
implementation and quality control.
Each field staff member is directly responsible for a specific group of
stores, and reports to the Company's vice president of store operations. Field
supervisors are typically hired from outside of the Company and have previous
experience in monitoring and supporting a number of retail stores. Some
multiple-unit franchisees hire their own field supervisors, who supplement the
field staff provided by the Company.
COMPANY STORE PERSONNEL
At June 30, 1996, the Company had approximately 870 employees in
Company-operated stores, of whom approximately 230 were store managers and
assistant store managers, 70 were full-time sales assistants and 570 were
part-time sales assistants. During the period from November through February,
the Company may hire as many as 250 additional part-time employees to handle
additional mall traffic. Most employees are paid on an hourly basis, except
store managers. The Company's employees are not unionized. The Company has
never experienced any significant work stoppages and believes that its employee
relations are good.
Many of the Company's employees are paid hourly rates related to the
federal minimum wage. The federal minimum wage will increase from $4.25 to
$4.75 on October 1, 1996 and from $4.75 to $5.15 on September 1, 1997. As of
June 30, 1996, 260 of the Company's 870 employees in Company-operated stores
earned hourly wages less than $4.75. The October 1, 1996 minimum wage increase
may negatively impact the Company's 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.
All full-time employees (employees who work a minimum of 30 hours per
week) are eligible to enroll in a group health insurance plan. There have been
a number of proposals before Congress which would require employers to provide
health insurance for all of the full-time and part-time employees. The approval
of such proposals could have a material adverse impact on the consolidated
operations and financial condition of the Company and the specialty retail
industry as a whole.
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COOKIES AND BATTER PRODUCTION
COOKIE PRODUCTS
Great American Cookie outlets sell a variety of cookies and brownies, as
well as assorted soft drinks, frozen drinks, coffee and tea. It is not unusual
for the Company to rotate the variety of cookies available system-wide, as it
often replaces lower volume products with new offerings in an effort to
increase sales. Cookie and brownie sales account for approximately 81% of a
typical store's gross revenues, with beverage sales generating most of the
balance. During fiscal 1996, the cookie and brownie product line included the
following offerings:
<TABLE>
<S> <C>
Original Chocolate Chip Cookies Original Chocolate Chip Cookies w/M&Ms(R)
Oatmeal Walnut Raisin Cookies Peanut Butter Supreme Cookies w/M&Ms(R)
Sugar Cookies Shortbread Cookies
Pecan Chocolate Chip Cookies Cookie Cakes
Peanut Butter Supreme Cookies Cookie Cakes by the Slice
Double Fudge Chocolate Chip Cookies Fudgenut Brownies
Chewy Chocolate Supreme Cookies Rocky Road Brownies
Chewy Pecan Supreme Cookies Cheesecake Brownies
Double Doozie and Dinky Doozie Cookies Chocolate Cheesecake Brownie Swirl
White Chunk Macadamia Cookies Fat Free Brownies
</TABLE>
Cookie Cakes are decorated with customer-selected messages and slogans and
are often purchased as gifts for special occasions, such as birthdays,
Valentine's Day, Father's Day, Mother's Day and Easter. Although cookie sales
are generally the result of impulse buying, the Company believes that its
Cookie Cakes tend to make its stores destination retail outlets. Based on
pounds of batter shipped, Cookie Cakes constitute the Company's second largest
volume product. The Company also believes that its success with Cookie Cakes
differentiates it from other specialty retailers of cookies.
PRODUCT DEVELOPMENT
The Company is continually developing new products which are introduced on
a trial basis into Company stores prior to being available to all stores. In
this way a portion of any start-up costs and related problems are absorbed by
the Company without disrupting franchise operations.
BATTER PRODUCTION AND SUPPLIERS
The Company's Atlanta batter facility currently produces over 11 million
pounds of batter per year, operating one ten-hour shift, four to seven days per
week based on seasonal demand. The plant employs approximately 30 line workers
plus a director of manufacturing.
Raw ingredients are mixed and packaged at the batter facility. "Ready to
bake" batter, which has a shelf life of about 120 days, is stored at the batter
facility for an average of one to three weeks, depending on demand, before
being shipped to retail stores by independent refrigerated carriers. Once the
product is shipped to a store, store sales assistants scoop the refrigerated
batter onto cookie sheets and place them in standardized ovens for baking.
Batter is produced from a variety of readily available ingredients.
Although all of the ingredients must meet Company specifications and some are
even custom-made for the Company, management believes that the Company is not
dependent on any individual vendor and that alternative sources of ingredients
are readily available.
REGULATION
The Company's products are subject to federal regulations administered by
the Food and Drug Administration (the "FDA"). The FDA enforces statutory
prohibitions against misbranded and adulterated foods, establishes ingredients
or manufacturing procedures for certain standard foods, establishes standards
for the identification of foods and determines the safety of food substances.
The Company maintains a quality control laboratory at its batter facility which
tests ingredients
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and finished products. Management believes that the Company is in compliance in
all material respects with applicable FDA regulations. The Company's facilities
are subject to state and local food service licensing, zoning, land use,
environmental, health, safety and fire standards. The Company believes that its
current facilities and practices are sufficient to maintain compliance with
applicable regulations.
The offer and sale of franchises by the Company is subject to regulation
by the Federal Trade Commission (the "FTC") and to various state laws. Several
state laws also regulate substantive aspects of the franchisor-franchisee
relationship. The FTC requires the Company to furnish to prospective
franchisees a Uniform Franchise Offering Circular containing prescribed
information. A number of states in which the Company might consider franchising
also regulates the sale of franchises and requires registration of the Uniform
Franchise Offering Circular with state authorities. Additionally, bills have
been introduced in Congress from time to time which would provide for federal
regulation of the franchisor-franchisee relationship in certain respects.
The Company also is subject to the Fair Labor Standard Act and various
federal and state laws governing such matters as minimum wage and working
conditions.
COMPETITION
The specialty retail food industry is highly competitive with respect to
price, service, selection, location and food quality, and the Company has many
well-established competitors with greater resources. Moreover, the retail food
business is often affected by changes in consumer tastes, local, regional and
national economic conditions, demographic trends and traffic patterns. In
addition, factors such as increased food, labor and benefits costs and the
availability of experienced management and hourly employees may adversely
affect the specialty retail industry in general and the Company and its
franchisees in particular. Any changes in these factors could adversely affect
the profitability of the Company.
The Company's principal competitors are Mrs. Fields, which owns and
franchises cookie stores primarily in the Western United States and the
Original Cookie Company which operates cookie stores primarily in the
Midwestern United States, none of which are franchised. In management's view,
competition between cookie stores primarily occurs in locating and obtaining
new store locations. Specifically, as of June 30, 1996, approximately 9% of all
Company and franchised stores operate in malls which have other cookie
retailers. In August 1996, it was publicly reported that Mrs. Fields and
Original Cookie Company will be merging into a single entity with over 480 mall
cookie stores. Management currently believes that the merger will not impair
its ability to obtain new locations in the future.
Great American Cookie also competes, both for leasing opportunities and
customers, with other confectionery and snack retailers, including pretzel,
cinnamon roll, yogurt, ice cream, baked goods and candy shops.
The Company's sales and profitability are subject to slight seasonal
fluctuation and are traditionally higher during the Christmas holiday season
and other gift-giving holidays because of increased mall traffic and holiday
gift purchases.
TRADEMARKS AND SERVICE MARKS
The Company has registered certain trademarks and service marks in the
United States Patent and Trademark office, including "Great American Cookie
Company" which expires in the year 2001. The Company believes that this and
other related marks are of material importance to the Company's business.
Trademarks remain valid so long as they are used properly for identification
purposes, the Company emphasizes correct use of its trademarks, and renewal
applications are properly filed. The Company generally intends to renew
trademarks and service marks prior to their expiration.
ITEM 2. PROPERTIES
As of June 30, 1996, all of the Company's retail outlets were operated in
leased premises. The Company's stores are primarily located in high-traffic
shopping malls and are typically 700 square feet in size with a minimum of 15
linear feet of counter space. The current cost to build and equip a new store
is approximately $139,000, consisting of $100,000 in
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construction build-out costs, $30,000 in equipment purchases and $9,000 in
inventory. The cost of opening a new store can be significantly higher for some
locations.
As of June 30, 1996, the Company leased 308 retail stores, of which 204
were subleased to franchisees under terms which cover all obligations of the
Company thereunder. Under its franchise agreements, the Company has certain
rights to gain control of a retail site in the event of default under the lease
or the franchise agreement. Most of the Company's operating leases provide for
the payment of lease rents plus real estate taxes, utilities, insurance, common
area charges and certain other expenses, as well as contingent rents which
generally range from 8% to 10% of net retail store sales in excess of
stipulated amounts.
The Company owns its headquarters and batter facility which is located in
a building of approximately 28,000 square feet in Atlanta, Georgia.
The Company owns substantially all of the equipment used in Company retail
outlets and corporate headquarters.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Number of Stockholders. Great American Cookie is a
wholly-owned subsidiary of Cookies USA, Inc. ("Cookies USA"). There is no
established trading market for the Company's common stock.
Dividends. During fiscal 1996, the Company declared dividends of
$1,181,000 to Cookies USA, all of which was paid during fiscal 1996.
Additionally, $202,900 of dividends declared in fiscal 1995 were paid to
Cookies USA during fiscal 1996. During fiscal 1995, Great American Cookie
declared dividends of $1,702,900 to Cookies USA, of which $1,312,500 was paid
during fiscal 1995. In addition, $265,400 of dividends declared in fiscal 1994
were paid to Cookies USA during fiscal 1995.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the summary historical financial data of
the Company, and pro forma data that reflects the acquisition of the Company,
Georgia Cookies, Inc., Toga Leasing and Sunbelt Investments by Cookies USA
("the Acquisition") (including the result of operations of Georgia Cookies,
Inc., TOGA Leasing and Sunbelt Investments, the assets of which were acquired
by Cookies USA and contributed to the Company). The following information
should be read in conjunction with the financial statements of the Company and
the related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Pro forma financial
information is provided for informational purposes only and does not purport to
be indicative of the Company's results of operations which would have actually
been obtained had such transactions been completed as of or for the periods
presented or which may be obtained in the future. The information contained in
the table below is presented in thousands (000's) except "Fixed charge coverage
ratio" and "Number of retail outlets".
<TABLE>
<CAPTION>
THE PREDECESSOR(1) THE COMPANY
--------------------------------- ---------------------------------------------------------------
PRO FORMA (UNAUDITED)
---------------------
TWENTY-FOUR TWENTY-NINE FISCAL FISCAL FISCAL FISCAL
FISCAL YEAR ENDED WEEK WEEK YEAR YEAR YEAR YEAR
----------------- PERIOD ENDED PERIOD ENDED ENDED ENDED ENDED ENDED
JUNE 25, JUNE 24, DECEMBER 9, JUNE 30, JUNE 24, JUNE 30, JUNE 29, JUNE 30,
1992 1993 1993 1994 1993(3) 1994(2) 1995 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue..................... $32,269 $35,202 $16,070 $21,935 $38,947 $39,667 $41,408 $40,384
Cost of sales..................... 15,966 16,758 7,537 10,887 18,327 18,968 19,975 19,522
Retail store
occupancy costs.................. 5,427 5,851 2,747 4,133 6,788 7,353 7,588 7,379
Other retail
store expenses................... 939 992 404 785 1,115 1,189 1,539 1,316
Selling, general
and administrative............... 6,420 6,921 3,212 4,135 6,328 6,787 7,482 7,107
Other expenses, net............... 4 504 354 4,609 4,888 4,920 4,838 4,883
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before nonrecurring
litigation charge and taxes...... 3,513 4,176 1,816 (2,614) 1,501 450 (14) 177
Non recurring litigation charge - - - - - - 396 -
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes........ 3,513 4,176 1,816 (2,614) 1,501 450 (410) 177
Provision (benefit)
for income taxes(4).............. 100 87 28 (838) - - 277 416
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)(5).............. 3,413 4,089 1,788 $(1,776) - - $ (687) $ (239)
======= ======= =======
Unaudited pro forma:
Provision for income taxes(4).... 1,308 1,604 700 - 971 573 -
------- ------- ------- ------- -------
Net income....................... $ 2,105 $ 2,485 $ 1,088 - $ 530 $ (123) -
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Total assets...................... 11,762 24,328(6) 20,898 58,908(7) - - 57,376 54,549
Long-term debt.................... 554 8,190(6) 4,220 40,000(8) - - 40,000 40,000
OTHER DATA (UNAUDITED):
EBITDA(9)......................... 4,641 5,911 2,742 1,297 8,661 7,658 6,967 7,783
Adjusted EBITDA(9)................ - - - 3,599 8,957 8,165 7,582 8,273
Adjusted EBITDA after
adding back nonrecurring
litigation charge................ 3,599 8,957 8,165 7,978 8,273
Fixed charge coverage ratio(10)... - - - 1.4 2.0 1.8 1.7 1.9
Number of retail outlets
as of period end
Company-operated................ 112 111 - 122 122 122 120 115
Franchised...................... 210 222 - 231 211 231 251 253
------- ------- ------- ------- ------- ------- ------- -------
Total.......................... 322 333 - 353 333 353 371 368
======= ======= ======= ======= ======= ======= ======= =======
Est. System-wide sales............ $70,370 $75,144 - - $75,144 $77,901 $82,822 $85,963
Average annual sales
per store in system.............. 250 256 - - 256 254 259 260
</TABLE>
-12-
<PAGE> 13
- --------------------------------
(1) Predecessor data includes only the results of operations and balance
sheet data for the Company.
(2) Includes the twenty-three week period ended December 9, 1993 for Georgia
Cookies and the fifty-three week period ended June 30, 1994 for the
Company.
(3) Includes the fifty-three week period ended July 1, 1993 for Georgia
Cookies and the fifty-two week period ended June 24, 1993 for the Company.
(4) For the historical periods presented for the predecessor, the Company was
an S Corporation and, accordingly, was not subject to corporate income
taxes, except in certain states. The pro forma income tax information has
been computed as if the Company were subject to federal and state
corporate income taxes for all periods presented, based on the tax laws in
effect during the periods presented.
(5) Earnings per share is not presented, as the Company is wholly-owned.
(6) The increases in total assets and long-term debt from June 25, 1992 to
June 24, 1993 relate to borrowings by the Company from a bank in November
1992 in the original principal amount of $11.7 million. In November 1992,
the Company loaned $10.2 million of the proceeds of the bank loan to the
Company's then stockholders and a receivable from the stockholders was
recorded. On June 24, 1993 the stockholders owed the Company approximately
$10.0 million related to this loan. In connection with the Acquisition,
the approximately $6.6 million principal amount of the bank loan which
remained outstanding at the time of the Acquisition was paid in full by
the Company.
(7) The increase in total assets from December 9, 1993 to June 30, 1994 is
primarily attributable to (i) the recording of goodwill of approximately
$34.6 million (net of amortization of approximately $487,400 for the
twenty-nine week period) in connection with the Acquisition, (ii) the
capitalization of approximately $3.7 million (net of amortization of
approximately $317,000 for the twenty-nine week period) of debt-issue
costs related to the issuance of $40 million of the Notes (as hereinafter
defined), and (iii) the assets acquired by Cookies USA from Georgia
Cookies, Inc., TOGA Leasing, and Sunbelt Investments and contributed to
the Company.
(8) Long-term debt increased from December 9, 1993 to June 30, 1994 due to
the issuance of $40.0 million principal amount of the Notes.
(9) EBITDA is presented because 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
those 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 to calculate compliance with the Fixed Charge
Coverage Ratio, consisting of adding back interest income, employment
related acquisition costs, and the elimination of certain non-cash
charges, including losses on the disposal of fixed assets and store
closings and accrual of lease expense in excess of cash paid. Unaudited
historical and pro forma EBITDA and Adjusted EBITDA are calculated as
follows (in thousands):
<TABLE>
<CAPTION>
THE PREDECESSOR(1) THE COMPANY
----------------------------------- ----------------------------------------------------------------
PRO FORMA (UNAUDITED)
TWENTY-FOUR TWENTY-NINE ------------------------
FISCAL YEAR ENDED WEEK WEEK FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
--------------------- PERIOD ENDED PERIOD ENDED ENDED ENDED ENDED ENDED
JUNE 25, JUNE 24, DECEMBER 9, JUNE 30, JUNE 24, JUNE 30, JUNE 29, JUNE 30,
1992 1993 1993 1994 1993(3) 1994(2) 1995 1996
---------- --------- ------------ ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........ $3,413 $4,089 $1,788 $(1,776) $ 530 $ (123) $ (687) $ (239)
Add:
Depreciation............. 1,124 1,231 572 750 1,395 1,407 1,662 1,853
Amortization of goodwill. - - - 487 877 882 877 870
Interest expense, net of
interest income......... 4 486 304 2,357 4,332 4,346 4,263 4,311
Amortization of debt
issue costs............. - 18 50 317 556 573 575 572
Provision (benefit) for
income taxes............ 100 87 28 (838) 971 573 277 416
------ ------ ------ ------- ------ ------ ------ ------
EBITDA................... $4,641 $5,911 $2,742 $ 1,297 $8,661 $7,658 $6,967 $7,783
====== ====== ======
Other non-cash items..... 232 220 395 518 433
Interest income.......... 134 76 112 97 57
Employment related
acquisition costs....... 1,936 - - - -
------- ------ ------ ------ ------
Adjusted EBITDA.......... $ 3,599 $8,957 $8,165 $7,582 $8,273
Nonrecurring litigation.. - - - 396 -
------- ------ ------ ------ ------
Adjusted EBITDA after
adding back nonrecurring
litigation charge....... $ 3,599 $8,957 $8,165 $7,978 $8,273
======= ====== ====== ====== ======
</TABLE>
(10) Represents the ratio of Adjusted EBITDA to interest expense (including
accruals and the interest component of capitalized lease obligations).
-13-
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 have not been stated.
FIFTY-TWO WEEKS ENDED JUNE 30, 1996 (FISCAL YEAR 1996) COMPARED TO FIFTY-TWO
WEEKS ENDED JUNE 29, 1995 (FISCAL YEAR 1995)
Accounting period
During the fiscal year ending June 30, 1996, the Company changed its year
end from the last Thursday in the month of June to the last Sunday in the month
of June. As a result, three days were added to the fifty-two week period ended
Thursday, June 27, 1996 to effectively change the Company's fiscal year end to
Sunday, June 30, 1996. The change does not materially impact the comparability
of the years presented in these financial statements.
Company and Franchise Store Activity
As of June 30, 1996 there were 104 Company-operated stores and 225
franchised stores in operation. The store activity for the fiscal year ended
June 30, 1996 and for the fiscal year ended June 29, 1995 is summarized as
follows:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
-------------------- --------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the year 108 215 111 204
Stores opened (including relocations) 12 14 16 11
Stores closed (including relocations) (10) (10) (8) (11)
Stores sold to franchisees (9) 9 (12) 12
Stores acquired from franchisees 3 (3) 1 (1)
--- --- --- ---
Stores open as of the end of the year 104 225 108 215
Satellite locations as of the end of the year 11 28 12 36
--- --- --- ---
Total outlets as of the end of the year 115 253 120 251
=== === === ===
</TABLE>
The activity reflected above resulted in 5,661 and 5,879 Company-operated
equivalent store weeks and 11,544 and 10,716 franchisee-operated equivalent
store weeks during fiscal 1996 and fiscal 1995, respectively.
Total Revenue
Total revenue decreased $1,024,000 or approximately 2.5%, during fiscal
1996 compared to fiscal 1995, primarily attributable to the following:
- Cookie and beverage sales at Company-operated retail stores decreased
$1,629,000 or approximately 6.2% during fiscal 1996 compared to
fiscal 1995. The decrease in revenue from Company-operated retail
stores was primarily attributable to (a) an approximately 3.7%
decrease in Company-operated equivalent store weeks and (b) a
decrease in the average retail sales volume for Company-operated
stores. Specifically, the average retail sales volume for
Company-operated stores decreased approximately 2.6% per equivalent
store week. On a comparable store basis, for those stores which were
Company-operated in fiscal 1996 and 1995, sales volumes decreased
0.3%.
-14-
<PAGE> 15
- Revenue from franchise sales decreased approximately $392,000
or 25.3% during fiscal 1996 compared to fiscal 1995. Revenue from
selling existing and new stores to franchisees is summarized below
(rounded):
<TABLE>
FISCAL FISCAL
1996 1995
------ ------
<S> <C> <C>
Number of licenses sold to franchisees
- existing 9 12
- new 11 11
Cash proceeds from sale of existing stores $1,602,000 $2,558,000
Less: Net book value of existing stores sold (741,000) (1,346,000)
---------- -----------
Revenue from sale of existing stores 861,000 1,212,000
---------- -----------
Revenue from license fees for new stores 275,000 280,000
Revenue from other fees 21,000 57,000
---------- -----------
Revenue from license fees for new stores and other fees 296,000 337,000
---------- -----------
Total revenue from sales of existing and
new stores to franchisees $1,157,000 $1,549,000
========== ==========
</TABLE>
- Other revenue, net decreased $46,000 or approximately 28.4% during
fiscal 1996 compared to fiscal 1995. The decrease in other revenue
is primarily attributable to (a) an increase in batter discounts
taken by franchisees (consistent with the increase in batter sales
to franchisees), partially offset by (b) an increase in sales of
miscellaneous supplies to franchise stores.
- Batter sales to franchisees increased $730,000 or approximately 7.8%
during fiscal 1996 compared to fiscal 1995. The increase in batter
sales to franchisees was primarily attributable to (a) an increase
of approximately 7.7% in franchisee-operated equivalent store weeks
and (b) a 0.1% increase in the volume of batter sold per franchisee-
operated equivalent store week.
- Franchise royalties increased $312,000 or approximately 7.9% during
fiscal 1996 compared to fiscal 1995. The increase in franchise
royalties was primarily attributable to (a) an increase of
approximately 7.7% in equivalent franchisee-operated retail store
weeks and (b) an increase in the average franchisee-operated
equivalent store sales volume of 0.2%. On a comparable store basis,
for those stores which were franchisee-operated in fiscal 1996 and
1995, management estimates franchisees' sales volumes did not change
materially.
Cost of Sales
Cost of sales decreased $452,000 or approximately 2.3% during fiscal 1996
compared to fiscal 1995. The decrease was primarily attributable to (a) a
decline in retail cookie and beverages sales volume in Company-operated stores
and (b) an improvement in wholesale batter margins, partially offset by (c) an
increase in the volume of batter sold to franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased $209,000 or approximately 2.8%
during fiscal 1996 compared to fiscal 1995. The decrease in retail store
occupancy costs was primarily attributable to (a) a decrease of approximately
3.7% in Company-operated store weeks, partially offset by (b) an increase in
depreciation due to the Company revising its estimate of the useful life of
certain leasehold improvements. The effect of this change in estimate was to
increase fiscal 1996 depreciation for Company-operated stores by $130,000.
-15-
<PAGE> 16
Other Retail Store Expenses
Other retail store expenses decreased $223,000 or approximately 14.5%
during fiscal year 1996 compared to fiscal 1995. The decrease in other retail
store expenses was primarily attributable to (a) a decrease in marketing
expenses, and (b) a decrease in bank charges and supplies expense as a result
of cost containment efforts.
Selling, General and Administrative
Selling, general and administrative expenses decreased $375,000 or
approximately 5.0% during fiscal 1996 compared to fiscal 1995. The decrease in
selling, general and administrative expenses was primarily attributable to (a)
a reduction in administrative salaries and benefits, (b) a decrease in
professional service fees, including legal and accounting services, and (c) a
decrease in various home office expenditures, including postage, supplies, and
training materials, partially offset by (d) an increase in travel costs due to
additional review of stores by field supervisors.
Other Expenses, Net
Other expenses, net increased $45,000 or approximately 0.9% during fiscal
1996 compared to fiscal 1995. The increase was primarily attributable to (a) a
decrease in interest income due to lower average cash balances, and (b) an
increase in interest expense due to an increase in capital lease obligations.
Non-Recurring Litigation Charge
During the third quarter of fiscal 1995, a non-recurring litigation charge
of $439,000 was recorded to cover a potential forthcoming judgment against the
Company in the Haagen-Burbank lawsuit. In June 1993, the Company won a judgment
for breach of written contract to a lease entered into with a developer,
Haagen-Burbank. On appeal, the Court of Appeals of the State of California
Second Appellate District overturned the jury's verdict and directed the trial
court to determine the amount of attorney fees and costs due to Haagen-Burbank
as the prevailing party in the litigation. Haagen-Burbank had submitted to the
court a request for legal fees totaling $439,000; however, on April 27, 1995,
the trial court entered a judgment of $417,985. On September 15, 1995 the
Company paid $395,966 to Haagen-Burbank as settlement of the judgment against
the Company.
Net Loss
Net loss decreased $448,000 or approximately 65.2% during fiscal 1996
compared to fiscal 1995. Net loss represented approximately 0.6% of total
revenue during fiscal 1996 compared to approximately 1.7% of total revenue
during fiscal 1995. The decrease in net loss reflected (a) the increase in
operating income, (b) the lack of a non-recurring litigation charge in 1996,
partially offset by (c) the increase in state and federal income tax expense
and (d) the increase in other expenses, net.
-16-
<PAGE> 17
FIFTY-TWO WEEKS ENDED JUNE 30, 1995 COMPARED TO FIFTY-THREE WEEKS ENDED JUNE
30, 1994 (PRO FORMA)
Management's discussion and analysis of the results of operations for the
fifty-two weeks ended June 30, 1995 is presented in connection with a
comparison to the results of operations for the fifty-three weeks ended June
30, 1994 prepared on a pro forma basis reflecting the acquisition of the
Company and other related assets by Cookies USA as if the Acquisition had
occurred on June 25, 1993 (the beginning of the fiscal year ending June 30,
1994).
Company and Franchise Store Activity
As of June 30, 1995 there were 108 Company-operated stores and 215
franchised stores in operation. The store activity for the fifty-two week
period ended June 30, 1995 ("fiscal 1995") and for the fifty-three week period
ended June 30, 1994 (pro forma) ("fiscal 1994") is summarized as follows:
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
--------------------- ---------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the year 111 204 101 200
Stores opened (including relocations) 16 11 15 15
Stores closed (including relocations) (8) (11) (7) (9)
Stores sold to franchisees (12) 12 (14) 14
Stores acquired from franchisees 1 (1) 3 (3)
Stores acquired from Georgia Cookies - - 13 (13)
--- --- --- ---
Stores open as of the end of the year 108 215 111 204
Satellite locations as of the end of the year 12 36 11 27
--- --- --- ---
Total outlets as of the end of the year 120 251 122 231
=== === === ===
</TABLE>
The activity reflected above resulted in 5,879 and 5,962 Company-operated
equivalent store weeks and 10,716 and 10,149 franchisee-operated equivalent
store weeks during fiscal 1995 and fiscal 1994, respectively.
Total Revenue
Total revenue increased $1,741,000 or approximately 4.4%, during fiscal
1995 compared to fiscal 1994, primarily attributable to the factors discussed
below:
- Batter sales to franchisees increased $776,000 or approximately
9.0% during fiscaly 1995 compared to fiscal 1994. The increase in
batter sales to franchisees was attributable to (a) an approximately
5.6% increase in equivalent franchisee-operated retail store weeks
and (b) a wholesale batter price increase during January 1995 on four
selected batter products, partially offset by (c) one additional
fiscal week's batter sales during fiscal 1994.
- Franchise royalties increased $344,000 or approximately 9.5% during
fiscal 1995 compared to fiscal 1994. The increase in franchise
royalties was attributable to (a) an approximately 5.6% increase in
equivalent franchisee-operated retail store weeks and (b) an
increase in the average sales volume of franchisee-operated retal
stores. Specifically, the average retail sales volume for a
franchisee-operated store during fiscal 1995 was $273,600 compared
to $265,500 during fiscal 1994, representing a 3.1% increase in
average volume. On a comparable store basis, for those stores which
were franchisee-operated in fiscal 1995 and 1994, management
estimates franchisees' sales volumes increase 2.1%. The average
volume increase (based on franchise equivalent store weeks) is
greater than the comparable store volume increase primarily due to
franchisee-operated stores which were opened in fiscal 1994 (i.e.
non-comparable stores)
-17-
<PAGE> 18
having an estimated increase of average sales of approximately 13.6%
(based on franchise equivalent store weeks).
- Revenue from franchise sales increased approximately $301,000 during
fiscal 1995 compared to fiscal 1994 primarily due to the sale of
existing Company-operated stores to franchisees at higher average
prices in fiscal 1995 than fiscal 1994. Revenue from selling existing
and new stores to franchisees is summarized as follows (rounded):
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1994
------ ------
<S> <C> <C>
Number of licenses sold to franchisees
- existing 12 14
- new 11 10
Cash proceeds from sale of existing stores $ 2,558,000 $ 1,984,000
Less: Net book value of existing stores sold (1,346,000) (1,050,000)
----------- -----------
Revenue from sale of existing stores 1,212,000 934,000
----------- -----------
Revenue from license fees for new stores 280,000 285,000
Revenue from other fees 57,000 29,000
----------- -----------
Revenue from license fees for new stores and other fees 337,000 314,000
----------- -----------
Total revenue from sale of existing and
new stores to franchisees $ 1,549,000 $ 1,248,000
=========== ===========
</TABLE>
- Cookie and beverage sales at Company-operated retail stores
increased $45,000 or approximately 0.2% during fiscal 1995 compared
to fiscal 1994. The increase in revenue from Company-operated retail
stores was attributable to (a) an increase in the volume of cookies
and beverages sold, partially offset by (b) a decrease in
Company-operated equivalent store weeks. Specifically, the
average retail sales volume for a Company-operated store during
fiscal 1995 was $233,000 compared to $229,400 during fiscal 1994,
representing a 1.6% increase in average volume. On a comparable store
basis, for those stores which were Company-operated in fiscal 1995
and 1994, sales volumes increased 1.1%. The average volume increase
(based on Company-operated equivalent store weeks) is greater than
the comparable store volume increase due to the Company closing lower
than average volume stores and opening higher than average volume
stores during fiscal 1995.
Cost of Sales
Cost of sales increased $1,007,000, or approximately 5.3%, during fiscal
year 1995 compared to fiscal 1994. Cost of sales represented approximately
48.2% of total revenue during fiscal 1995 compared to approximately 47.8% of
total revenue during fiscal 1994. The increase in cost of sales as a percentage
of total revenue was attributable to (a) a decrease in wholesale batter margins
due to an increase in ingredient costs, (b) the introduction of several new
products with lower wholesale profit margins, (c) a decrease in retail beverage
margins due to the introduction of lower margin specialty frozen drinks in
Company-operated stores and (d) an increase in retail store labor expense.
Retail Store Occupancy
Retail store occupancy costs increased $235,000 or approximately 3.2%
during fiscal 1995 compared to fiscal 1994. The increase in retail store
occupancy costs was attributable to (a) an increase in average rent expense and
related charges per equivalent Company-operated retail store week, partially
offset by (b) a decrease in Company-operated retail store weeks.
-18-
<PAGE> 19
Other Retail Store Expenses
Other retail store expenses increased $350,000 or approximately 29.5%
during fiscal year 1995. The increase in other retail store expenses can be
attributed to (a) an increase in selling expenditures due to an increase in
promotional material utilized within the Company's retail stores, (b) an
increase in the purchase of cooking utensils for production of several new
products, and (c) an increase in general supply expenditures at
Company-operated retail stores, partially offset by (d) a decrease in
Company-operated store weeks.
Selling, General and Administrative
Selling, general and administrative expenses increased $695,000 or
approximately 10.2% during fiscal 1995. The increase in selling, general, and
administrative expenses was primarily attributable to (a) an increase in the
franchise sales and administrative staff and corporate field supervisors, (b)
an increase in selling expenditures due to an increase in promotional materials
utilized in franchise retail stores, (c) an increase in depreciation expense on
equipment purchased for the corporate headquarters, (d) an increase in travel
expense due to field supervisors traveling to additional retail stores and due
to introducing various new products at the retail stores, partially offset by
(e) one less fiscal week's expenses during fiscal 1995.
Other Expenses, Net
Other expenses, net decreased $82,000 or approximately 1.7% during fiscal
1995 compared to fiscal 1994, primarily attributable to a $99,000 decrease in
interest expense due to one less fiscal week, partially offset by a $15,000
decrease in interest income earned during fiscal 1995.
Non-Recurring Litigation Charge
On April 27, 1995 a judgment of $417,985 was entered against the Company
in the Haagen-Burbank lawsuit. Previously the Company in June 1993 won a
judgment for breach of written contract related to a lease entered into with a
developer, Haagen-Burbank. On appeal, the Court of Appeal of the State of
California Second Appellate District overturned the jury's verdict and directed
the trial court to determine the amount of attorney fees and costs due to
Haagen-Burbank as the prevailing party in the litigation. Haagen-Burbank had
submitted to the court a request for legal fees totaling $439,000; however, the
trial court entered a judgment of $417,985 on April 27, 1995. On September 15,
1995 the Company paid $395,966 to Haagen-Burbank as settlement of the judgment
against the Company.
Net Loss
Net loss increased $564,000 or approximately 459% during fiscal 1995
compared to fiscal 1994. Net loss represented approximately (1.7)% of total
revenue during fiscal 1995 compared to approximately (.3)% of total revenue
during fiscal 1994. The increase in net loss reflected (a) the decrease in
operating income, and (b) the recording of the non-recurring litigation charge,
partially offset by (c) a $296,000 decrease in the provision for federal and
state income taxes.
-19-
<PAGE> 20
FIFTY-THREE WEEKS ENDED JUNE 30, 1994 (PRO FORMA) COMPARED TO FIFTY-TWO WEEKS
ENDED JUNE 30, 1993 (PRO FORMA)
Management's discussion and analysis of the results of operations for the
fifty-three weeks ended June 30, 1994 has been prepared from the pro forma
financial information reflecting the acquisition of the Company and other
related assets by Cookies USA as if the Acquisition had occurred on June 26,
1992 (the beginning of the fiscal year ended June 24, 1993) and June 25, 1993
(the beginning of the fiscal year ending June 30, 1994).
Company and Franchise Store Activity
As of June 30, 1994, there were 111 Company-operated stores and 204
franchised stores in operation. The store activity for the fifty-three week
period ended June 30, 1994 (pro forma) ("fiscal 1994") and for the fifty-two
week period ended June 30, 1993 (pro forma) ("fiscal 1993") is summarized as
follows:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993
-------------------- --------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Stores open as of the beginning of the year 101 200 99 186
Stores opened (including relocations) 15 15 11 18
Stores closed (including relocations) (7) (9) (6) (7)
Stores sold to franchisees (14) 14 (6) 6
Stores acquired from franchisees 3 (3) 3 (3)
Stores acquired from Georgia Cookies(1) 13 (13) - -
--- --- --- ---
Stores open as of the end of the year 111 204 101 200
Satellite locations as of the end of the year 11 27 10 22
--- --- --- ---
Total outlets as of the end of the year 122 231 111 222
=== === === ===
</TABLE>
- --------------
(1) As part of the Acquisition, the Company acquired the stores of Georgia
Cookies, Inc. in conjunction with acquiring the assets of TOGA
Leasing and Sunbelt Investments.
Total Revenue
Total revenue increased $720,000, or approximately 1.8%, during fiscal
1994 compared to fiscal 1993, primarily attributable to the factors discussed
below:
- Batter sales to franchisees and franchise royalties increased
$951,000 or approximately 8.4% during fiscal 1994 compared to fiscal
1993. The increase in revenue from franchisee-operated retail stores
was attributable to (a) an approximately 6.5% increase in equivalent
franchisee-operated retail store months, (b) a wholesale batter
price increase during July 1993, and (c) one additional fiscal
week's batter sales during fiscal 1994.
- Cookie and beverage sales at Company-operated retail stores decreased
$83,000 or approximately 0.3% during fiscal 1994 compared to fiscal
1993. The decrease in revenue from Company-operated retail stores
was attributable to (a) a decrease in the volume of cookies and
beverages sold due to unusually severe winter weather on the East
Coast and in the upper Midwest and (b) the selling of stores with
higher than average sales to franchisees and opening units with less
than average sales during their respective start-up phase, partially
offset by (c) one additional fiscal week's sales during fiscal 1994
and (d) a retail price increase during late December 1993 in certain
Company-operated retail stores.
-20-
<PAGE> 21
- Revenue from franchise sales decreased approximately $174,000 during
fiscal 1994 compared to fiscal 1993 primarily due to the sale of
existing Company-operated stores to franchisees at lower average
prices and higher net book values in fiscal 1994 than fiscal 1993.
Revenue from selling existing and new stores to franchisees is
summarized as follows (rounded):
<TABLE>
<CAPTION>
FISCAL FISCAL
1994 1993
---- ----
<S> <C> <C>
Number of licenses sold to franchisees
- existing 14 6
- new 10 14
Cash proceeds from sale of existing stores $ 1,984,000 $1,338,000
Less: Net book value of existing stores sold (1,050,000) (407,000)
----------- ----------
Revenue from sale of existing stores 934,000 931,000
----------- ----------
Revenue from license fees for new stores 285,000 426,000
Revenue from other fees 29,000 65,000
----------- ----------
Revenue from license fees for new stores and other fees 314,000 491,000
----------- ----------
Total revenue from sale of existing and
new stores to franchisees $ 1,248,000 $1,422,000
=========== ==========
</TABLE>
Cost of Sales
Cost of sales increased $641,000, or approximately 3.5%, during fiscal
year 1994 compared to fiscal 1993. Cost of sales represented approximately
47.8% of total revenue during fiscal 1994 compared to approximately 47.1% of
total revenue during fiscal 1993. The increase in cost of sales as a percentage
of total revenue was attributable to (a) a $392,000 increase in retail store
labor costs and benefits, increasing from approximately 32.9% of revenue from
Company-operated retail stores during fiscal 1993 to approximately 34.5% of
revenue from Company-operated retail stores during fiscal 1994, attributable to
(i) increased workers' compensation insurance costs and (ii) inflation-affected
employee benefits, partially offset by (b) a wholesale batter price increase
during July 1993 and (c) the maintenance of effective food cost controls in
Company-operated stores and at the Company's batter production facility.
Retail Store Occupancy
Retail store occupancy costs increased $565,000 or approximately 8.3%
during fiscal 1994 compared to fiscal 1993. The increase in retail store
occupancy costs was attributable to (a) a $277,000 net increase in accrued
straight-line minimum rent payable (straight-line minimum rent payable is a
noncash accounting charge), (b) an increase in average rent expense and related
charges per equivalent Company-operated retail store month, (c) an increase in
mall operating costs passed through to tenants, (d) an increase in average
utilities and property tax charges per equivalent Company-operated retail store
month, and (e) one additional fiscal week of expenses during fiscal 1994.
Other Retail Store Expenses
Other retail store expenses increased $74,000 or approximately 6.6% during
fiscal 1994 compared to fiscal 1993. The increase in other retail store
expenses was attributable to (a) an increase in promotional advertising, (b) an
increase in supply expenditures, and (c) one additional fiscal week of expenses
during fiscal 1994.
Selling, General and Administrative
Selling, general and administrative expenses increased $459,000 or
approximately 7.3% during fiscal 1994. The increase in selling, general and
administrative expenses was attributable to (a) increased corporate field
supervisors, franchise sales and administrative staffing, (b)
inflation-affected employee benefits, (c) increased costs for the Company's
annual
-21-
<PAGE> 22
franchise convention due to unprecedentedly high franchisee attendance, (d)
increased office supplies and computer-related expenses attributable to
management's expansion of the staffing and computer resources of the corporate
office, and (e) one additional fiscal week's expenses during fiscal 1994,
partially offset by a $102,000 decrease in net loss on sales and disposals of
property and equipment (other than gain on sale of existing Company-operated
stores to franchisees).
Other Expenses, Net
Other expenses, net increased $32,000 or approximately 0.7% during fiscal
1994 compared to fiscal 1993, attributable to a $68,000 increase in interest
expense primarily due to an additional week of interest expense, offset by a
$36,000 increase in interest income earned during fiscal 1994.
Net Income (Loss)
Net income (loss) decreased $653,000 or approximately 123% during fiscal
1994 compared to fiscal 1993. Net income (loss) represented approximately
(0.3)% of total revenue during fiscal 1994 compared to approximately 1.4% of
total revenue during fiscal 1993. The decrease in net income reflected (a) the
decrease in operating income and (b) the increase in net interest expense,
partially offset by (c) a $398,000 decrease in the provision for federal and
state income taxes.
-22-
<PAGE> 23
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 June 30, 1996 and as of
June 29, 1995 was $3.2 million and $2.3 million, respectively. The specialty
retail cookie business does not require the maintenance of significant
receivables or inventories; therefore, it is not unusual for the Company's
working capital balance to be less than $5 million.
The Company regularly invests in its business through the addition of new
Company-operated units. These store additions are reflected as long-term assets
and not as part of working capital. The Company anticipates that it will open
approximately 3 Company-operated stores during fiscal 1997. 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 new and existing stores to
franchisees.
During fiscal 1996, the Company opened 12 Company-operated stores
(including 3 store relocations within the same malls) and remodeled 1 store,
requiring capital expenditures of approximately $1,466,000. Total fiscal 1996
capital expenditures were approximately $1,900,000 while capital expenditures
for fiscal 1995 totaled approximately $4,300,000.
A portion of the consideration paid in connection with the acquisition of
the Company in December 1993 consisted of Cookies USA Senior Preferred Stock
and the cash provided by the sale by Cookies USA of Subordinated Notes, Junior
Class A Preferred Stock, Junior Class B Preferred Stock, and Common Stock. The
Company is the sole source of any cash to be paid as interest, principal
payments or dividends on such securities or to pay any other expenses,
including management fees, incurred by Cookies USA. The Company expects to pay
dividends to Cookies USA in amounts sufficient to service the cash flow
requirements of Cookies USA to the extent that such payments are permitted by
the terms of the Company's Senior Secured Notes and, if additional indebtedness
is incurred that restricts such payments, by the terms of such additional
indebtedness. The Company paid $1,383,900 of dividends to Cookies USA during
fiscal 1996, of which $202,900 was declared and accrued in fiscal 1995.
Based on the terms 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 June 30, 1996 the Company had a
cash balance of approximately $3,302,000. The Company anticipates that
additional cash flow will be generated primarily from the sale of existing
retail stores to franchisees so that, with cash generated from retail store and
batter facility operations and royalties from franchisees, the Company will be
able to meet its debt service requirements as well as its capital expenditure
requirements for the foreseeable future. Based upon the Company's plans to
develop additional stores, the Company's liquidity is dependent upon its
ability to sell both new and existing stores to franchisees.
SEASONALITY AND INFLATION
The Company's sales and profitability are subject to slight seasonal
fluctuation and are traditionally higher during the Christmas holiday season
because of various factors such as increased mall traffic and holiday gift
purchases.
The Company does not believe that inflation has materially affected
earnings during the past three years. 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 will increase from $4.25 to
$4.75 on October 1, 1996 and from $4.75 to $5.15 on September 1, 1997. As of
June 30, 1996, 260 of the Company's 870 employees in Company-operated stores
earned hourly wages less than $4.75. The October 1, 1996 minimum wage increase
may negatively impact the Company's 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.
-23-
<PAGE> 24
INCOME TAXES
The Company was treated as an S Corporation for income tax purposes for
all periods presented prior to December 10, 1993. The pro forma income tax
information has been computed as if the Company were subject to federal and
state income tax laws in effect during the respective periods.
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 determined such value based on potential growth rates,
which were lower than those the Company experienced in the five years preceding
the acquisition. The carrying value of goodwill is evaluated regularly 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 June 30,
1996.
-24-
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GREAT AMERICAN COOKIE COMPANY, INC.
Report of Independent Accountants
Balance Sheet as of June 30, 1996 and June 29, 1995
Statement of Operations for the fifty-two week periods ended June 30, 1996
and June 29, 1995
Statement of Changes in Stockholder's Equity for the fifty-two week
periods ended June 30, 1996 and June 29, 1995
Statement of Cash Flows for the fifty-two week periods ended June 30, 1996
and June 29, 1995
Notes to Financial Statements
Report of Independent Accountants
Balance Sheet as of June 30, 1994
Statement of Operations for the twenty-nine week period ended June 30,
1994
Statement of Changes in Stockholder's Equity for the twenty-nine week
period ended June 30, 1994
Statement of Cash Flows for the twenty-nine week period ended June 30,
1994
Notes to Financial Statements
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
Report of Independent Accountants
Report of Independent Accountants
Balance Sheet as of June 24, 1993
Statements of Income and Retained Earnings for the fifty-two week period
ended June 24, 1993, and for the twenty-four week period ended
December 9, 1993
Statements of Cash Flows for the fifty-two week period ended June 24, 1993
and for the twenty-four week period ended December 9, 1993
Notes to Financial Statements
-25-
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Great American Cookie Company, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholder's equity, and of cash flows present
fairly, in all material respects, the financial position of Great American
Cookie Company, Inc. at June 30, 1996 and June 29, 1995, and the results of its
operations and its cash flows for the fifty-two week periods then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, Georgia
August 30, 1996
<PAGE> 27
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,301,627 $ 4,251,780
Accounts receivable - trade 1,675,584 1,343,426
Inventory (Notes 1 and 2) 1,443,811 1,304,174
Prepaid expenses (Note 3) 1,175,309 1,075,333
Income tax receivable 155,789 147,583
Current deferred tax benefit (Notes 1 and 11) 81,360 256,787
Current portion of notes receivable (Note 4) 33 198,085 277,795
Other receivables 33,899 162,399
----------- -----------
Total current assets 8,065,464 8,819,277
----------- -----------
Property and equipment, net of accumulated depreciation (Note 5) 8,325,726 9,101,235
Construction in progress, net of construction deposits received from franchisees 29,258 15,682
----------- -----------
8,354,984 9,116,917
----------- -----------
Other assets
Deferred loan costs, net of accumulated amortization
of $1,464,100 and $891,700, respectively (Note 1) 2,608,958 3,181,358
Notes receivable, net of current portion (Note 4) 19,963 92,219
Deferred tax benefit (Notes 1 and 11) 1,419,143 1,365,036
Deposits 61,386 54,759
Accrued straight-line minimum rent receivable for subleases to franchisees (Note 1) 1,300,872 1,157,948
----------- -----------
5,410,322 5,851,320
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $2,233,851 and $1,364,200, respectively (Note 1) 32,718,474 33,588,125
----------- -----------
$54,549,244 $57,375,639
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 832,044 $ 1,293,679
Sales taxes payable 129,974 128,090
Accrued interest payable 1,996,681 1,996,676
Accrued expenses (Note 6) 1,065,043 1,936,214
Deposits 738,542 760,512
Dividends payable 125,000 390,400
----------- -----------
Total current liabilities 4,887,284 6,505,571
----------- -----------
Capital lease obligations, net (Note 9) 67,036 83,638
----------- -----------
Accrued straight-line minimum rent payable (Note 1) 2,176,523 1,947,614
----------- -----------
Long-term debt (Note 7) 40,000,000 40,000,000
----------- -----------
Commitments and contingencies (Note 9)
Stockholder's equity (Note 12)
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 (6,417,662) (4,997,247)
----------- -----------
7,418,401 8,838,816
----------- -----------
$54,549,244 $57,375,639
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-27-
<PAGE> 28
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FIFTY-TWO FOR THE FIFTY-TWO
WEEK PERIOD ENDED WEEK PERIOD ENDED
JUNE 30, 1996 JUNE 29, 1995
----------------- -----------------
<S> <C> <C>
Revenue:
Cookie and beverage sales $24,718,712 $26,347,256
Batter sales to franchisees 10,104,241 9,374,644
Franchise royalties 4,288,846 3,976,591
Franchise sales - existing and new stores 1,156,753 1,548,525
Other - net 115,165 160,769
----------- -----------
Total revenue 40,383,717 41,407,785
----------- -----------
Operating expenses:
Cost of sales 19,522,528 19,974,765
Retail store occupancy 7,379,160 7,588,158
Other retail store expenses 1,315,818 1,538,826
Selling, general and administrative expenses 7,106,685 7,481,994
----------- -----------
Total operating expenses 35,324,191 36,583,743
----------- -----------
Other (income) expenses, net
Interest income (56,633) (96,964)
Interest expense 4,367,479 4,359,942
Amortization of deferred loan costs 572,400 575,100
----------- -----------
Total other expenses, net 4,883,246 4,838,078
----------- -----------
Income (loss) before non-recurring litigation charge and taxes 176,280 (14,036)
Non-recurring litigation charge (Note 10) 0 396,000
----------- -----------
Income (loss) before taxes 176,280 (410,036)
State and federal income tax expense (Note 11) 415,695 277,077
----------- -----------
Net loss $ (239,415) $ (687,113)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-28-
<PAGE> 29
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<Capiton>
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
----- ------- ------- ------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 $13,500,000 $336,063 $(2,607,234) $11,228,829
Net loss (687,113) (687,113)
Dividends (1,702,900) (1,702,900)
----------- -------- ----------- -----------
Balance at June 29, 1995 13,500,000 336,063 (4,997,247) 8,838,816
Net loss (239,415) (239,415)
Dividends (1,181,000) (1,181,000)
----------- -------- ----------- -----------
Balance at June 30, 1996 $13,500,000 $336,063 $(6,417,662) $ 7,418,401
=========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-29-
<PAGE> 30
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FIFTY-TWO FOR THE FIFTY-TWO
WEEK PERIOD WEEK PERIOD
ENDED ENDED
JUNE 30, 1996 JUNE 29, 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (239,415) $ (687,113)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation 1,853,790 1,662,018
Amortization of cost in excess of fair value of net assets acquired (goodwill) 869,651 876,800
Amortization of deferred loan costs 572,400 575,100
Net gain on sales and disposals of property and equipment (402,303) (739,123)
Net increase in accrued straight-line minimum rent receivable and payable 85,985 218,405
Changes in assets and liabilities
(Increase) in accounts receivable (550,500) (276,653)
(Increase) decrease in inventory (139,637) 144,490
(Increase) in prepaid expenses (99,976) (69,268)
(Increase) in income tax receivable (8,206) (147,583)
Decrease in current deferred tax benefit 175,427 206,913
Decrease (increase) in other receivables 128,500 (135,798)
(Increase) decrease in deferred tax benefit (54,107) 70,164
(Increase) decrease in other assets (6,627) 9,450
(Decrease) increase in accounts payable (461,635) 480,518
Increase (decrease) in sales taxes payable 1,884 (14,714)
Increase (decrease) in accrued interest payable 5 (424,775)
(Decrease) increase in accrued expenses (871,171) 317,967
(Decrease) increase in deposits (21,970) 91,865
----------- -----------
Net cash provided by operating activities 832,095 2,158,663
----------- -----------
Cash flows from investing activities
Acquisitions of property and equipment, including net increase
in construction in progress, net of construction deposits received from franchisees (1,913,503) (4,333,341)
Proceeds from sales and disposals of property and equipment 1,083,428 2,280,087
Acceptance of notes receivable 0 (319,708)
Proceeds from collection of notes receivable 448,329 17,969
----------- -----------
Net cash used for investing activities (381,746) (2,354,993)
----------- -----------
Cash flows from financing activities
Payment of acquisition related expenses 0 (118,842)
Payment of deferred loan costs 0 (33,397)
Principal repayments under capital lease obligations (16,602) (6,463)
Dividends paid (1,383,900) (1,577,900)
----------- -----------
Net cash used for financing activities (1,400,502) (1,736,602)
----------- -----------
Net decrease in cash and cash equivalents during period (950,153) (1,932,932)
----------- -----------
Cash and cash equivalents, beginning of period 4,251,780 6,184,712
----------- -----------
Cash and cash equivalents, end of period $ 3,301,627 $ 4,251,780
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-30-
<PAGE> 31
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FIFTY-TWO FOR THE FIFTY-TWO
WEEK PERIOD WEEK PERIOD
ENDED ENDED
JUNE 30, 1996 JUNE 29, 1995
------------- -------------
Supplemental disclosure of cash flow information:
- -------------------------------------------------
<S> <C> <C>
Cash paid for:
Interest $4,367,473 $4,784,716
========== ==========
State and federal income taxes $ 118,500 $ 133,953
========== ==========
</TABLE>
Supplemental schedule of non-cash financing and investing activities:
During the fifty-two weeks ended June 30, 1996, notes receivable with face
amounts of $177,919 and $118,444 were received from unrelated franchisees in
connection with the sale of Company-operated stores.
During the fifty-two weeks ended June 29, 1995, the Company entered into
several capital lease obligations totaling $108,175 for office equipment.
The accompanying notes are an integral part of these financial statements.
-31-
<PAGE> 32
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 distributed to Company-operated retail stores
and sold to franchised retail stores.
On December 10, 1993, the Company was acquired by Cookies USA, Inc.
("Cookies USA") in several transactions. Immediately following the
acquisition, the Company changed its name from The Original Great American
Chocolate Chip Cookie Company, Inc. to Great American Cookie Company, Inc.
The acquisition was recorded in the accounts of the Company using the
purchase method of accounting with "push-down" accounting. Due to the 22%
interest retained by the selling stockholders of the Company via their
common and convertible preferred stock interests in Cookies USA, the
Company did not recognize an increase in the carrying value of 22% of the
underlying assets of the Company and the assets of Georgia Cookies, Inc.,
TOGA Leasing and Sunbelt Investments.
ACCOUNTING PERIOD
During the fiscal year ending June 30, 1996, the Company changed its year
end from the last Thursday in the month of June to the last Sunday in the
month of June. As a result, three days were added to the fifty-two week
period ended Thursday, June 27, 1996 to effectively change the Company's
fiscal year end to Sunday, June 30, 1996. The change does not materially
impact the comparability of the years presented in these financial
statements.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, accounts
receivable, accounts payable and accrued expenses approximate fair value
at June 30, 1996 due to the relatively short period to maturity of these
instruments. The long-term notes payable with a fixed interest rate of
10.875% are recorded at face value (see Note 7); however, their fair value
at June 30, 1996, based on quoted market values, is approximately
$31,000,000.
REVENUE RECOGNITION
Revenue from Company-operated stores is recognized in the period the
related cookies and beverages are sold. Revenues from the sale of batter
are recognized at the time of shipment. Franchise royalties, which are
based on a percentage of franchised store sales, are recognized in the
same period related franchise store revenue is generated. Franchise
license fee revenues are recognized at the time that all Company
obligations regarding the franchise have been met. Fees received pursuant
to development agreements which grant the right to develop franchised
units in future periods in specific geographic areas are deferred and
recognized as income on a pro rata basis as the Company's obligations
regarding the franchised units subject to the development agreements are
met.
CASH EQUIVALENTS
The Company considers all highly liquid, short-term investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents at June 30, 1996 and June 29, 1995 consist of short-term
commercial paper. These investments are stated at cost, which approximates
market.
-32-
<PAGE> 33
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
STORE OPENING AND CLOSING COSTS
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed in the year incurred. When a store is closed,
the unamortized investment in leasehold improvements is recorded as a loss
on store closing.
INVENTORIES
Inventories of cookie and brownie products, beverage products, paper and
supplies and smallwares are stated at the lower-of-cost or market with
cost determined on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed, and the related accumulated
depreciation, are eliminated from the accounts, and any resulting gain or
loss is recognized in the income statement.
Depreciation is provided using accelerated methods over the estimated
useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Building 20 years
Furniture, fixtures and equipment 5-7 years
Building and leasehold improvements lesser of 8 years or the life of the related lease
</TABLE>
During fiscal 1996, the Company revised its estimate of the useful life of
certain leasehold improvements. The effect of this change in estimate was
to increase fiscal 1996 pretax net loss by $214,000.
DEFERRED LOAN COSTS
Debt issue costs of approximately $4.0 million were incurred in connection
with the issuance of the 10.875% senior secured notes payable due 2001
(Note 7). Deferred loan costs are being amortized over the life of the
related notes (85 months), with annual charges to income of approximately
$572,000.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Cost in excess of fair value of net assets acquired (goodwill) is being
amortized over a forty year period, with annual charges to income of
approximately $870,000.
The carrying value of goodwill is evaluated for indications of possible
impairment. The review is based on comparing the carrying amount to the
undiscounted estimated cash flows from continuing operations over the
remaining amortization period. No impairment is indicated as of June 30,
1996.
LEASES
The Company has various operating lease commitments on both
Company-operated and franchised store locations and equipment. Operating
leases with escalating payment terms, including those subleased to
franchisees, are expensed on a straight-line basis over the life of the
related lease.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Concurrent with the acquisition and its termination of the S Corporation
status (see Note 11), the Company adopted SFAS 109, "Accounting for Income
Taxes". In accordance with the provisions of SFAS 109, deferred income
taxes
-33-
<PAGE> 34
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities
given the provisions of the enacted tax laws.
EARNINGS PER SHARE
Earnings per share is not presented, as the Company is wholly-owned.
RECLASSIFICATIONS
Certain fiscal year 1995 amounts have been reclassified to conform to
fiscal year 1996 presentation.
2. INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1996 1995
----------- ----------
<S> <C> <C>
Raw ingredients $ 218,512 $ 241,965
Batter, including retail stores 454,005 308,325
Beverage syrup 75,635 89,033
Paper goods and packaging supplies 190,375 169,620
Purchased icing and decorative toppings held for resale 106,531 39,786
Equipment held for resale 78,799 147,090
Marketing and miscellaneous supplies held for resale 319,954 308,355
---------- ----------
$1,443,811 $1,304,174
========== ==========
</TABLE>
3. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
---------- ----------
<S> <C> <C>
Rent $1,171,721 $1,064,065
Other 3,588 11,268
---------- ----------
$1,175,309 $1,075,333
========== ==========
</TABLE>
4. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
-------- --------
<S> <C> <C>
Notes receivable $218,048 $ 370,014
Less current portion 198,085 277,795
-------- ----------
Notes receivable, net of current portion $ 19,963 $ 92,219
======== ==========
</TABLE>
-34-
<PAGE> 35
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
Notes receivables are due from various franchisees and principally result
from the sale of existing Company stores to franchisees. Each note is
guaranteed by the purchaser and collateralized by the assets sold. The
notes, in most instances, are generally due in monthly installments of
principal and interest, with the interest rates ranging between 9% and
12.5% per annum.
The aggregate maturities of the notes receivable are as follows:
<TABLE>
<S> <C>
1997 $198,085
1998 19,963
--------
$218,048
========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
------------ ------------
<S> <C> <C>
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 7,724,036 7,568,603
Furniture, fixtures, and equipment 3,227,210 2,723,682
Vehicles 12,779 12,779
----------- -----------
11,964,820 11,305,859
Less accumulated depreciation (3,639,094) (2,204,624)
----------- -----------
Property and equipment - net $ 8,325,726 $ 9,101,235
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
---------- ----------
<S> <C> <C>
Employee compensation including payroll taxes $ 317,599 $ 550,214
Employment related acquisition costs 0 300,000
Profit-sharing contribution 0 100,000
Construction expenses 59,252 111,420
Professional fees 107,500 141,500
Accrued non-recurring litigation charge 0 396,000
Income taxes payable 225,564 0
Other 355,128 337,080
---------- ----------
$1,065,043 $1,936,214
========== ==========
</TABLE>
-35-
<PAGE> 36
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Notes payable at June 30, 1996 and June 29, 1995 represent notes
issued in connection with the acquisition of the Company on December 10,
1993 (See Note 1). Notes payable are described as follows:
<TABLE>
<S> <C>
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, commencing July 15, 1994. $40,000,000
===========
</TABLE>
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. (See Note 12
Dividends - Requirements and Restrictions).
8. PROFIT-SHARING PLAN
The Company provides a defined contribution profit-sharing plan for all
employees meeting certain requirements. Contributions to the plan are at
the discretion of management. During the fifty-two week period ended June
30, 1996, no amounts were expensed for profit-sharing plan contributions;
however, $100,000 which was expensed in the fiscal year ending June 29,
1995 and accrued as of June 29, 1995 was contributed to the plan.
-36-
<PAGE> 37
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments on both
Company-operated and franchised store locations. These leases contain
various provisions for contingent rental payments based on sales volume,
and escalating rental payments. The effect of the escalating payments is
included in the amounts of minimum future rental payments. The minimum
future rental payments are expensed on a straight-line basis over the life
of the related lease. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
FISCAL PERIOD SUBLEASES TO
ENDING JUNE LEASES FRANCHISES NET
----------- ------ ---------- ---
<S> <C> <C> <C>
1997 $ 9,848,200 $ 6,330,077 $ 3,518,123
1998 9,293,400 5,980,337 3,313,063
1999 8,512,500 5,445,005 3,067,495
2000 7,469,000 4,792,183 2,676,817
2001 6,226,900 4,061,342 2,165,558
Thereafter 14,498,300 9,028,843 5,469,457
----------- ------------ -----------
$55,848,300 $35,637,787 $20,210,513
=========== =========== ===========
</TABLE>
For the fifty-two week periods ended June 30, 1996 and June 29, 1995,
gross rent expense (including mall pass-through charges) was approximately
$13,332,000 and $12,714,000, while sublease income (including mall
pass-through charges) was approximately $9,628,000 and $8,722,000,
respectively.
The Company leases various office equipment under capital lease agreements
expiring on various dates through 2000. The Company's aggregate future
obligation under these agreements is $103,882.
The Company is committed to purchases of certain raw materials from
various suppliers over the next year at fixed prices. At June 30, 1996,
these purchase commitments totaled approximately $1,600,000.
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.
10. NON-RECURRING LITIGATION CHARGE
On April 27, 1995 a judgment of $417,985 was entered against the Company
in the Haagen-Burbank lawsuit. In June 1993, the Company had previously
won a judgment for breach of written contract related to a lease entered
into with a developer, Haagen-Burbank. On appeal, the Court of Appeal of
the State of California Second Appellate District overturned the jury's
verdict and directed the trial court to determine the amount of attorney
fees and costs due to Haagen-Burbank as the prevailing party in the
litigation. Haagen-Burbank had submitted to the court a request for legal
fees totaling $439,000; however, the trial court entered a judgment of
$417,985 on April 27, 1995. On September 15, 1995 the Company paid
$395,966 to Haagen-Burbank as settlement of the judgment against the
Company.
-37-
<PAGE> 38
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
11. INCOME TAXES
Effective on the date of the acquisition of the Company by Cookies USA,
the Company converted to "C" corporation status and is therefore subject
to federal and state income taxes commencing December 10, 1993. Prior to
December 10, 1993, the Company was taxed as an "S" corporation resulting
in a pass-through of the Company's taxable income and related federal and
state income tax liabilities to the selling stockholders. The Company and
Cookies USA will file consolidated federal and state income tax returns
for the fiscal period ending June 30, 1996, and the Company will reimburse
Cookies USA for its share of the consolidated federal and state income tax
liabilities under a tax sharing agreement. In accordance with the terms of
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, and the Company's ability to utilize loss
carrybacks and loss carryforwards could be limited. The agreement states
that the Company may only use any of its carryforward or carryback amounts
if not used by Cookies USA. The federal and state income tax provision
recorded in the accompanying financial statements represents management's
estimate of the Company's federal and state income tax liabilities
calculated at combined federal and state statutory income tax rates based
upon the Company's estimated taxable income for the fifty-two weeks ending
June 30, 1996.
The following information has been determined based upon the provision of
Statement of Financial Accounting Standards No. 109 at June 30, 1996 and
June 29, 1995.
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
-------- --------
<S> <C> <C>
Income tax provision:
Current: federal $263,557 $ -
state 31,007 -
-------- --------
294,564 -
======== ========
Deferred: federal $108,380 $247,911
state 12,751 29,166
-------- --------
121,131 277,077
-------- --------
$415,695 $277,077
======== ========
</TABLE>
The differences between income taxes at the statutory federal and state
income tax rates and the income tax expense reported in the statement of
income for the fifty-two weeks ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
-------- --------
<S> <C> <C>
Federal statutory tax rate 34.0% (34.0)%
State income taxes, net of federal benefit 4.0% (4.0)%
Non-deductible amortization of goodwill 187.5% 81.3%
Other 10.3% 24.3%
----- -----
235.8% 67.6%
===== =====
</TABLE>
-38-
<PAGE> 39
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 29,
1996 1995
---------- ----------
<S> <C> <C>
Current:
NOL carryforward $ 0 $ 109,661
Other 81,360 147,126
---------- ----------
$ 81,360 $ 256,787
========== ==========
Non-current:
Depreciation $ 896,800 $ 944,427
Other 522,343 420,609
---------- ----------
$1,419,143 $1,365,036
========== ==========
</TABLE>
12. DIVIDENDS - REQUIREMENTS AND RESTRICTIONS
In connection with the acquisition of the Company, Cookies USA issued $10
million of Subordinated Notes, $2.5 million of Junior Class A Preferred
Stock, $750,000 of Junior Class B Preferred Stock and $250,000 of common
stock in order to raise the $13.5 million paid to the Company in exchange
for 210 newly issued shares of stock. Additionally, Cookies USA issued
$10.5 million of Senior Preferred Stock to the selling stockholders of the
Company in exchange for a portion of the stock of the Company ($3.5
million) and the assets of other entities owned by the selling
stockholders ($7.0 million). As the Company is a 100% subsidiary of
Cookies USA and is the sole operating unit of the consolidated entity, the
Company is the sole source of any cash to be paid by Cookies USA as
interest, principal payments or dividends on such securities. Such
payments will be made primarily via dividends to Cookies USA.
The $10 million of Subordinated Notes issued by Cookies USA carry an
interest rate of 12.5% and require semi-annual interest payments on April
30 and October 31, commencing April 30, 1994. Principal payments on the
Subordinated Notes are due as follows: $2.5 million due October 31, 2001;
$2.5 million due October 31, 2002; and $5.0 million due October 31, 2003.
The 10,500 shares of $1.00 par Senior Preferred shares issued by Cookies
USA in conjunction with the acquisition are 6% cumulative convertible
shares. Accumulated dividends on such shares have priority over any
dividends of "Junior Securities" (Junior Class A and Class B Preferred and
Common Stock), but are subordinate to any debt payments of Cookies USA or
the Company. Such preferred shares may be redeemed at any time for $1,000
per share plus accrued but unpaid dividends at the option of Cookies USA;
however, all such shares not previously converted or redeemed shall be
redeemed by payment in cash of $1,000 per share plus accrued but unpaid
dividends on November 30, 2003.
The 2,500 shares of $1.00 par Junior Class A Preferred Stock and the 750
shares of $1.00 par Junior Class B Preferred Stock issued by Cookies USA
in conjunction with the acquisition are entitled to receive, when legally
available and when declared, dividends at the rate of $50 per share per
annum. Such shares may be redeemed by Cookies USA at any time for $1,000
per share plus all dividends accrued and unpaid; however, all such shares
not previously redeemed shall be redeemed by payment of cash of $1,000 per
share plus all accrued and unpaid dividends on the first business day of
January 2004.
-39-
<PAGE> 40
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
The Company's debt covenants related to the Notes limit the ability of the
Company to pay dividends. Under the debt covenants, as outlined in the
Indenture pursuant to which the Notes were issued, the Company may pay
dividends if:
(a) no Default or Event of Default has occurred and is continuing
or would occur as a consequence thereof,
(b) immediately after the dividend and after giving effect thereto
on a pro forma basis, the Company could incur at least $1.00 of
additional Indebtedness under the provisions of the debt covenants,
and
(c) such dividend, together with the aggregate of all other
"Restricted Payments" (as defined in the Indenture) made by the
Company and its subsidiaries after the date of the Indenture, is less
than the sum of (x) 50% of the Adjusted Consolidated Net Income of
the Company for the period (taken as one accounting period) from the
beginning of the first quarter commencing immediately after the date
of the Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Adjusted
Consolidated Net Income for such period is a deficit, 100% of such
deficit), plus (y) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale of Equity Interests of the
Company (other than Equity Interests sold to a subsidiary of the
Company and other than Disqualified Stock) after the date of the
Indenture and on or prior to the time of such Restricted Payment,
plus (z) 100% of the net cash proceeds received by the Company from
the issuance or sale, other than to a subsidiary of the Company, of
any convertible or exchangeable debt security of the Company that has
been converted or exchanged into equity interests of the Company
pursuant to the terms thereof (other than Disqualified Stock) after
the date of the Indenture and on or prior to the time of such
dividend. The foregoing limitations on Restricted Payments do not
prohibit, among other items, payment to Cookies USA under the Tax
Sharing Agreement, payments to Cookies USA to permit payments of
current interest then due on the Subordinated Debt or for any other
purpose provided that certain fixed charge coverage ratio tests have
been achieved, or making other Restricted Payments in the aggregate
amount not to exceed $1.5 million.
13. COMPANY AND FRANCHISED STORES
As of June 30, 1996, there were 115 Company-operated outlets and 253
franchised outlets in operation, while there were 120 Company-operated
outlets and 251 franchised outlets in operation as of June 29, 1995.
During the fifty-two week period ended June 30, 1996, the Company earned
initial license fees of $275,000 from the sale of 11 new in-line stores to
franchisees. Additionally, the Company earned $21,000 from license
transfer and upgrade fees.
During the fifty-two week period ended June 29, 1995, the Company earned
initial franchise fees of $275,000 from franchisees opening 11 new in-line
stores plus $5,000 for a new satellite location. Additionally, the Company
earned $57,000 from license transfer and upgrade fees.
-40-
<PAGE> 41
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
14. RELATED PARTY TRANSACTIONS
A franchisee who owns 11 franchise outlets is related to one of the
Company's directors. During the fifty-two week period ended June 30, 1996,
the Company sold a franchise license for $25,000 to this related party.
Additionally, during the fifty-two week periods ended June 30, 1996 and
June 29, 1995, the Company had batter sales of approximately $464,000 and
$537,000 and equipment sales of approximately $33,000 and $25,000,
respectively, to this related party. The Company also received royalty
revenues of approximately $202,000 and $222,000 for the fifty-two week
periods ended June 30, 1996 and June 29, 1995, respectively. As of June
30, 1996 and June 29, 1995, this franchisee owed the Company $91,000 and
$55,000, respectively.
-41-
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Great American Cookie Company, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholder's equity, and of cash flows present
fairly, in all material respects, the financial position of Great American
Cookie Company, Inc. at June 30, 1994, and the results of its operations and
its cash flows for the twenty-nine week period then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, Georgia
August 23, 1994
<PAGE> 43
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1994
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,184,712
Accounts receivable - trade, net of allowance for doubtful accounts of $21,646 1,066,773
Inventory (Notes 1 and 2) 1,442,584
Prepaid expenses (Note 3) 1,006,065
Current deferred tax benefit (Note 10) 463,700
Current portion of notes receivable (Note 4) 34,056
Other receivables 26,601
-----------
Total current assets 10,224,491
-----------
Property and equipment (Note 1)
Land 240,000
Building 760,795
Building and leasehold improvements 6,476,786
Furniture, fixtures and equipment 1,465,544
Vehicles 12,779
-----------
8,955,904
Accumulated depreciation (750,078)
-----------
8,205,826
Construction in progress, net of construction deposits received from franchisees (101,760)
-----------
8,104,066
-----------
Other assets
Deposits 64,209
Notes receivable, net of current portion (Notes 1 and 4) 34,219
Deferred tax benefit (Notes 1 and 10) 1,179,200
Deferred loan costs, net of accumulated amortization of $316,600 (Note 1) 3,723,061
Accrued straight-line minimum rent receivable for subleases to franchisees (Note 1) 976,724
-----------
5,977,413
-----------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $487,400 (Note 1) 34,602,083
-----------
$58,908,053
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 813,161
Sales taxes payable 142,804
Accrued interest payable 2,421,451
Accrued expenses (Note 5) 1,600,173
Deposits 668,647
Dividends payable 265,400
-----------
Total current liabilities 5,911,636
-----------
Accrued straight-line minimum rent payable 1,767,588
-----------
Long-term debt (Note 7) 40,000,000
-----------
Commitments and contingencies (Note 8)
Stockholder's equity (Note 11)
Common stock, no par value, 2,000 shares authorized; 210 shares issued
and outstanding 13,500,000
Additional paid-in capital 336,063
Accumulated deficit (2,607,234)
-----------
11,228,829
-----------
$58,908,053
===========
</TABLE>
The accompanying notes are in integral part of these financial statements.
-43-
<PAGE> 44
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE TWENTY-NINE
WEEK PERIOD ENDED
JUNE 30, 1994
-------------------
<S> <C>
Revenue:
Cookie and beverage sales $ 14,416,628
Batter sales to franchisees 4,707,527
Franchise royalties 2,003,377
Franchise sales - existing and new stores 869,099
Sales discounts - net (61,369)
------------
Total revenue 21,935,262
------------
Operating expenses:
Cost of sales 10,886,919
Retail store occupancy 4,132,621
Selling, general and administrative expenses 4,920,029
------------
Total operating expenses 19,939,569
------------
Other (income) expenses, net
Interest (income) (134,191)
Interest expense 2,491,046
Amortization of deferred loan costs 316,600
Employment related acquisition costs (Note 6) 1,936,000
------------
Total other (income) expenses, net 4,609,455
------------
Income (loss) before taxes (2,613,762)
State and federal income tax benefit (Note 10) 837,900
------------
Net loss $ (1,775,862)
============
</TABLE>
The accompanying notes are in integral part of these financial statements.
-44-
<PAGE> 45
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE TWENTY-NINE WEEK PERIOD ENDED JUNE 30, 1994
----------------------------------------------------
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
----------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Opening balance
(December 10, 1993) $13,500,000 $336,063 $ - $13,836,063
Current period net loss - - (1,775,862) (1,775,862)
Dividends - - (831,372) (831,372)
----------- -------- ------------ -----------
$13,500,000 $336,063 $(2,607,234) $11,228,829
=========== ======== ============ ===========
</TABLE>
The accompanying notes are in integral part of these financial statements.
-45-
<PAGE> 46
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE TWENTY-NINE
WEEK PERIOD
ENDED
JUNE 30, 1994
-------------------
<S> <C>
Cash flows from operating activities
Net (loss) $ (1,775,862)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 750,078
Amortization of cost in excess of fair value of net assets acquired (goodwill) 487,400
Amortization of deferred loan costs 316,600
Net (gain) on sales and disposals of property and equipment (421,281)
Net increase in accrued straight-line minimum rent receivable and payable 120,690
Other noncash (credits) (3,170)
Changes in assets and liabilities net of effects from contribution of net
assets of TOGA Leasing, Sunbelt Investments, and Georgia Cookies, Inc.
by Cookies USA, Inc.:
Increase in accounts receivable (287,471)
Increase in inventory (36,537)
Increase in current deferred tax benefit (463,700)
Increase in prepaid expenses (905,180)
Increase in other receivables (26,595)
Increase in deferred tax benefit (379,200)
Increase in other assets (2,867)
Decrease in accounts payable (138,605)
Increase in payroll and sales taxes payable 77,711
Increase in accrued interest payable 2,404,767
Increase in deposits 159,244
Decrease in income taxes payable (16,134)
Increase in accrued expenses 560,866
------------
Net cash provided by operating activities 420,754
------------
Cash flows from investing activities
Acquisitions of property and equipment, including net (increase) decrease
in construction in progress, net of construction deposits received from franchisees (1,512,497)
Proceeds from sales and disposals of property and equipment 1,213,562
Net cash received from contribution of net assets acquired by Cookies USA, Inc. from:
TOGA Leasing 8,471
Sunbelt Investments 19,623
Georgia Cookies, Inc. 202,891
Proceeds from collection of notes receivable 239,396
------------
Net cash provided by investing activities 171,446
------------
Cash flows from financing activities
Issuance of common stock to Cookies USA, Inc. 13,500,000
Issuance of 10.875% senior secured notes payable due 2001, series B 40,000,000
Repurchase of common stock (37,923,316)
Payment of acquisition related expenses (367,150)
Payment of deferred loan costs (3,946,764)
Principal repayments under long-term debt (6,560,000)
Dividends paid (565,972)
------------
Net cash provided by financing activities 4,136,798
------------
Net increase in cash and cash equivalents during period 4,728,998
Cash and cash equivalents, beginning of period 1,455,714
------------
Cash and cash equivalents, end of period $ 6,184,712
============
</TABLE>
-46-
<PAGE> 47
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE TWENTY-NINE
WEEK PERIOD
ENDED
JUNE 30, 1994
-------------------
<S> <C>
Supplemental disclosure of cash flow information:
- --------------------------------------------------------------------
Cash paid during the fifty-two weeks ended June 30, 1994 for:
Interest $ 79,716
============
State and federal income taxes $ 27,718
============
</TABLE>
Supplemental schedule of noncash financing and investing activities:
- --------------------------------------------------------------------
As more fully described in Note 1 to the financial statements,
on December 10, 1993 Cookies USA, Inc. acquired 100% of the outstanding
common stock of The Original Great American Chocolate Chip Cookie
Company, Inc. and certain other assets held by the selling stockholders
of the Company, through a series of related transactions resulting in
the assumption of liabilities as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 49,269,362
Cash paid (37,923,316)
Fair value of assets contributed by Cookies USA, Inc. (10,500,000)
------------
Liabilities assumed $ 846,046
============
</TABLE>
As more fully described in Note 1 to the financial statements,
in connection with the acquisition of the Company by Cookies USA, Inc.,
assets with a net book value of $9,272,720 were distributed to the
selling stockholders as follows:
<TABLE>
<S> <C>
Prepaids and other current assets $ 20,000
Property and equipment, net 124,398
Receivables from stockholders 9,128,322
------------
$ 9,272,720
============
</TABLE>
During the twenty-nine weeks ended June 30, 1994, the Company
exchanged accounts receivable from unrelated franchisees with a face
value of $20,952 for notes receivable with a face value of $20,952 (see
Note 4).
During the twenty-nine weeks ended June 30, 1994, the Company
exchanged an account receivable from an unrelated franchisee with a
face value of $48,164 for fixtures and equipment and leasehold
improvements representing a retail cookie store previously licensed by
the franchisee.
The accompanying notes are in integral part of these financial statements.
-47-
<PAGE> 48
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Great American Cookie Company, Inc. ("the Company") is in the business of
franchising cookie stores and manufacturing cookie batter which is sold to
Company-operated and franchised retail stores.
On December 10, 1993, the Company was acquired by Cookies USA, Inc.
("Cookies USA") in several transactions as described below. Immediately
following the acquisition, the Company changed its name from The Original
Great American Chocolate Chip Cookie Company, Inc. to Great American
Cookie Company, Inc.
Summary of Acquisition Related Transactions:
(1) Cookies USA acquired 210 newly-issued shares of the Company for
$13,500,000.
(2) Cookies USA acquired 14.6 shares of the Company for 3,500
shares of preferred stock of Cookies USA valued at $3,500,000 from
the selling stockholders of the Company and then contributed those
shares to the treasury of the Company for retirement.
(3) The Company acquired 185.4 shares of the Company from the
selling stockholders of the Company for $37,923,316 and then retired
those shares.
(4) Cookies USA acquired all of the assets of Georgia Cookies,
Inc., TOGA Leasing, and Sunbelt Investments, a corporation and
general partnerships owned exclusively by the selling stockholders of
the Company, in exchange for 7,000 shares of preferred stock of
Cookies USA valued at $7,000,000 and then contributed all of the
assets to the Company.
(5) The selling stockholders of the Company acquired a 13% interest
in Cookies USA for $32,608.
(6) The Company distributed cash and assets with a book value of
$9,272,720 to the selling stockholders of the Company in conjunction
with the above transactions.
The acquisition described above was recorded in the accounts of the
Company using the purchase method of accounting with "push-down"
accounting. The application of purchase accounting principles requires a
new basis of accounting to be established for the Company at the date of
the acquisition, and therefore, prior historical data is deemed not to be
comparable.
The significant effects of the transaction on the Company's financial
statements are summarized below:
<TABLE>
<S> <C>
Value in excess of historical cost assigned to land and buildings $ 880,756
Value in excess of historical cost assigned to inventory 115,000
Value in excess of historical cost assigned to goodwill 35,089,483
Stockholder's equity increase due to stock sold 13,500,000
</TABLE>
-48-
<PAGE> 49
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
Due to the 22% interest retained by the selling stockholders of the
Company via their interests in Cookies USA, the Company did not recognize
an increase in the carrying value of 22% of the underlying assets of the
Company and the assets of Georgia Cookies, Inc., TOGA Leasing and Sunbelt
Investments. In regard to the allocation of the purchase price, the only
information that the Company is awaiting is an analysis of leases. A
summary of the acquisition cost and allocation is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Assets acquired recorded at predecessor basis $ 576
Assets acquired recorded at fair value 37,770
Acquisition costs 359
---------
38,705
Less historical book value of net assets acquired (2,620)
---------
Excess to be allocated $ 36,085
=========
Allocated to:
Land and building $ 881
Inventory 115
Goodwill 35,089
---------
$ 36,085
=========
</TABLE>
CASH EQUIVALENTS
The Company considers all highly liquid, short-term investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents at June 30, 1994 consist of short-term commercial paper. These
investments are stated at cost, which approximates market.
ACCOUNTING PERIOD
The Company's fiscal year ends on the last Thursday in the month of June.
STORE OPENING AND CLOSING COSTS
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed in the year incurred. When a store is closed,
the unamortized investment in leasehold improvements is recorded as a loss
on store closing.
INVENTORIES
Inventories of cookie and brownie products, beverage products, paper and
supplies and smallwares are stated at the lower-of-cost or market with
cost determined on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed, and the related accumulated
depreciation, are eliminated from the accounts, and any resulting gain or
loss is recognized in the income statement.
-49-
<PAGE> 50
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
Depreciation is provided using both straight-line and accelerated methods
over the estimated useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Building 20 years
Furniture, fixtures and equipment 5-7 years
Building and leasehold improvements lesser of 10 years or the life of the related lease
</TABLE>
REVENUE RECOGNITION
Franchise license fee revenues are recognized at the time that all Company
obligations regarding the franchise have been met. Fees received pursuant
to development agreements which grant the right to develop franchised
units in future periods in specific geographic areas are deferred and
recognized as income on a pro rata basis as the Company's obligations
regarding the franchised units subject to the development agreements are
met. Revenues related to cookies and beverages are recognized at the point
of sale. Revenues from the sale of batter are recognized at the time of
shipment. Franchise royalties, which are based on a percentage of
franchised store sales, are recognized as earned.
DEFERRED LOAN COSTS
Debt issuance costs of approximately $4.0 million were incurred in
connection with the issuance of the 10.875% senior secured notes payable
due 2001 (Note 7). Deferred loan costs are being amortized over the life
of the related notes (85 months), with annual charges to income of
approximately $564,300.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Cost in excess of fair value of net assets acquired (goodwill) is being
amortized over a forty year period, with annual charges to income of
approximately $877,200.
The carrying value of goodwill is reviewed for indications of possible
impairment. The review is based on comparing the carrying amount to the
undiscounted estimated cash flows over the remaining amortization period.
No impairment is indicated as of June 30, 1994.
LEASES
The Company has various operating lease commitments on both
Company-operated and franchised store locations and equipment. Operating
leases with escalating payment terms, including leases underlying
subleases with franchisees, are on a straight-line basis over the life of
the related lease.
INCOME TAXES
Concurrent with the Acquisition and its termination of the S Corporation
status (see Note 10), the Company adopted SFAS 109, "Accounting for Income
Taxes". In accordance with the provisions of SFAS 109, deferred income
taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws.
EARNINGS PER SHARE
Earnings per share is not presented, as the Company is wholly-owned.
-50-
<PAGE> 51
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
2. INVENTORY
The major components of inventory are as follows at June 30, 1994:
<TABLE>
<S> <C>
Raw ingredients $ 417,450
Batter, including retail stores 414,459
Beverage syrup 67,222
Paper goods and packaging supplies 146,915
Purchased icing and decorative toppings held for resale 70,743
Equipment held for resale 87,461
Marketing and miscellaneous supplies held for resale 238,334
----------
$1,442,584
==========
</TABLE>
3. PREPAID EXPENSES
Prepaid expenses consist of the following at June 30, 1994:
<TABLE>
<S> <C>
Rent $ 963,427
Other 42,638
----------
$1,006,065
==========
</TABLE>
-51-
<PAGE> 52
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
4. NOTES RECEIVABLE
Notes receivable consist of the following at June 30, 1994:
<TABLE>
<S> <C>
B&J Cookie Company - Note dated June 4, 1993 for $57,219; with
monthly principal payments of $1,000 plus interest at 9%. Due May
1998. Secured by assets of cookie system facility operated by B&J
Cookie Company. $46,219
Ron and Sally Molly - Unsecured note dated June 1, 1994 for $9,399.
Principal and interest at the prime rate is due on June 1, 1995. 9,399
LGT, Inc. - Unsecured note dated June 1, 1994 for $6,484; with
monthly principal payments of $540 plus interest at 8.75%. Due June 1,
1995. 6,484
It's All In the Chips, Inc. - Unsecured note dated June 10, 1994 for
$5,069; with monthly principal payments of $425 plus interest at
8.75%. Due June 15, 1995. 5,069
The Cookie Connection, Inc. - Note dated October 14, 1990 for
$18,331; with monthly payments of principal and interest of $500;
remaining principal and interest due October 1992; interest at prime
plus 2% (but not less than 9.75%). Matured October 1992. Note paid in
full on July 7, 1994. 1,104
-------
68,275
Less current portion 34,056
-------
Notes receivable, net of current portion $34,219
=======
</TABLE>
The aggregate maturities of the notes receivable are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
ENDING JUNE
--------------------
<S> <C>
1995 $34,056
1996 12,000
1997 12,000
1998 10,219
-------
$68,275
=======
</TABLE>
-52-
<PAGE> 53
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
5. ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 1994:
<TABLE>
<S> <C>
Employee compensation including payroll taxes $ 463,543
Employment related acquisition costs 300,000
Profit-sharing contribution 100,000
Sales and use taxes including related interest 193,810
Construction expenses 136,481
Professional fees 102,024
Other 304,315
----------
$1,600,173
==========
</TABLE>
6. PROFIT-SHARING PLAN AND EMPLOYMENT RELATED ACQUISITION COSTS
The Company provides a defined contribution profit-sharing plan for all
employees meeting certain requirements. Contributions to the plan are at
the discretion of management. There were no contributions to the plan
during the twenty-nine week period ended June 30, 1994; however, $100,000
has been accrued as of June 30, 1994 and expensed in the accompanying
financial statements for the twenty-nine week period ended June 30, 1994.
In connection with the acquisition of the Company by Cookies USA, the
Company entered into employment agreements with the selling stockholders
of the Company. The employment agreements have a term of five years and
may be terminated by either party on the anniversary date. As a provision
of the employment agreements, the Company agreed to distribute acquisition
related bonuses totaling $1,936,000 to the selling stockholders of the
Company and other officers and employees of the Company, ad directed by
the selling stockholders of the Company. The acquisition related bonuses
have been expensed in the accompanying financial statements for the
twenty-nine week period ended June 30, 1994.
7. LONG-TERM DEBT
Notes payable at June 30, 1994 represent notes issued in connection with
the acquisition of the Company on December 10, 1993 (See Note 1). Notes
payable are described as follows:
<TABLE>
<S> <C>
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, commencing July 15, 1994.
The notes are secured by certain tangible and intangible assets,
including but not limited to, the equipment constituting the
Company's batter production facility, the capital stock of all
current and future subsidiaries of the Company, intellectual
property rights and other intangible assets of the Company. $40,000,000
===========
</TABLE>
-53-
<PAGE> 54
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
During the twenty-nine week period ended June 30, 1994, the Company's
noteholders exchanged unregistered Series A Notes with a face value of
$40,000,000 for registered Series B Notes with identical terms and a face
value of $40,000,000 (the "Notes"). The Company received no cash proceeds
from the exchange.
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.
8. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments on both
Company-operated and franchised store locations and equipment. These
leases contain various provisions for contingent rental payments based on
sales volume, and escalating rental payments. The effect of the escalating
payments is included in the amounts of minimum future rental payments. The
minimum future rental payments are expensed on a straight-line basis over
the life of the related lease. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
FISCAL PERIOD SUBLEASES TO
ENDING JUNE LEASES FRANCHISEES NET
----------- ------ ----------- ---
<S> <C> <C> <C>
1995 $ 8,722,900 $ 5,185,800 $ 3,537,100
1996 8,291,200 4,825,700 3,465,500
1997 7,972,200 4,622,700 3,349,500
1998 7,291,300 4,268,200 3,023,100
1999 6,282,600 3,740,400 2,542,200
Thereafter 14,222,000 8,430,100 5,791,900
----------- ----------- -----------
$52,782,200 $31,072,900 $21,709,300
=========== =========== ===========
</TABLE>
For the twenty-nine week period ended June 30, 1994, gross rent expense
(including mall pass-through charges) was approximately $6,043,900 and
sublease income (including mall pass-through charges) was approximately
$3,683,200.
The Company is committed to purchases of certain raw materials from
various suppliers over the next year at fixed prices. At June 30, 1994
these purchase commitments totaled approximately $830,000.
The Company is a defendant in various legal proceedings with former
franchisees and landlords of the Company, alleging breaches of contract
and certain other claims. Although the ultimate disposition of these
proceedings are not presently determinable, management does not believe
that an adverse determination in any of these proceedings will have an
adverse material effect upon the financial condition of the Company or
results of operations.
-54-
<PAGE> 55
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
9. COMPANY AND FRANCHISED STORES
As of June 30, 1994, there were 122 Company-operated outlets in operation,
with revenues of approximately $14,416,600 and costs of approximately
$12,317,600 for the twenty-nine week period then ended.
As of June 30, 1994, there were 231 franchised outlets in operation.
During the twenty-nine week period ended June 30, 1994, the Company
received initial license fees for 6 new in-line store franchises and 5 new
satellite location franchises, and earned initial franchise fees of
$85,000. Additionally, the Company earned $17,000 from license transfer
and upgrade fees.
10. INCOME TAXES
Effective on the date of the acquisition of the Company by Cookies USA,
the Company converted to "C" corporation status and is therefore subject
to federal and state income taxes commencing December 10, 1993. Prior to
December 10, 1993, the Company was taxed as an "S" corporation resulting
in a pass-through of the Company's taxable income and related federal and
state income tax liabilities to the selling stockholders. The Company and
Cookies USA will file consolidated federal and state income tax returns
for the fiscal period ending June 30, 1994, and the Company will reimburse
Cookies USA for its share of the consolidated federal and state income tax
liabilities under a tax sharing agreement. In accordance with the terms of
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, and the Company's ability to utilize loss
carrybacks and loss carryforwards could be limited. The agreement states
that the Company may only use any of its carryforward or carryback amounts
if not used by Cookies USA. The federal and state income tax provision
(benefit) recorded in the accompanying financial statements represents
management's estimate of the Company's federal and state income tax
liabilities calculated at combined federal and state statutory income tax
rates based upon the Company's estimated taxable income for the period
December 10, 1993 through June 30, 1994.
The following information has been determined based upon the provision of
Statement of Financial Accounting Standards No. 109 at June 30, 1994.
<TABLE>
<S> <C>
Income tax provision (benefit):
Deferred (federal and state) $(837,900)
=========
</TABLE>
The differences between income taxes at the statutory federal and
state income tax rates and the income tax benefit reported in the
statement of income for the twenty-nine weeks ended June 30, 1994
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal statutory tax rate (benefit) (34.0)%
State income taxes, net of federal benefit (5.7)
Non-deductible amortization of goodwill and other items 7.6
---------
(32.1)%
=========
</TABLE>
-55-
<PAGE> 56
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets are comprised of the following at June 30, 1994:
<TABLE>
<S> <C>
Current:
NOL carryforward $ 463,700
==========
Non-current:
Depreciation $ 970,000
Other 209,200
----------
$1,179,200
==========
</TABLE>
11. DIVIDENDS - REQUIREMENTS AND RESTRICTIONS
In connection with the acquisition of the Company, Cookies USA issued $10
million of Subordinated Notes, $2.5 million of Junior Class A Preferred
Stock $750,000 of Junior Class B Preferred Stock and $250,000 of common
stock in order to raise the $13.5 million paid to the Company in exchange
for 210 newly issued shares of stock. Additionally, Cookies USA issued
$10.5 million of Senior Preferred Stock to the selling stockholders of the
Company in exchange for a portion of the stock of the Company ($3.5
million) and the assets of other entities owned by the selling
stockholders ($7.0 million). As the Company is a 100% subsidiary of
Cookies USA and is the sole operating unit of the consolidated entity, the
Company is the sole source of any cash to be paid by Cookies USA as
interest, principal payments or dividends on such securities. Such
payments will be made primarily via dividends to Cookies USA.
The $10 million of Subordinated Notes issued by Cookies USA carry an
interest rate of 12.5% and require semi-annual interest payments on April
30 and October 31, commencing April 30, 1994. Principal payments on the
Subordinated Notes are due as follows: $2.5 million due October 31, 2001;
$2.5 million due October 31, 2002; and $5.0 million due October 31, 2003.
The 10,500 shares of $1.00 par Senior Preferred shares issued by Cookies
USA in conjunction with the acquisition are 6% cumulative convertible
shares. Accumulated dividends on such shares have priority over any
dividends of "Junior Securities" (Junior Class A and Class B Preferred and
Common Stock), but are subordinate to any debt payments of Cookies USA or
the Company. Such preferred shares may be redeemed at any time for $1,000
per share plus accrued but unpaid dividends at the option of Cookies USA;
however, all such shares not previously converted or redeemed shall be
redeemed by payment in cash of $1,000 per share plus accrued but unpaid
dividends on November 30, 2003.
The 2,500 shares of $1.00 par Junior Class A Preferred Stock and the 750
shares of $1.00 par Junior Class B Preferred Stock issued by Cookies USA
in conjunction with the acquisition are entitled to receive, when legally
available and when declared, dividends at the rate of $50 per share per
annum. Such shares may be redeemed by Cookies USA at any time for $1,000
per share plus all dividends accrued and unpaid; however, all such shares
not previously redeemed shall be redeemed by payment of cash of $1,000 per
share plus all accrued and unpaid dividends on the first business day of
January 2004.
The Company's debt covenants related to the Notes limit the ability of the
Company to pay dividends. Under the debt covenants, as outlined in the
debt "Indenture," the Company may pay dividends if:
(a) no Default or Event of Default has occurred and is continuing
or would occur as a consequence thereof,
-56-
<PAGE> 57
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
(b) immediately after the dividend and after giving effect thereto
on a pro forma basis, the Company could incur at least $1.00 of
additional Indebtedness under the provisions of the debt covenants,
and
(c) such dividend, together with the aggregate of all other
"Restricted Payments" (as defined in the Indenture) made by the
Company and its subsidiaries after the date of the Indenture, is less
than the sum of (x) 50% of the Adjusted Consolidated Net Income of
the Company for the period (taken as one accounting period) from the
beginning of the first quarter commencing immediately after the date
of the Indenture to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Adjusted
Consolidated Net Income for such period is a deficit, 100% of such
deficit), plus (y) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale of Equity Interests of the
Company (other than Equity Interests sold to a subsidiary of the
Company and other than Disqualified Stock) after the date of the
Indenture and on or prior to the time of such Restricted Payment,
plus (z) 100% of the net cash proceeds received by the Company from
the issuance or sale, other than to a subsidiary of the Company, of
any convertible or exchangeable debt security of the Company that has
been converted or exchanged into equity interests of the Company
pursuant to the terms thereof (other than Disqualified Stock) after
the date of the Indenture and on or prior to the time of such
dividend.
12. PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
On December 10, 1993, The Original Great American Chocolate Chip Cookie
Company, Inc. (the "Company") was acquired by Cookies USA, Inc. ("Cookies
USA") in several transactions as described in Note 1. The following
unaudited pro forma results of operations have been prepared as if the
Acquisition had occurred at the beginning of the earliest period presented
(at June 26, 1992). The pro forma results of operations are not
necessarily indicative of the actual results that would have occurred had
the transactions been consummated at June 26, 1992, or of future
operations.
-57-
<PAGE> 58
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FIFTY-THREE FISCAL WEEK PERIOD ENDED JUNE 30, 1994 (IN 000'S)
<TABLE>
<CAPTION>
THE ORIGINAL GREAT AMERICAN
GREAT AMERICAN COOKIE COMPANY, GEORGIA
CHOCOLATE CHIP INC. COOKIES, INC.
COOKIE COMPANY, INC. DECEMBER 10, JULY 2, PRO FORMA
JUNE 25, 1993 1993 TO 1993 TO ELIMINATIONS
TO JUNE 30, DECEMBER 9, AND PRO FORMA
DECEMBER 9, 1993 1994 1993 ADJUSTMENTS COMBINED
---------------- ---------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 16,070 $ 21,935 $ 2,342 $ (680) (q) $ 39,667
Cost of Sales 7,537 10,887 1,243 (452) (q)
(13) (a)
(42) (b)
(27) (e)
(165) (g) 18,968
Operating expenses 6,363 9,053 780 (185) (q)
(933) (d)
(22) (e)
(13) (a)
(33) (b)
(113) (c)
35 (h)
2 (i)
395 (o) 15,329
--------- --------- -------- -------- ---------
Operating Income 2,170 1,995 319 886 5,370
Other (expense)
income, net (354) (4,609) 343 (j)
50 (k)
(2,030) (l)
(256) (m)
1,936 (n) (4,920)
--------- --------- -------- -------- ---------
Income before taxes 1,816 (2,614) 319 929 450
Provision (benefit) for
income taxes 28 (838) 1,383 (p) 573
--------- --------- -------- -------- ---------
Net income $ 1,788 $ (1,776) $ 319 $ (454) $ (123)
========= ========= ======== ======== =========
</TABLE>
-58-
<PAGE> 59
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FIFTY-TWO FISCAL WEEK PERIOD ENDED JUNE 30, 1994(1) (IN 000'S)
<TABLE>
<CAPTION>
THE ORIGINAL PRO FORMA
GREAT AMERICAN ELIMINATIONS
CHOCOLATE CHIP GEORGIA AND PRO FORMA
COOKIE COMPANY, INC. COOKIES, INC. ADJUSTMENTS COMBINED
-------------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Total Revenue $ 35,202 $ 5,092 $ (1,347) (q) $ 38,947
Cost of Sales 16,758 2,658 (917) (q)
(45) (a)
(110) (b)
(29) (e)
12 (f) 18,327
Operating expenses 13,764 1,654 (410) (q)
(1,277) (d)
(21) (e)
(61) (a)
(250) (c)
(51) (b)
6 (f)
877 (o) 14,231
---------- -------- --------- ---------
Operating Income 4,680 780 929 6,389
Other (expense) income, net (504) 552 (j)
18 (k)
(4,398) (l)
(556) (m) (4,888)
---------- -------- --------- ---------
Income before taxes 4,176 780 (3,455) 1,501
Income taxes 87 884 (p) 971
---------- -------- --------- ---------
Net income $ 4,089 $ 780 $ (4,339) $ 530
========== ======== ========= =========
</TABLE>
______________
(1) For the fifty-three fiscal week period ended July 1, 1993 for Georgia
Cookies, Inc.
-59-
<PAGE> 60
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
The pro forma adjustments and elimination entries necessary to adjust
the combined historical financial statements are as follows:
(a) To eliminate equipment rental payments paid to TOGA Leasing.
(b) To eliminate building rental payments paid to Sunbelt
Investments.
(c) To eliminate other stockholder related expenses.
(d) To eliminate stockholder compensation in excess of employment
contracts.
(e) To eliminate excess property and casualty and workers'
compensation insurance due to parent company's ability to
negotiate better volume rates.
(f) To reflect depreciation on assets acquired from TOGA Leasing
and Sunbelt Investments.
(g) To adjust retail stores cost of goods sold due to usage of
batter inventory restated at fair market value at date of
acquisition.
(h) To reflect directors' fees.
(i) To reflect trust administration fees.
(j) To eliminate interest on First Union National Bank of Georgia
long-term debt repaid in conjunction with the acquisition.
(k) To eliminate amortization of deferred debt issue costs
associated with First Union National Bank of Georgia long-term
debt repaid in conjunction with the acquisition.
(l) To reflect interest on 10.875% senior secured notes payable
due 2001, series B.
(m) To reflect amortization of deferred debt issue costs
associated with 10.875% senior secured notes payable due 2001,
series B.
(n) To eliminate non-recurring post acquisition officer and
employee bonuses.
(o) To reflect amortization of cost in excess of fair value of net
assets acquired (goodwill).
(p) To reflect income tax expense for C corporation status, giving
effect to non-deductible goodwill amortization. Combined
statutory state and federal income tax rates of 40% have been
used for both periods presented.
(q) To eliminate inter/intracompany transactions and accounts.
13. RELATED PARTY TRANSACTIONS
A franchisee who owns 11 franchise outlets is related to one of the
Company's Directors. During the twenty-nine week period ended June 30,
1994, the Company had batter sales of approximately $260,000 to this
related party. Additionally, the Company received royalty revenues of
approximately $107,000 from this related party during the period, and
a Company store was sold to this related party for approximately
$134,000 for a gain of approximately $22,000.
-60-
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Original Great American Chocolate Chip
Cookie Company, Inc.
In our opinion, the accompanying statements of income and retained earnings and
of cash flows present fairly, in all material respects, the results of
operations of The Original Great American Chocolate Chip Cookie Company, Inc.
and its cash flows for the twenty-four week period ended December 9, 1993, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, Georgia
August 23, 1994
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Original Great American Chocolate Chip
Cookie Company, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of The Original Great American Chocolate Chip
Cookie Company, Inc. at June 24, 1993, and the results of its operations and
its cash flows for the fifty-two week period then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, Georgia
December 10, 1993
<PAGE> 63
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 24,
1993
--------
<S> <C>
ASSETS
Current assets
Cash (Note 2) $ 3,186,907
Accounts receivable, net of allowance (Note 3) 1,401,773
Inventory (Note 4) 1,112,137
Prepaid expenses (Note 5) 970,472
Current portion of notes receivable (Note 6) 50,628
-----------
Total current assets 6,721,917
-----------
Property and equipment (Note 1)
Leasehold improvements 8,565,894
Furniture, fixtures and equipment 3,730,568
Vehicles 461,843
-----------
12,758,305
Accumulated depreciation (6,668,604)
-----------
6,089,701
Construction in progress, net of construction deposits received
from franchisees 74,751
-----------
6,164,452
-----------
Other assets
Deposits 83,492
Notes receivable, net of current portion (Note 6) 102,650
Receivables from stockholders (Note 7) 10,309,769
Investment 20,000
Deferred loan costs, net of accumulated amortization of $18,459 129,212
Accrued straight-line minimum rent receivable for subleases to franchises (Note 1) 796,425
-----------
11,441,548
-----------
$24,327,917
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 874,694
Payroll and sales taxes payable 104,395
Accrued expenses (Note 8) 1,323,656
Due to profit sharing plan 100,000
Deposits 523,052
Current portion of long-term debt (Note 10) 2,340,000
-----------
Total current liabilities 5,265,797
-----------
Accrued straight-line minimum rent payable 1,227,327
-----------
Long-term debt, net of current portion (Note 10) 8,190,000
-----------
Commitments and contingencies (Note 11)
Stockholders' equity
Common stock, no par value, 2,000 shares authorized;
200 shares issued and outstanding 2,000
Retained earnings 9,642,793
-----------
9,644,793
-----------
$24,327,917
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-63-
<PAGE> 64
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE FOR THE
24-WEEK 52-WEEK
PERIOD ENDED PERIOD ENDED
DECEMBER 9, JUNE 24,
1993 1993
-------- --------
<S> <C> <C>
Revenue:
Cookie and beverage sales $ 9,564,713 $ 21,346,434
Batter sales to franchisees 4,312,345 8,712,123
Franchise royalties 1,791,541 3,808,097
Franchise sales - existing and new stores 429,592 1,421,823
Sales discounts - net (28,353) (86,346)
------------- -------------
Total revenue 16,069,838 35,202,131
------------- -------------
Operating expenses:
Cost of goods sold 7,537,256 16,757,673
Retail store occupancy 2,746,798 5,851,132
Selling, general and administrative expenses 3,616,023 7,912,896
------------- -------------
Total operating expenses 13,900,077 30,521,701
------------- -------------
Other (income) expenses, net
Interest (income) (45,430) (76,109)
Interest expense 348,921 561,810
Amortization of deferred loan costs 50,107 18,459
------------- -------------
Total other (income) expenses, net 353,598 504,160
------------- -------------
Income before taxes 1,816,163 4,176,270
State income taxes 27,616 87,265
------------- -------------
Net income 1,788,547 4,089,005
Retained earnings, beginning of period 9,642,793 7,643,788
Dividends (900,196) (2,090,000)
------------- -------------
Retained earnings, end of period $ 10,531,144 $ 9,642,793
============= =============
Unaudited pro forma data (Note 15)
Income before provision for income taxes $ 1,788,547 $ 4,089,005
Provision for income taxes 690,000 1,604,000
------------- -------------
Pro forma net income $ 1,098,547 $ 2,485,005
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-64-
<PAGE> 65
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
24-WEEK 52-WEEK
PERIOD ENDED PERIOD ENDED
DECEMBER 9, JUNE 24,
1993 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,788,547 $ 4,089,005
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 571,993 1,231,134
Amortization of deferred loan costs 50,107 18,459
Provision for losses on accounts receivable - 24,415
Gain on sale of property and equipment (44,894) (601,707)
Net increase in accrued straight-line minimum
rent receivable and payable 132,837 -
Other noncash charges 3,170 -
Changes in assets and liabilities
(Increase) decrease in accounts receivable (186,486) (369,881)
(Increase) decrease in inventory (92,417) 32,157
(Increase) decrease in prepaid expenses 869,587 (156,284)
(Increase) in deposits (2,618) (5,163)
Increase (decrease) in accounts payable (31,008) 389,607
Increase (decrease) in payroll and sales taxes
payable (39,820) (3,821)
Increase (decrease) in accrued expenses (418,920) 295,305
Increase in deposits 21,332 84,067
------------ ------------
Net cash provided by operating activities 2,621,410 5,027,293
------------ ------------
Cash flows from investing activities
Acceptance of notes receivable - -
Acceptance of receivable from stockholders, net (18,553) (11,011,269)
Payments received on notes receivable 26,559 137,128
Payments received on receivables from stockholders 1,200,000 1,000,000
Proceeds from sales and disposals of property
and equipment 306,183 1,141,063
Acquisitions of property and equipment, including net
(increase) decrease in construction in progress, net of
construction deposits received from franchisees (996,596) (2,139,555)
------------ ------------
Net cash provided by (used for)
investing activities 517,593 (10,872,633)
------------ ------------
Cash flows from financing activities
Payment of deferred loan costs - (147,671)
Proceeds from issuance of long-term debt - 11,700,000
Principal payments on long-term debt (3,970,000) (2,689,266)
Dividends paid (900,196) (2,090,000)
------------ ------------
Net cash provided by (used for)
financing activities (4,870,196) 6,773,063
------------ ------------
Net increase (decrease) in cash (1,731,193) 927,723
Cash, beginning of period 3,186,907 2,259,184
------------ ------------
Cash, end of period $ 1,455,714 $ 3,186,907
============ ============
</TABLE>
-65-
<PAGE> 66
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FOR THE
24-WEEK 52-WEEK
PERIOD ENDED PERIOD ENDED
DECEMBER 9, JUNE 24,
1993 1993
-------- --------
<S> <C> <C>
Supplemental disclosures of cash flows information
Cash paid during the period for
Interest $ 336,020 $ 524,914
========== =========
Income taxes 26,133 99,966
========== =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the fiscal year ended June 24, 1993, a note receivable in the face
amount of $57,219 was received from B & J Cookie Company in connection with the
sale of the Company-operated Richland Fashion Mall store.
During the twenty-four weeks ended December 9, 1993, a note receivable in the
face amount of $160,000 was received from Jeffrey Bernstein in connection with
the sale of the Company-operated Villa Linda Mall store.
The accompanying notes are an integral part of these financial statements.
-66-
<PAGE> 67
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Original Great American Chocolate Chip Cookie Company, Inc. (the
"Company") is in the business of franchising cookie stores and
manufacturing cookie batter which is sold to Company and franchised
retail stores.
FISCAL YEAR END
The Company's fiscal year ends on the last Thursday in the month of
June.
STORE OPENING AND CLOSING COSTS
The non-capital expenditures incurred in opening new stores or
remodeling existing stores are expensed in the year in which they are
incurred. When a store is closed, the remaining investment in
leasehold improvements, net of expected salvage, is expensed.
INVENTORY
Inventory is valued at the lower-of-cost or market with cost
determined on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Expenditures for
maintenance and repairs are expensed currently, while renewals and
betterments that materially extend the life of an asset are
capitalized. The cost of assets sold, retired, or otherwise disposed,
and the related accumulated depreciation, are eliminated from the
accounts, and any resulting gain or loss is recognized in the income
statement.
Depreciation is provided using both straight-line and accelerated
methods over the estimated useful lives of the assets which are as
follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 5-7 years
Vehicles 3-5 years
Leasehold improvements life of the related lease
</TABLE>
INVESTMENT
The investment consists of silver coins, stated at cost, which
approximates fair market value.
LOAN COSTS
Loan costs have been capitalized and are being amortized on a
straight-line basis over sixty months, the life of the related loan.
REVENUE RECOGNITION
Franchise license fee revenues are recognized at the time that all
Company obligations regarding the franchise have been met. Revenues
related to cookies and beverages are recognized at the point of sale.
Revenues from the sale of batter are recognized at the time of
shipment.
LEASES
The Company has various operating lease commitments on both
Company-operated and franchised store locations and equipment.
Operating leases with escalating payment terms, including leases
underlying subleases with franchisees, are expensed on an
straight-line basis over the life of the related lease.
-67-
<PAGE> 68
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES
The Company has elected to be treated as an "S" corporation for tax
reporting purposes. As such, the taxes on income are paid by the
stockholders rather than by the corporation, except in those states
which do not recognize "S" corporation status. In connection with a
subsequent change in ownership (see Note 14), the Company terminated
its "S" Corporation status (see Note 15).
EARNINGS PER SHARE
Earnings per share are not presented as such information is not
meaningful due to a subsequent change in ownership. (See Note 14).
RECLASSIFICATIONS
Certain fiscal year 1993 amounts have been reclassified to conform to
presentation for the twenty-four week period ended December 9, 1993.
2. CREDIT RISK
The Company maintained cash deposits in excess of federally insured
limits at June 24, 1993 of approximately $2,721,000.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 24,
1993
--------
<S> <C>
Trade $ 1,409,019
Due from affiliates 38,754
-----------
1,447,773
(Less) Allowance for doubtful accounts (46,000)
-----------
$ 1,401,773
===========
</TABLE>
4. INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 24,
1993
--------
<S> <C>
Raw ingredients $ 208,123
Batter, including retail stores 388,818
Paper goods and marketing supplies 353,622
Equipment held for resale 105,359
Beverage syrup 56,215
-----------
$ 1,112,137
===========
</TABLE>
-68-
<PAGE> 69
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
5. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 24,
1993
--------
<S> <C>
Rent $911,312
Architect fees 28,646
Insurance 11,635
Interest 12,900
Maintenance contracts 4,774
Other 1,205
--------
$970,472
========
</TABLE>
-69-
<PAGE> 70
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
6. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 24,
1993
-------
<S> <C>
B & J Cookie Company - Note dated June 4, 1993 for $57,219; with monthly principal
payments of $1,000 plus interest at 9%. Due May, 1998. Secured by assets of
cookie system facility operated by B & J Cookie Company. $ 57,219
The Cookie Connection, Inc. - Note dated October 14, 1990 for $18,331; with monthly
payments of principal and interest of $500; interest at prime plus 2% (but not
less than 9.75%). Matured October 1992. 9,345
Jerman Cookie Company, Inc. - Note dated August 30, 1990 for $128,000; with monthly
principal payments of $1,524 plus interest at prime plus 2% (but not less than
9.75%). Due October, 1997. 57,714
Jerman Cookie Company, Inc. - Note dated November 8, 1991 for $48,000; with monthly
principal payments of $1,000 plus interest at prime plus 2% (but not less than
9.75%). Due November, 1995. 29,000
--------
153,278
Less current portion 50,628
--------
$102,650
========
</TABLE>
The aggregate maturities of the notes receivable are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING JUNE
-----------
<S> <C>
1994 $ 50,628
1995 42,288
1996 35,286
1997 14,857
1998 10,219
--------
$153,278
========
</TABLE>
-70-
<PAGE> 71
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
7. RECEIVABLES FROM STOCKHOLDERS
The receivables from stockholders at June 24, 1993 in the amount of
$10,309,769 are due on demand and bear no interest.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 24,
1993
--------
<S> <C>
Construction expenses $ 200,562
Income taxes 14,650
Insurance 105,384
Interest 28,008
Miscellaneous 20,686
Professional fees 98,701
Property taxes 67,131
Rents 32,752
Salaries and bonuses 537,792
Sales taxes 157,905
Travel expenses 20,499
Vacation 39,586
-----------
$ 1,323,656
===========
</TABLE>
9. PROFIT-SHARING PLAN
The Company provides a defined contribution profit-sharing plan for
all employees meeting certain requirements. Contributions to the plan
are at the discretion of management. Contributions totaling $100,000
were made to the plan for the twenty-four week period ended December
9, 1993. For the fifty-two week period ended June 24, 1993,
contributions to the plan totaled approximately $94,000.
-71-
<PAGE> 72
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 24,
1993
----
<S> <C>
Payable in quarterly installments of $585,000, plus interest payable
monthly at prime plus 1.375%; all unpaid principal together with
accrued and unpaid interest is due and payable on November 12, 1997;
secured by tangible assets, intangible assets, including but not
limited to, franchise rights, licensing agreements, and trademarks,
and a pledge of the stock of the Company and Georgia Cookies, Inc., a
corporation under similar ownership as the Company. $ 10,530,000
-------------
10,530,000
Less current portion of long-term debt 2,340,000
-------------
$ 8,190,000
=============
</TABLE>
The Company is subject to certain covenants provided for under its
loan agreement, including maintenance of certain levels of tangible
net worth, fixed charge coverages, and interest charge coverages.
Additionally, capital expenditures and distributions to stockholders
are restricted. If a violation of a restrictive covenant occurs, the
lender has the right to accelerate the due date of the loan.
Subsequent to June 24, 1993, the Company is in violation of certain
covenants; however, the lender has provided a waiver of default on
these covenants.
The aggregate maturities of the debt in each of the years subsequent
to June 24, 1993 are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING JUNE
-----------
<S> <C>
1994 $ 2,340,000
1995 2,340,000
1996 2,340,000
1997 2,340,000
1998 1,170,000
-------------
$ 10,530,000
=============
</TABLE>
The term note for $10,530,000 requires the Company to make
mandatory prepayments in addition to the quarterly installments.
The required prepayments are due every six months commencing December
31, 1993 and shall be an amount equal to the greater of twenty-five
percent of excess cash flow or fifty percent of the excess company
store gains over $2,000,000, as defined in the loan agreement.
The Company has available a $1,000,000 line-of-credit agreement
expiring on October 15, 1993. Interest is payable monthly at the prime
rate plus 1.375%. The line is cross-collateralized with the term loan.
There were no borrowings under the agreement as of or for the fifty-two
week period ended June 24, 1993.
-72-
<PAGE> 73
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease commitments on both
Company-operated and franchised store locations and equipment. These
leases contain various provisions for contingent rental payments based
on sales volume, and escalating rental payments. The effect of the
escalating payments is included in the amounts of minimum future
rental payments. The annual minimum rental obligations are as follows:
<TABLE>
<CAPTION>
FISCAL PERIOD SUBLEASES TO
ENDING JUNE LEASES FRANCHISEES NET
----------- ------ ----------- ----
<S> <C> <C> <C>
1994 $ 7,706,481 $ 4,369,004 $ 3,337,477
1995 7,162,600 3,990,289 3,172,311
1996 6,648,473 3,639,095 3,009,378
1997 6,183,784 3,341,509 2,842,275
1998 5,637,699 3,008,620 2,629,079
Thereafter 13,323,932 7,476,577 5,847,355
------------ ------------ ------------
$ 46,662,969 $ 25,825,094 $ 20,837,875
============ ============ ============
</TABLE>
For the twenty-four week period ended December 9, 1993, gross rent
expense (including mall pass-through charges) was approximately
$5,310,500 and sublease income (including mall pass-through charges)
was approximately $3,753,400. For the fifty-two week period ended June
24, 1993, gross rent expense (including mall pass-through charges) was
approximately $10,216,000, and sublease income (including mall
pass-through charges) was approximately $6,968,000.
The Company is committed to purchases of certain raw materials from
various suppliers over the next year at a fixed price. At June 24,
1993, these purchase commitments totaled approximately $1,656,000.
The Company is a defendant in various legal proceedings with former
franchisees of the Company, alleging breaches of contract and certain
other claims. Although the ultimate disposition of these proceedings
are not presently determinable, management does not believe that an
adverse determination in any of these proceedings will have an adverse
material effect upon the financial condition or results of operations
of the Company.
12. RELATED PARTY TRANSACTIONS
The Company sells its batter, ingredients, and paper products to,
subleases store space to, and receives franchise royalties of 7% of
sales from Georgia Cookies, Inc., a company with similar ownership as
the Company.
Franchise royalties received from Georgia Cookies, Inc. for the
twenty-four week period ended December 9,1993 totaled $162,500 and for
the fifty-two week period ended June 24, 1993 totaled $352,720.
Management fees received from and training facility fees paid to this
related party for the twenty-four week period ended December 9, 1993
totaled $15,500 and $15,000, respectively. Such fees for the fifty-two
weeks ended June 24, 1993 totaled $37,200 and $36,000. Initial license
fees and sublease rental payments received from this related party
during the twenty-four week period ended December 9, 1993 were $50,000
and $346,400, respectively. For the fifty-two weeks ended June 24,
1993 such fees and sublease payments were approximately $40,000 and
$595,000, respectively.
Batter sales to Georgia Cookies, Inc. were approximately $422,000 for
the twenty-four week period ended December 9, 1993. Batter sales for
fiscal 1993 to Georgia Cookies, Inc. were approximately $900,000.
Batter sales
-73-
<PAGE> 74
THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
to other related parties for the twenty-four week period ended
December 9, 1993 and the fifty-two week period ended June 24, 1993
were approximately $210,000 and $382,000, respectively.
The Company leases its office space and various equipment under
operating leases from Sunbelt Investments and TOGA Leasing, entities
controlled by the Company's stockholders. Total lease payments to
these entities for the twenty-four week period ended December 9, 1993
were approximately $87,000 and were approximately $269,000 for the
fifty-two week period ended June 24, 1993.
13. COMPANY AND FRANCHISED STORES
During the twenty-four weeks ended December 9, 1993, Company stores
had revenues of $9,564,700 and costs of $8,048,800. During the fiscal
year ended June 24, 1993 Company stores had revenues of $21,346,434
and costs of $19,650,910.
During the twenty-four week period ended December 9, 1993, the Company
acquired one store from a franchisee. In addition, during the period,
the Company sold 10 new franchises, including two to Georgia Cookies,
Inc. and six existing stores, to franchisees. The Company bought three
stores from franchisees during the fifty-two week period ended June
24, 1993. In addition, the Company sold 15 franchises and 6 existing
stores during fiscal year 1993.
14. SUBSEQUENT EVENT
Subsequent to December 9, 1993 the Company's stockholders sold all
outstanding common stock of The Original Great American Chocolate Chip
Cookie Company, Inc. and substantially all assets of three related
entities (Georgia Cookies, Inc., TOGA Leasing and Sunbelt Investments)
to a group of unrelated investors. The existing stockholders will own
12% of the common stock of the parent company, Cookies USA, Inc.
Closing of the transaction occurred on December 10, 1993.
In connection with the acquisition, the new Company will issue debt
totaling $40 million upon final closing of the acquisition. As part of
the agreement, the stockholders liquidated the outstanding balance of
the term loan with First Union National Bank of Georgia.
15. PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED)
As described in Note 1, the Company was not subject to federal income
taxes and was only subject to certain state income taxes. The pro
forma data presented on the Statements of Income and Retained Earnings
reflects estimated income taxes as if the Company were subject to
federal and state income taxes for the periods shown.
-74-
<PAGE> 75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
---- --- -------- -----
<S> <C> <C> <C>
Michael J. Coles . . . . . . . 52 Chairman of the Board, Secretary and Vice President 1977
Arthur S. Karp . . . . . . . . 58 Director 1977
Adam E. Max . . . . . . . . . . 38 Director, Vice President 1993
Thomas H. Quinn . . . . . . . . 48 Director 1993
David W. Zalaznick . . . . . . 41 Director 1993
David B. Barr . . . . . . . . . 33 President, Chief Financial Officer, and Treasurer 1996
Thomas H. Lynch . . . . . . . . 57 Executive Vice President - Store Development 1984
W. James Squire, III . . . . . 49 Senior Vice President - Franchise Sales 1993
Betty W. Ansley . . . . . . . . 67 Vice President - Administration and Assistant Secretary 1978
Daniel L. Breault . . . . . . . 47 Vice President - Store Operations 1996
</TABLE>
-75-
<PAGE> 76
MICHAEL J. COLES is a co-founder of the Company and has served as
Director, Chairman of the Board, Vice President, and Secretary since June 1977.
Mr. Coles began his career in retail sales 30 years ago, and prior to founding
the Company, he was active with several different wholesale and retail
concerns. Mr. Coles is currently a director of Merit Holdings, Inc., the Vice
Chairman of the Board of Directors of the Charter Bank and Trust Company, and a
director and member of the executive committee of Kennesaw State College.
ARTHUR S. KARP is a co-founder of the Company and has served as a
Director since June 1977. From 1984 to 1991, Mr. Karp was a director of the
International Franchise Association ("IFA") and in 1990 served as chairman of
that organization. Mr. Karp served as President of the Company from June 1977
until December 1995.
ADAM E. MAX has been a Director and Vice President of the Company
since December 1993. Mr. Max has been a partner at The Jordan Company since
1986. The Jordan Company's partners and affiliates structure and invest in
acquisitions of private companies. Mr. Max also serves as a Director of
Rockshox, Inc. and other private companies.
THOMAS H. QUINN has been a Director of the Company since December
1993. Mr. Quinn currently serves as the President and Chief Operating Officer
of Jordan Industries, Inc., positions which he has held since 1988. Mr. Quinn
is also the Chairman of the Board and Chief Executive Officer of American
Safety Razor Co. and Welcome Home, Inc. as well as other privately held
companies.
DAVID W. ZALAZNICK has been a Director of the Company since December
1993. Mr. Zalaznick has been a managing partner at The Jordan Company since
1982 and Jordan/Zalaznick Capital Co. since 1985. Mr. Zalaznick also is a
Director of Jordan Industries, Inc., American Safety Razor Company, Carmike
Cinemas, Inc., Marisa Christina, Inc. and Apparel Ventures, Inc. as well as
other privately held companies.
DAVID B. BARR was promoted to President of the Company in May 1996.
Mr. Barr joined the Company in May 1994 as Vice-President-Finance, Chief
Financial Officer, and Treasurer and, in June 1995, assumed responsibilities
for operations and development as Executive Vice President of Operations. From
March 1991 to May 1994, Mr. Barr was a division finance manager for Pizza Hut,
Inc., a subsidiary of PepsiCo. Prior to that, from January 1986 until March
1991, he was with Price Waterhouse, last serving as an audit manager. Mr. Barr
is a certified public accountant.
THOMAS H. LYNCH has been employed by the Company since 1981. He
currently serves as Executive Vice President- Store Development, a position
that he has held since 1984. Prior to joining the Company, Mr. Lynch held
senior management positions with General Foods, including the supervision of
over 300 retail food sites of the Burger Chef chain. In his present capacity,
Mr. Lynch is responsible for negotiating new leases and renewal terms for
expiring leases and overseeing the construction and equipping of new stores.
W. JAMES SQUIRE, III joined the Company in 1993 as Senior Vice
President-Franchise Sales, and oversees the Company's franchising efforts
domestically and internationally. A current board member of the International
Franchise Association, he is also currently chairman of the Southeast Franchise
Forum. Mr. Squire, a Certified Franchise Executive, was president of Franchise
Marketing, Inc. prior to joining the Company. He also held senior management
positions with Arby's, Inc. from 1987 through 1991 including group vice
president of the franchise division.
BETTY W. ANSLEY has been an employee of the Company since 1978. She
currently serves as the Company's Vice President-Administration and Assistant
Secretary. Prior to joining the Company, Ms. Ansley was a vice president with a
retail fashion company.
DANIEL L. BREAULT joined the Company in January 1996 as Vice
President-Store Operations. Prior to joining the Company, Mr. Breault was a
Director of Operations for Pizza Hut, Inc., a subsidiary of PepsiCo, with
operations responsibilities for approximately 100 retail stores. Prior to that,
from 1973 until 1992, Mr. Breault worked in Operations and Development for one
of the largest Pizza Hut, Inc. franchise groups.
-76-
<PAGE> 77
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses compensation earned by the Company's
executive officers for the fiscal year ended June 30, 1996:
<TABLE>
<CAPTION> ALL OTHER
ANNUAL COMPENSATION COMPENSATION($)
NAME AND ----------------------------------- ----------------------------------
PRINCIPAL POSITION YEAR SALARY($) BONUS($) NON-COMPETE BONUS(5) OTHER
----------------------------------------- ---- --------- -------- ----------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Coles . . . . . . . . . . . . 1996(1) $150,000 $ - $100,000 $ - $ 5,856(6)
Chairman of the Board 4,206(7)
1995(1) 150,000 - 100,000 - 5,729(6)
5,998(7)
1994(2) 323,654 181,750 55,769 750,000 8,041(6)
7,400(7)
Arthur S. Karp . . . . . . . . . . . . . 1996(1) $ 69,808 $ - $ 44,022 $ - $ 2,590(6)
Director(8) 4,206(7)
1995(1) 150,000 - 100,000 - 5,729(6)
5,998(7)
1994(2) 323,654 388,500 55,769 750,000 28,146(6)
7,400(7)
David B. Barr . . . . . . . . . . . . . . 1996(1) $141,673 $ - $ - $ - $ 5,856(6)
President, Chief Financial Officer, 1995(1) 123,846 35,000 - - 5,729(6)
and Treasurer(3) 1994(2) 9,231 - - - 509(6)
Thomas H. Lynch . . . . . . . . . . . . . 1996(1) $127,080 $ - $ - $ - $ 5,856(6)
Executive Vice President- 4,206(7)
Store Development 1995(1) 127,080 40,000 - - 6,729(6)
5,590(7)
1994(2) 127,403 40,000 - 50,000 6,593(6)
6,800(7)
W. James Squire, III . . . . . . . . . . 1996(1) $100,000 $ 56,000 $ - $ - $ 5,856(6)
Senior Vice President- 3,084(7)
Franchise Sales(4) 1995(1) 100,000 10,000 - - 5,729(6)
4,472(7)
1994(2) 101,923 - - - 5,538(6)
</TABLE>
________________________
Footnotes:
(1) Represents 52 fiscal weeks.
(2) Represents 53 fiscal weeks.
(3) Employment commenced May 31, 1994.
(4) Employment commenced March 29, 1993.
(5) Special nonrecurring acquisition related bonus.
(6) Represents premiums paid for health, life & disability insurance
(7) Allocated contribution to Profit Sharing Plan
(8) Employment as President ceased on December 10, 1995
-77-
<PAGE> 78
Employment Agreements
In connection with the Acquisition, the Company entered into
Employment Agreements with Mr. Coles and Mr. Karp (the "Employees"). The
Employment Agreements provide that the Employees will be employed for an
initial term of five years, although either of the Employees or the Company may
terminate the Employment Agreement by written notice given 60 days in advance
of the end of each year of employment. Pursuant to these termination
provisions, Mr. Karp's employment with the Company ceased on December 10, 1995.
Under each Employment Agreement, the Employees received a payment upon
signing of $750,000 and will receive during the term of employment a salary of
$150,000 and payment in connection with an agreement not to compete of $100,000
per year. In addition to any discretionary bonuses approved by the Board of
Directors, each Employee will be entitled to receive an annual bonus of
$100,000 to be paid by Cookies USA if the Company advances funds to Cookies USA
to permit Cookies USA to pay interest on its Subordinated Notes. The Employment
Agreements also provide that each Employee will be entitled to receive a second
annual bonus (to a maximum of $350,000, although the Board of Directors may
increase the amount to be paid or declare a bonus in its sole discretion) of
35% of the amount by which the annual consolidated Operating Cash Flow of
Cookies USA exceeds the following amounts for each respective year:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating cash flow . . . . . . . . . . . $10.5 $12.0 $13.7 $16.4 $18.8
</TABLE>
The annual consolidated Operating Cash Flow of Cookie USA for fiscal 1994, 1995
and 1996 did not exceed the above described noted targets and an additional
bonus was not paid.
If one of the Employees, such as Mr. Karp on December 10, 1995, ceases
employment for any reason, he will be entitled to receive a bonus, if earned,
in respect to the then current fiscal year and the two fiscal years thereafter.
The Company is not required in any event to pay a bonus with respect to any
fiscal year ending after 1998.
The Employment Agreements define "Operating Cash Flow" as the
consolidated net income of Cookies USA and its subsidiaries for each fiscal
year, computed in accordance with generally accepted accounting principles
consistently applied, and then, to the extent reflected in computing such net
income, (i) adding back the amounts charged for net interest expense, income
taxes, depreciation and amortization, the non-cash portion of any charges to
net income for rental charges under FAS 13 and for employee compensation,
benefits or stock plans (excluding recurring period-end accruals for employee
compensation and benefits), the cash charges to income for employee
compensation arising out of stock appreciation rights or other similar plans
and stock option plans and the amounts paid for directors and management fees
and amounts paid under the Employment Agreement as bonuses and (ii) deducting
any cash charges incurred by the Company or Cookies USA, but not reflected in
net income on account of (a) employee benefit or compensation plans (excluding
recurring period-end accruals for employee compensation and benefits) and
excluding cash payments on account of stock appreciation rights and stock
plans, and (b) rental charges under FAS 13, all as reflected in Cookies USA's
financial statements certified by its regular auditors in accordance with
generally accepted accounting principles and practices consistently applied,
which shall include in consolidated net income gains and losses from sales of
Company- operated stores or franchises sold to franchisees. Gains and losses
from the sale of other capital assets and any other extraordinary gains or
losses shall be excluded in determining net income, provided that the grant or
sale of one or more franchises or licenses by the Company applicable to a
territory not included in the United States or its possessions will not be
deemed an extraordinary gain, and gains and losses from such sales will be
included in computing consolidated net income. Income or costs attributable to
the amortization of the purchase price premium and acquisition and closing
costs incurred in the consummation of the offering of the Notes and Acquisition
will be excluded in determining net income.
Each Employment Agreement contains a provision that prohibits the
Employee from competing with the Company and Cookies USA or revealing
confidential Company information during the term of their respective Employment
Agreement and for a period of three years following the termination of their
Employment Agreement.
-78-
<PAGE> 79
Stock Option Agreements. In connection with the Acquisition, Cookies
USA entered into Non-Qualified Stock Option Agreements (the "Stock Option
Agreements") with each of the Employees. Under the Stock Option Agreements,
each of the Employees is granted an option to purchase 5,600 shares of Common
Stock of Cookies USA at an exercise price of $2.23 per share. Once vested, the
options may be exercised any time until the tenth anniversary of their
issuance. Upon consummation of the Acquisition and (a) after the exercise of
warrants to purchase 8% of the Common Stock of Cookies USA issued to the
purchasers of the Notes, but before the conversion of the Senior Preferred
Stock, the shares of Common Stock issuable under the Stock Option Agreements
would represent 11.1% of the Cookies USA Common Stock, and (b) after (i)
exercise of such warrants and (ii) conversion of the Senior Preferred Stock,
the shares of Common Stock issuable under the Stock Option Agreements would
equal 9.9% of the Cookies USA Common Stock.
The options will become vested at the rate of 20% per year for each
fiscal year in which Cookies USA's consolidated Operating Cash Flow (as defined
in the Employment Agreements) equals or exceeds the following amounts for each
respective year:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating cash flow . . . . . . . . . $10.5 $12.0 $13.7 $16.4 $18.8
</TABLE>
Notwithstanding the foregoing, (i) if Cookies USA's cumulative
consolidated Operating Cash Flows exceeds $22,498,000 by the end of fiscal year
1995, a total of 40% of the options will become vested, (ii) if such cash flow
exceeds $36,189,000 by the end of fiscal year 1996, a total of 60% of the
options will become vested, (iii) if such cash flow exceeds $52,574,000 by the
end of fiscal year 1997, a total of 80% of the options will become vested and
(iv) if such cash flow exceeds $71,326,000 by the end of fiscal year 1998, 100%
of the options will become vested. All the options will vest upon the
occurrence of a business combination (as defined in the Stock Option
Agreements) if such business combination occurs within five years from the date
of Acquisition. Each Stock Option Agreement provides that vesting will continue
even if the Employee ceases to be employed by the Company. In addition, the
Board of Directors of the Company may waive the foregoing vesting schedule at
any time at their discretion.
-79-
<PAGE> 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Great American Cookie is a wholly-owned subsidiary of Cookies USA,
Inc. The following table sets forth the person known by the Company to be the
beneficial owner of more than 5% of Great American Cookie's Common Stock.
<TABLE>
<CAPTION>
SHARES OF
OWNERSHIP
NAME OF GREAT AMERICAN (1) PERCENT
- ---- ------------------ -----------
<S> <C> <C>
Cookies USA, Inc. 210 100%
9 West 57th Street
New York, NY 10019
</TABLE>
The following table sets forth a list of the beneficial ownership of
Great American Cookie's Common Stock owned by the directors and executive
officers of Great American Cookie:
<TABLE>
<CAPTION>
SHARES OF
OWNERSHIP
NAME OF GREAT AMERICAN (1) PERCENT
- ----- ------------------ -----------
<S> <C> <C>
Mr. Michael J. Coles 0 0%
Mr. Arthur S. Karp 0 0%
Mr. Adam E. Max 0 0%
Mr. Thomas H. Quinn 0 0%
Mr. David W. Zalaznick 0 0%
Mr. David B. Barr 0 0%
Mr. Thomas H. Lynch 0 0%
Mr. W. James Squire, III 0 0%
Ms. Betty W. Ansley 0 0%
Mr. Daniel L. Breault 0 0%
All directors and executive
officers as a group (10 persons) 0 0%
</TABLE>
- -----------------
(1)All of the directors of the Company are also directors of Cookies USA
and own Common Stock of Cookies USA (82,800 shares outstanding) as
follows: Mr. Coles owns 5,400 shares, Mr. Karp owns 5,400 shares, Mr. Max
owns 3,189 shares, Mr. Quinn owns 3,600 shares, and Mr. Zalaznick owns 5,352
shares. Other stockholders of Cookies USA include affiliates of Jordan (as
hereinafter defined) and before (i) the conversion of the Senior Preferred
Stock of Cookies USA, Inc., (ii) the issuance of shares of Common Stock of
Cookies USA pursuant to the Stock Option Agreements (as hereinafter defined)
or (iii) the exercise of the warrants held to purchase Common Stock of
Cookies USA such affiliates of Jordan own 84.51% of the Cookies USA Common
Stock. See "Item 13. Certain Relationships and Related Transactions".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Acquisition. The Jordan Company ("Jordan") formed Cookies USA to
acquire, through a series of transactions, 100% of the common stock of the
Company and related assets for $55.0 million, consisting of $44.5 million in
cash (of which $6.5 million was used to pay existing Company indebtedness) and
$10.5 million of 6% Cumulative Convertible Senior Preferred Stock of Cookies
USA (the "Senior Preferred Stock"). Cookies USA raised a portion of the cash
price by selling $10.0 million of its Subordinated Notes (the "Subordinated
Notes"), $2.5 million of its Junior Class A Preferred Stock ("Junior Class A
Preferred Stock"), $750,000 of its Junior Class B Preferred Stock ("Junior
Class B Preferred Stock") and $250,000 of Common Stock primarily to affiliates
of Jordan and to Michael Coles and Arthur Karp, the sole stockholders of
-80-
<PAGE> 81
the Company before the Acquisition (the "Selling Stockholders"). The cash
proceeds from the sale of such securities were used to purchase from the
Company newly issued shares of its common stock that constituted a majority of
the stock of the Company then outstanding. The Company used a portion of the
cash invested by Cookies USA and the proceeds of the Series A Notes to redeem a
portion of the shares of its common stock owned by the Selling Stockholders,
all as provided in the Stock Purchase and Redemption Agreement among the
Company, the Selling Stockholders and Cookies USA (the "Purchase Agreement").
The Company also used such proceeds to pay fees and expenses of the offering of
the Series A Notes and the Acquisition and for working capital. (During the
twenty-nine week period ended June 30, 1994, the Company's noteholders
exchanged unregistered Series A Notes for registered Series B Notes with
identical terms and face value.)
In addition, as part of the Acquisition, other entities owned by the
Selling Stockholders, Georgia Cookies, TOGA Leasing and Sunbelt Investments
(the "Affiliated Entities") transferred certain other assets related to the
operations of the Company (the "Related Assets"), and the Selling Stockholders
transferred the remaining shares of Common Stock of the Company to Cookies USA
in exchange for the shares of the Senior Preferred Stock as provided in the
Subscription Agreement among Cookies USA, the Selling Stockholders and the
Affiliated Entities (the "Subscription Agreement"). The Related Assets
consisted of 13 franchised units operating in Georgia in addition to the land,
building and equipment which are used by the Company for its operations and
administration subject to liabilities as going concern. Upon consummation of
the transactions contemplated by the Subscription Agreement, Cookies USA
contributed such Related Assets to the Company. Following these transactions,
the Company became the wholly-owned subsidiary of Cookies USA.
Affiliates of Jordan purchased the Subordinated Notes, the Junior
Class A Preferred Stock, and the majority of the Junior Class B Preferred
Stock. Affiliates of Jordan as well as the Selling Stockholders and others
purchased Cookies USA Common Stock. Upon consummation of the Acquisition and
before (i) the conversion of the Senior Preferred Stock, (ii) the issuance of
shares of Common Stock of Cookies USA pursuant to the Stock Option Agreements
(as hereinafter defined) or (iii) the exercise of the warrants held to purchase
Common Stock of Cookies USA, affiliates of Jordan own 84.51% of the Cookies USA
Common Stock.
Closing Expenses. In connection with the Acquisition, the Company paid
certain legal and other out-of-pocket expenses incurred by Messrs. Coles and
Karp aggregating approximately $158,000.
Investment Banking, Management Services and Directors' Fees. In
connection with the consummation of the Acquisition, the Company paid to Jordan
an investment banking fee of $1.0 million and reimbursed its expenses in
connection with the Acquisition. In addition, Cookies USA and TJC Management
Corp. ("TJC"), an affiliate of Jordan, entered into an agreement pursuant to
which TJC or its designee will provide management services to the Company upon
consideration of the payment of certain fees, not to exceed $300,000 per annum,
and expenses. The Indenture also permits the Company, through Cookies USA, to
pay directors fees and certain fees to Jordan in connection with future capital
transactions.
Tax Sharing Agreement. In connection with the consummation of the
Acquisition, the Company and Cookies USA entered into an agreement pursuant to
which the Company will pay to Cookies USA an amount equal to the net tax
liability of the Company and its subsidiaries.
Certain Franchises. Mr. Karp, together with members of his family,
family trusts, and partnerships and corporations in which members of his family
have a beneficial interest, own 11 franchised Great American Cookie outlets.
Payment on Cookies USA Senior Securities. A portion of the
consideration paid in connection with the Acquisition consisted of Cookies USA
Senior Preferred Stock and the cash provided by the sale by Cookies USA of its
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
with respect to principal, interest or dividends on such securities.
81
<PAGE> 82
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
(1) See Item 8 "Financial Statements and Supplementary Data" for a
list of the financial statements filed as part of this report.
(2) The following financial statement schedule for the Great
American Cookie Company, Inc. is filed as a part of this
report
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . 86
</TABLE>
(3) Exhibits Index
The exhibits filed with or incorporated by reference in this
report are listed in the Exhibit Index beginning on page 83.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1996.
-82-
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
3.1 - Certificate of Incorporation of Great American Cookie Company, Inc., as amended.*
3.2 - Bylaws of Great American Cookie Company, Inc.*
4.1 - Indenture for the 10 7/8% A Senior Secured Notes due 2001 (the "Series A Notes") and 10 7/8% B Senior
- Secured Noted due 2001 (the "Series B Notes") dated as of December 10, 1993, between Great American
Cookie Company, Inc. and First Trust National Association, as trustee.*
4.2 - Form of Series A Note (included in Exhibit No. 4.1).*
4.3 - Form of Series B Note (included in Exhibit No. 4.1).*
4.4 - Debt Registration Rights Agreement, dated as of December 10, 1993, by and between Great American Cookie
- Company, Inc. and purchasers of Series A Notes.*
4.5 - Security Agreement, dated as of December 10, 1993, made by Great American Cookie Company, Inc. in favor
- of First Trust National Association, as trustee for the holders of Series A Notes and Series B Notes.*
4.6 - Trademark Security Agreement, dated as of December 10, 1993, between Great American Cookie Company, Inc.
- and First Trust National Association, as trustee for the holders of Series A Notes and Series B Notes.*
10.1 - Agreement, dated as of November 19, 1993, by and among The Original Great American Chocolate Chip
- Company, Inc., Michael J. Coles, Arthur S. Karp and Cookies USA, Inc.*
10.2 - Subscription Agreement, dated as of November 19, 1993, by and between Cookies USA, Inc., Georgia
- Cookies, Inc., Sunbelt Investments and TOGA Leasing.*
10.3 - Subscription and Stockholders Agreement, dated as of December 10, 1993, among Cookies USA, Inc., and
- certain stockholders.*
10.4 - Purchase Agreement, dated as of December 10, 1993, between Great American Cookie Company, USA, Inc. and
- purchasers of Series A Notes. *
10.5+ - Letter Agreement, dated December 10, 1993, by and between Michael J. Coles, Arthur S. Karp and Cookies
- USA, Inc. relating, in part, to Employment Agreement and Stock Purchase Agreement.*
10.6+ - Non-Qualified Stock Option Agreement, dated as of December 10, 1993, by and between Cookies USA, Inc.
- and Arthur S. Karp.*
10.7+ - Letter Agreement, dated December 10, 1993, by and between Cookies USA, Inc. and Michael J. Coles
- relating to payment of bonuses to Mr. Coles.*
10.8+ - Letter Agreement, dated December 10, 1993, by and between Cookies USA, Inc. and Michael J. Coles
- relating to payment of bonuses to Mr. Coles.*
10.9+ - Employment Agreement, dated December 10, 1993, between Arthur S. Karp and Great American Cookie Company,
- Inc.*
10.10+ - Employment Agreement, dated December 10, 1993, by and between Michael J. Coles and Great American Cookie
- Company, Inc.*
10.11 - Income Tax Allocation Agreement, dated December 10, 1993, by and between Great American Cookie Company,
- Inc. and Cookies USA, Inc.*
10.12 - Executive Tax Indemnity Loan Agreement, dated as of December 10, 1993, by and among Cookies USA, Inc.,
- Michael J. Coles and Arthur S. Karp.*
10.13 - Standard Franchise Agreement.*
10.14 - Abstention Agreement, dated as of December 10, 1993 among Cookies USA, Mezzanine Capital & Income Trust
- 2001 PLC and affiliates of Jordan.*
10.15 - Supplemental Agreement, dated December 10, 1993, by and between Michael J. Coles, Arthur S. Karp, The
- Original Great American Chocolate Chip Company, Inc. and Cookies USA, Inc.*
10.16+ - Letter agreement, dated December 10, 1993, by and between Cookies USA, Inc. and Arthur S. Karp relating
- to payment of bonuses to Mr. Karp.**
27 - Financial Data Schedule (for SEC use only).
</TABLE>
<TABLE>
<S> <C>
* Incorporated herein by reference to the exhibit of the same number to the Registrant's
registration statement on Form S-4 (Registration No. 33-76306) effective with the Commission on
June 8, 1994.
** Incorporated herein by reference to exhibit of the same number to Registrant's Form 10-K for
the year ended June 30, 1994.
+ Compensatory plan arrangement or management contract required to be filed as an exhibit
pursuant to Item 14(c) of this Form 10-K.
</TABLE>
- 83 -
<PAGE> 84
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: September 27, 1996 By: /s/ Michael J. Coles
-------------------------------------------
Michael J. Coles, Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael J. Coles Chairman of the Board September 27, 1996
-------------------------------------------------- (Principal Executive Officer)
Michael J. Coles and Director
/s/ David B. Barr President, Chief Financial Officer, and September 27, 1996
-------------------------------------------------- Treasurer (Principal Financial Officer)
David B. Barr
/s/ Adam E. Max Director September 27, 1996
--------------------------------------------------
Adam E. Max
/s/ Thomas H. Quinn Director September 27, 1996
--------------------------------------------------
Thomas H. Quinn
/s/ David W. Zalaznick Director September 27, 1996
--------------------------------------------------
David W. Zalaznick
</TABLE>
-84-
<PAGE> 85
GREAT AMERICAN COOKIE COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Retirements
-------------------------
Balance at Charged to Charged
Beginning of Costs and to Balance at End
Classification Fiscal Expenses Accounts Deductions of Fiscal Period
-------------- ------ -------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
For the Fifty-Two Fiscal Weeks Ended June 30, 1996......... 0 0 0 0 0
======= ======= ======= ======= =========
For the Fifty-Two Fiscal Weeks Ended June 29, 1995......... 21,646 0 (21,646) 0 0
======= ======= ======= ======= =========
For the Twenty-Nine Fiscal Weeks Ended June 30, 1994....... 46,000 0 0 (36,168)A 21,646
======= ======= ======= 11,814 R =========
=======
For the Twenty-Four Fiscal Weeks Ended December 9, 1993.... 46,000 0 0 0 46,000
======= ======= ======= ======= =========
</TABLE>
FOOTNOTE LEGEND:
A Accounts written-off against allowance for doubtful accounts receivable.
R Recovery of accounts written-off against allowance for doubtful accounts
receivable.
-85-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JUNE 30, 1996 AND THE STATEMENT OF OPERATIONS FOR THE FIFTY-TWO WEEK
PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,301,627
<SECURITIES> 0
<RECEIVABLES> 1,675,584
<ALLOWANCES> 0
<INVENTORY> 1,443,811
<CURRENT-ASSETS> 8,065,464
<PP&E> 11,964,820
<DEPRECIATION> 3,639,094
<TOTAL-ASSETS> 54,549,244
<CURRENT-LIABILITIES> 4,887,284
<BONDS> 40,000,000
0
0
<COMMON> 13,500,000
<OTHER-SE> (6,417,662)
<TOTAL-LIABILITY-AND-EQUITY> 54,549,244
<SALES> 24,718,712
<TOTAL-REVENUES> 40,383,717
<CGS> 19,522,528
<TOTAL-COSTS> 35,324,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,939,879
<INCOME-PRETAX> 176,280
<INCOME-TAX> 415,695
<INCOME-CONTINUING> (239,415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (239,415)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
