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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 29, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 33-76306
GREAT AMERICAN COOKIE COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1295221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4685 FREDERICK DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 696-1700
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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
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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
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PART I
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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
</TABLE>
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PART I
ITEM 1. BUSINESS
Great American Cookie Company, Inc. (the "Company" or "Great American
Cookies"), 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 29, 1997, the Company had 363 retail outlets including 100
Company-operated and 263 franchised retail units generating $90.1 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 29, 1997, the Company had total revenue
of $40.0 million, a .8% decrease from the fiscal year ended June 30, 1996, and
Adjusted EBITDA of $9.6 million, a 15.7% increase from the fiscal year ended
June 30, 1996. 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 2.3%. 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 363 at June 29, 1997 and (ii)
an increase in average store sales, which have grown at a compound annual
growth rate of approximately 1.5% over the past five fiscal years. Since the
fiscal year ended June 24, 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), $8.3 million and $9.6 for fiscal years 1993, 1994, 1995, 1996 and
1997, respectively. For a description and additional discussion of Adjusted
EBITDA, see Item 6 - "Selected Financial Data".
BUSINESS STRATEGY
Management believes that the Company's revenue growth and
profitability over the past five years reflects the implementation of the
following strategies:
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 64% 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 Cookies
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 methods intended to increase
the size of customer orders.
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.
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 $90.1 million in fiscal 1997, representing an
increase of approximately 4.8% over fiscal 1996 estimated system-wide retail
sales of $86.0 million. As of June 29, 1997, Great American Cookies had 363
retail units, including 100 Company-operated and 263 franchised units. Of these
363 retail units, 324 were full-size stores and 39 operated as satellite units,
consisting of carts, wagons and kiosks. Over the past five fiscal years, Great
American Cookies has increased its retail units as follows:
<TABLE>
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Store Openings and Closings(1)
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1993 1994 1995 1996 1997
--------------- ------------- ------------- ------------- -------------
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..... 99 186 101 200 111 204 108 215 104 225
Stores opened(1)......... 11 18 15 15 16 11 12 14 1 12
Stores closed(1)......... (6) (7) (7) (9) (8) (11) (10) (10) (10) (8)
Stores sold to
franchisees........... (6) 6 (14) 14 (12) 12 (9) 9 (12) 12
Stores acquired
from franchisees...... 3 (3) 3 (3) 1 (1) 3 (3) 8 (8)
Stores acquired
from Georgia Cookies(2) - - 13 (13) - - - - - -
---- --- --- --- --- --- ---- --- --- ---
Stores open at end
of fiscal year........ 101 200 111 204 108 215 104 225 91 233
==== === === === === === ==== === ==== ===
Total stores............. 301 315 323 329 324
Estimated satellite
locations............. 32 38 48 39 39
Total retail units....... 333 353 371 368 363
Net change in retail units 11 20 18 (3) (5)
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(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 29, 1997, the Company's stores were located in 39 states,
and Guam, with a concentration of retail outlets in the Southeastern and
South-central United States. As of June 29, 1997, the Company had ten or more
outlets in the following states:
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% OF % OF FISCAL
COMPANY- RETAIL 1997 SYSTEM-
STATE OPERATED FRANCHISED TOTAL OUTLETS WIDE SALES
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Texas..................... 1 52 53 14.6% 17.1%
Georgia................... 19 11 30 8.3% 10.1%
Florida................... 2 25 27 7.5% 6.6%
North Carolina............ 0 19 19 5.3% 5.2%
Tennessee................. 1 16 17 4.7% 4.3%
Louisiana................. 3 13 16 4.4% 6.6%
New York.................. 7 9 16 4.4% 3.6%
Virginia.................. 9 7 16 4.4% 3.3%
Alabama................... 0 13 13 3.6% 4.6%
Ohio...................... 7 5 12 3.3% 3.0%
South Carolina............ 3 9 12 3.3% 3.2%
Illinois.................. 1 9 10 2.8% 2.0%
Missouri.................. 4 6 10 2.8% 2.9%
</TABLE>
For fiscal 1997, retail sales of Company-operated and franchised units
in the Southeast accounted for approximately 45% of estimated system-wide
sales. These Southeastern retail units (Georgia, Florida, North Carolina,
Tennessee, Virginia, Alabama, and South Carolina) represented approximately 41%
of the total Company-operated and franchised retail units.
STORES AND UNITS
The typical Great American Cookies 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.
In fiscal 1997, retail sales volume averaged approximately $225,000
per store for Company-operated stores, and approximately $296,000 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 Cookies 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 per location. Rents can be significantly
higher for certain retail locations.
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Great American Cookies 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 2002 for Company-operated and
franchised stores leased by the Company and the contribution of those stores to
estimated system-wide sales for fiscal 1997.
<TABLE>
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% OF TOTAL
CALENDAR YEAR SYSTEM-WIDE % OF TOTAL
OF NUMBER OF STORES AS OF FISCAL 1997 1997
LEASE EXPIRATION STORES JUNE 29, 1997 SALES $ SYSTEM-WIDE SALES
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1998 22 6.2% 4,669,631 5.2%
1999 15 14.0% 13,067,610 14.5%
2000 37 10.3% 9,274,025 10.3%
2001 35 9.8% 9,763,120 10.8%
2002 28 7.8% 7,729,882 8.6%
</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 1997, existing Great American Cookies franchisees opened 12
stores, which management believes, reflects existing franchisees' enthusiasm
for the Great American Cookies concept. Additionally, in fiscal 1997 the
Company sold 12 existing Company-operated stores to franchisees of which 4
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 29, 1997, the ratio of franchised to Company-operated units
was approximately 2.63:1. The number of franchised and Company-operated retail
units for each of the last five fiscal years is as follows:
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NUMBER OF FRANCHISED VS. COMPANY-OPERATED RETAIL UNITS
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1993 1994 1995 1996 1997
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NUMBER OF RETAIL UNITS:
Franchised.................. 222 231 251 253 263
Company-operated............ 111 122 120 115 100
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333 353 371 368 363
===== ===== ===== ===== =====
PERCENTAGE OF RETAIL UNITS:
Franchised.................. 66.7% 65.4% 67.7% 68.8% 72.5%
Company-operated............ 33.3% 34.6% 32.3% 31.2% 27.5%
------ ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
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FRANCHISEE INVESTMENT
Each franchisee pays the Company an initial licensing fee of $25,000
per store 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 Cookies 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 29, 1997, the five largest franchisees operated 71
stores and 6 satellite units and, the Company estimates, had aggregate retail
sales of $22.2 million, or approximately 24.7% of total estimated system-wide
retail sales.
Over 41% of all franchisees currently operate more than one retail
store, but at the end of fiscal year 1997, no single franchisee held licenses
to more than 10.3% of the Company's total number of franchised outlets or
accounted for more than 9.6% 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 products for sale at all times. Products are baked in store ovens
throughout the day. The typical transaction in Company-operated stores is
approximately $2.55. 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 Cookies 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 have historically been 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 29, 1997, the Company had approximately 660 employees in
Company-operated stores, of whom approximately 180 were store managers and
assistant store managers, 40 were full-time sales assistants and 440 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 increased from $4.75 to $5.15 on
September 1, 1997. The September 1, 1997 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 Cookies 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 80% of a
typical store's gross revenues, with beverage sales generating most of the
balance. During fiscal 1997, the cookie and brownie product line included the
following offerings:
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Original Chocolate Chip Cookies Triple Chocolate Cookies
Oatmeal Walnut Raisin Cookies Chocolate Crunch Cookies
Sugar Cookies Original Chocolate Chip Cookies w/M&Ms(R)
Pecan Chocolate Chip Cookies Peanut Butter Supreme Cookies w/M&Ms(R)
Peanut Butter Supreme Cookies Shortbread Cookies
Double Fudge Chocolate Chip Cookies Cookie Cakes
Chewy Chocolate Supreme Cookies Cookie Cakes by the Slice
Chewy Pecan Supreme Cookies Fudge Brownies
Double Doozie and Dinky Doozie Cookies Fudgenut Brownies
White Chunk Macadamia Cookies Cheesecake Brownies
Snickerdoodles Chocolate Cheesecake Swirl Brownies
Domino Cookies Pumpkin Cheesecake Brownies
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-operated 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 into "ready to bake" batter which is then
packaged at the batter facility. This 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.
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REGULATION
The Company's products are subject to federal regulations administered
by the Food and Drug Administration (the "FDA"). The Company maintains a
quality control laboratory at its batter facility which tests ingredients 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 regulate the sale of franchises and require 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 competitor is Mrs. Fields' Original Cookies,
which owns and franchises cookie stores throughout the United States. In
management's view, competition between cookie stores primarily occurs in
locating and obtaining new store locations. Specifically, as of June 29, 1997,
approximately 9% of all Company-operated and franchised stores operate in malls
which have other cookie retailers. Mrs. Field's Original Cookies has expressed
an interest in acquiring the Company. Discussions are ongoing, but no agreement
has been reached. (See Item 3.)
Great American Cookies 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.
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FORWARD-LOOKING STATEMENTS
The preceding section (Item 1. Business) contains various
"forward-looking statements" which represent the Company's expectations or
beliefs concerning future events, including statements regarding unit growth,
future retail occupancy costs, and future labor costs. The Company cautions
that a number of important factors could, individually or in the aggregate,
cause actual results to differ materially from those stated in the
forward-looking statements including, without limitation, the following:
consumer spending trends and habits, mall traffic trends, increased competition
among snack retailers, economic conditions in the regions where the Company and
its franchisees operate stores, the ability to identify and secure suitable
locations for new stores, the availability of experienced management and hourly
employees, and the laws and regulations affecting labor and employee benefit
costs.
ITEM 2. PROPERTIES
As of June 29, 1997, 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 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 29, 1997, the Company leased 296 retail stores, of which
205 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
On September 12, 1997, nine Great American Cookies franchisees filed a
lawsuit against the Company and certain other parties alleging certain
anticipatory breaches of contract and violations of certain state, franchise
and unfair trade practice laws. These allegations were made as a result of
discussions held between the shareholder of Great American Cookies and Mrs.
Fields Original Cookies, Inc. ("Mrs. Fields") regarding the possibility of Mrs.
Fields acquiring all of the outstanding shares of Common Stock of Cookies USA,
Inc, the sole stockholer of Great American Cookies. As of September 24, 1997,
no agreement with Mrs. Fields has been reached nor has the Company been served
with this lawsuit. The Company believes that the claims of the plaintiffs are
without merit and intends to vigorously defend itself against the claims.
Nevertheless, this action is at its earliest stages, and it is not possible at
this time to determine the outcome of the lawsuit or the effect of its
resolution on the Company's financial position or operating results.
In addition, from time to time the Company is subject to claims and
legal actions in the ordinary course of its business. Such claims or legal
actions would not have a material adverse effect on the Company or its
business, and the Company is not aware that any other litigation is threatened.
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ITEM 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 Cookies
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 1997, the Company declared and paid dividends
of $1,250,000 to Cookies USA. 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.
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<PAGE> 13
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 as of period end".
<TABLE>
<CAPTION>
THE
PREDECESSOR(1) THE COMPANY
-------------- ----------------------------------------------------------------------------
PRO FORMA (UNAUDITED)
------------------------------
TWENTY-FOUR TWENTY-NINE
WEEK PERIOD WEEK PERIOD FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 9, JUNE 30, JUNE 24, JUNE 30, JUNE 29, JUNE 30, JUNE 29,
1993 1994 1993(3) 1994(2) 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue....................... $16,070 $21,935 $38,947 $39,667 $41,408 $40,384 $40,042
Cost of sales....................... 7,537 10,887 18,327 18,968 19,975 19,522 18,615
Retail store
occupancy costs................... 2,747 4,133 6,788 7,353 7,588 7,379 7,055
Other retail
store expenses.................... 404 785 1,115 1,189 1,539 1,316 1,019
Selling, general
and administrative................ 3,212 4,135 6,328 6,787 7,482 7,107 7,240
Other expenses, net................. 354 4,609 4,888 4,920 4,838 4,883 4,691
------- ------- ------- ------- ------- ------- -------
Income (loss) before non-recurring
litigation charge and taxes...... 1,816 (2,614) 1,501 450 (14) 177 1,422
Non recurring Litigation charge..... - - - - 396 - -
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes.......... 1,816 (2,614) 1,501 450 (410) 177 1,422
Provision (benefit)
for income taxes(4)............... 28 (838) - - 277 416 887
------- ------- ------- ------- ------- ------- -------
Net income (loss)(5)................ 1,788 $(1,776) - - $ (687) $ (239) $ 535
======= ======= ======= =======
Unaudited pro forma:
Provision for income taxes(4)....... 700 - 971 573
------- ------- -------
Net income.......................... $ 1,088 - $ 530 $ (123)
======= ======= =======
BALANCE SHEET DATA:
Total assets.......................... 20,898 58,908(7) - - 54,376 54,549 53,191
Long-term debt........................ 4,220 40,000(8) - - 40,000 40,000 40,000
OTHER DATA (UNAUDITED):
EBITDA(9)............................. 2,742 1,297 8,661 7,658 6,697 7,783 8,923
Adjusted EBITDA(9).................... - 3,599 8,957 8,165 7,582 8,273 9,575
Adjusted EBITDA after adding
back nonrecurring litigation
charge .............................. - 3,599 8,957 8,165 7,978 8,273 9,575
Fixed charge coverage
ratio(6)............................ 1.4 2.0 1.8 1.7 1.9 1.9
Number of retail outlets
as of period end
Company-operated.................. - 122 122 122 120 115 100
Franchised........................ - 231 211 231 251 253 263
------- ------- ------- ------- ------- ------- -------
Total........................... - 353 333 353 371 368 363
======= ======= ======= ======= ======= ======= =======
Est. System-wide sales................ - - $75,144 $77,901 $82,822 $85,963 $90,061
Average annual sales
per store in system................. - - 256 254 259 260 275
</TABLE>
-13-
<PAGE> 14
- ----------------------------
(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) Represents the ratio of Adjusted EBITDA to interest expense (including
accruals and the interest component of capitalized lease obligations).
(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
WEEK PERIOD WEEK PERIOD FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 9, JUNE 30, JUNE 24, JUNE 30, JUNE 29, JUNE 30, JUNE 29,
1993 1994 1993(3) 1994(2) 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)......... $1,788 $(1,776) $ 530 $ (123) $ (687) $ (239) $ 535
Add:
Depreciation.............. 572 750 1,395 1,407 1,662 1,853 1,940
Amortization of goodwill.. - 487 877 882 877 870 870
Interest expense, net of
interest income......... 304 2,357 4,332 4,346 4,263 4,311 4,105
Amortization of debt
issue costs............. 50 317 556 573 575 572 586
Provision (benefit) for
income taxes............ 28 (838) 971 573 277 416 887
------ ------- ------ ------ ------ ------ ------
EBITDA.................... $2,742 $ 1,297 $8,661 $7,658 $6,967 $7,783 $8,923
======
Other non-cash items...... 232 220 395 518 433 401
Interest income........... 134 76 112 97 57 251
Employment related
acquisition costs....... 1,936 - - - - -
------- ------ ------ ------ ------ ------
Adjusted EBITDA........... $ 3,599 $8,957 $8,165 $7,582 $8,273 $9,575
Nonrecurring litigation... - - - 396 - -
------- ------ ------ ------ ------ ------
Adjusted EBITDA after
adding back nonreucrring
litigation charge....... $ 3,599 $8,957 $8,165 $7,978 $8,273 $9,575
======= ====== ====== ====== ====== ======
</TABLE>
-14-
<PAGE> 15
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.
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. This change does not materially impact the
comparability of the years presented in these financial statements.
FIFTY-TWO WEEKS ENDED JUNE 29, 1997 (FISCAL YEAR 1997) COMPARED TO
FIFTY-TWO WEEKS ENDED JUNE 30, 1996 (FISCAL YEAR 1996)
Company and Franchise Store Activity
As of June 29, 1997, there were 91 Company-operated stores and 233
franchised stores in operation. The store activity for fiscal year 1997 and for
fiscal year 1996 is summarized as follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------- -----------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Stores open as of beginning of the fiscal year 104 225 108 215
Stores opened (including relocations) 1 12 12 14
Stores closed (including relocations) (10) (8) (10) (10)
Stores sold to franchisees (12) 12 (9) 9
Stores acquired from franchisees 8 (8) 3 (3)
---- ---- ---- ----
Stores open as of the end of the year 91 233 104 225
Satellite locations as of the end of the year 9 30 11 28
---- ---- ---- ----
Total outlets as of the end of the year 100 263 115 253
==== ==== ==== ====
</TABLE>
The above activity results in 5,161 Company-operated equivalent store
weeks and 11,858 franchisee-operated equivalent store weeks during the fiscal
year ended June 29, 1997 compared to 5,661 Company-operated equivalent store
weeks and 11,544 franchisee-operated equivalent store weeks during the fiscal
year ended June 30, 1996.
-15-
<PAGE> 16
Total Revenue
Total revenue decreased approximately $341,000, or 0.8%, during the
fiscal year ended June 29, 1997 compared to the fiscal year ended June 30,
1996. Each of the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores
decreased approximately $2,344,000, or 9.5%, during the
fiscal year ended June 29, 1997 compared to the fiscal year
ended June 30, 1996. The decrease in revenue from
Company-operated retail stores was attributable to (a) an
8.8% decrease in Company-operated equivalent store weeks and
(b) a 0.7% decrease in the average retail sales volume for
Company-operated stores. On a comparable store basis, (those
stores which were Company-operated during the entire 1997 and
1996 fiscal years), sales volumes increased 1.3%. The change
in average store volume does not equal the change in
comparable store sales volume due to differences in the
stores being compared as a result of opening, closing,
selling, and acquiring stores throughout the year.
- Batter sales to franchisees increased approximately
$1,166,000, or 11.5%, during the fiscal year ended June 29,
1997 compared to the fiscal year ended June 30, 1996. The
increase in batter sales to franchisees was primarily
attributable to (a) an 8.8% increase in the volume of batter
sold per franchisee-operated equivalent store week and (b) a
2.7% increase in franchisee-operated equivalent store weeks.
- Franchise royalties increased approximately $440,000, or
10.3%, during the fiscal year ended June 29, 1997 compared to
the fiscal year ended June 30, 1996. The increase in
franchise royalties was attributable to (a) an increase in
the average retail sales volume per franchisee-operated store
of 7.6% and (b) a 2.7% increase in franchisee-operated
equivalent store weeks. On a comparable store basis, (those
stores which were franchisee-operated during the entire 1997
and 1996 fiscal years), management estimates franchisees'
sales volumes increased 5.5%.
- Revenue from franchise sales increased approximately
$446,000, or 38.5%, during the fiscal year ended June 29,
1997 compared to the fiscal year ended June 30, 1996. Revenue
from selling existing and new stores to franchisees is
summarized as follows (rounded):
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
--------------- -----------------
<S> <C> <C>
Number of licenses sold to franchisees
- existing stores 12 9
- new stores 12 11
Cash and notes from sale of existing stores $ 2,045,000 $ 1,602,000
Less: net book value of existing stores sold 818,000 741,000
Revenue from sale of existing stores 1,227,000 861,000
------------ ------------
Revenue from license fees for new stores 300,000 275,000
Revenue from other fees 75,000 21,000
------------ ------------
Revenue from license fees
for new stores and other fees 375,000 296,000
------------ ------------
Total revenue from sale of existing
and new stores to franchisees $ 1,602,000 $ 1,157,000
============ ============
</TABLE>
- Other revenue decreased approximately $50,000, or 43.1%,
during the fiscal year ended June 29, 1997 compared to the
fiscal year ended June 30, 1996. The decrease in other
revenue was primarily attributable to (a) a decrease in
construction assistance revenue derived from construction
assistance performed by the Company for the franchisees and
(b) an increase in batter discounts given to franchisees as a
result of increased batter sales to franchisees in fiscal
1997.
-16-
<PAGE> 17
Cost of Sales
Cost of sales decreased approximately $907,000, or 4.6%, during the
fiscal year ended June 29, 1997 compared to the fiscal year ended June 30,
1996. The decrease in cost of sales was primarily attributable to (a) a decline
in cookie and beverage sales due to less Company-operated equivalent store
weeks, and (b) a decrease in the cost of packaging and freight for
Company-operated retail stores, offset by (c) an increase in batter sales to
franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased approximately $324,000, or
4.4%, during the fiscal year ended June 29, 1997 compared to the fiscal year
ended June 30, 1996. The decrease was primarily attributable to an 8.8%
decrease in Company-operated equivalent store weeks.
Other Retail Store Expenses
Other retail store expenses decreased approximately $297,000, or
22.6%, during the fiscal year ended June 29, 1997 compared to the fiscal year
ended June 30, 1996. The decrease in other retail store expenses was primarily
attributable to (a) a decrease in operating supplies expense within
Company-operated stores in fiscal 1997 due to (1) the opening of 11 less
Company-operated stores in fiscal 1997 versus fiscal 1996 and (2) additional
costs incurred in fiscal 1996 related to the rollout of a new cookie
merchandising program and (b) an 8.8% decrease in Company-operated equivalent
store weeks, offset by (c) an increase in point-of-sale marketing expenses in
Company-operated stores.
Selling, General and Administrative
Selling, general and administrative expenses increased approximately
$135,000, or 1.9%, during the fiscal year ended June 29, 1997 compared to the
fiscal year ended June 30, 1996. This increase was primarily attributable to
(a) an increase in point-of-sale marketing expenses on behalf of franchisees,
(b) an increase in professional service fees and (c) an increase in salaries,
offset by (d) a decrease in travel expense and (e) a decrease in insurance
costs.
Other Expenses, Net
Other expenses, net, decreased approximately $193,000, or 3.9%, during
the fiscal year ended June 29, 1997 compared to the fiscal year ended June 30,
1996. The decrease was primarily attributable to an increase in interest
income.
Net Income (Loss)
Net income increased approximately $774,000, or 323.3%, for the fiscal
year ended June 29, 1997 compared to the fiscal year ended June 30, 1996. The
increase in net income was primarily attributable to a 20.8% increase in
operating income, (b) a 3.9% decrease in other expenses, net, offset by (c) a
113.3% increase in state and federal income tax expense.
-17-
<PAGE> 18
FIFTY-TWO WEEKS ENDED JUNE 30, 1996 (FISCAL YEAR 1996) COMPARED TO FIFTY-TWO
WEEKS ENDED JUNE 29, 1995 (FISCAL YEAR 1995)
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, (those
stores which were Company-operated during the entire 1996 and
1995 fiscal years), sales volumes decreased 0.3%.
-18-
<PAGE> 19
- 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>
<CAPTION>
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, (those stores which
were franchisee-operated during the entire 1996 and 1995
fiscal years), 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.
-19-
<PAGE> 20
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.
-20-
<PAGE> 21
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 29, 1997 and as
of June 30, 1996 was $5.7 million and $3.2 million, respectively. The specialty
retail cookie business does not require the maintenance of significant
receivables or inventories; therefore, it is not unusual for the Company's
working capital balance to be less than $5 million.
The Company 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 2 Company-operated stores during fiscal 1998. 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 1997, the Company opened 1 Company-operated store and
remodeled 1 store, requiring capital expenditures of approximately $251,000.
Total fiscal 1997 capital expenditures were approximately $1,100,000 while
capital expenditures for fiscal 1996 totaled approximately $1,900,000.
The Company is a 100% subsidiary of Cookies USA and the sole operating
unit of the consolidated entity. As of June 29, 1997, Cookies USA had
outstanding debt consisting of $10 million of Subordinated Notes. Additionally,
as of June 29, 1997, Cookies USA had outstanding securities and accrued
dividends of $12,738,658 of Senior Preferred Stock, $2,944,178 Junior Class A
Preferred Stock, $883,253 of Junior Class B Preferred Stock and $250,000 of
common stock. The Company is the sole source of any cash to be paid as
interest, principal payments or dividends on such securities or to pay any
other expenses, including management fees, incurred by Cookies USA. The Company
expects to pay dividends to Cookies USA in amounts sufficient to service the
cash flow requirements of Cookies USA to the extent that such payments are
permitted by the terms of the Company's Senior Secured Notes and, if additional
indebtedness is incurred that restricts such payments, by the terms of such
additional indebtedness. During fiscal 1997, the Company declared and paid
$1,250,000 of dividends to Cookies USA. 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 29, 1997 the Company had a
cash balance of approximately $4,884,000. 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.
The preceding discussion of liquidity and capital resources contains
various "forward-looking statements" which represent the Company's expectations
or beliefs concerning future events, including statements regarding unit growth
and cash requirements. The Company cautions that a number of important factors
could, individually or in the aggregate, cause actual results to differ
materially from those stated in the forward-looking statements including,
without limitation, the following: consumer spending trends and habits, mall
traffic trends, increased competition among snack retailers, economic
conditions in the regions where the Company and its franchisees operate stores,
the ability to identify and secure suitable locations for new stores, the
availability of experienced management and hourly employees, and the laws and
regulations affecting labor and employee benefit costs.
-21-
<PAGE> 22
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 increased from $4.75 to
$5.15 on September 1, 1997. The 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.
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 periodically 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 29,
1997.
-22-
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GREAT AMERICAN COOKIE COMPANY, INC.
Report of Independent Accountants
Balance Sheet as of June 29, 1997 and June 30, 1996
Statement of Operations for the fifty-two week periods ended June 29,
1997 and June 30, 1996 Statement of Changes in Stockholder's Equity
for the fifty-two week periods ended June 29, 1997
and June 30, 1996
Statement of Cash Flows for the fifty-two week periods ended June 29,
1997 and June 30, 1996 Notes to Financial Statements
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
-23-
<PAGE> 24
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 29, 1997 and June 30, 1996, 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 15, 1997, except for
Note 14 as to which
the date is September 24, 1997
<PAGE> 25
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1997 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,883,991 $ 3,301,627
Accounts receivable - trade 1,701,587 1,675,584
Inventory (Notes 1 and 2) 1,291,907 1,443,811
Prepaid expenses (Note 3) 1,227,378 1,175,309
Income tax receivable 0 155,789
Current deferred tax benefit (Notes 1 and 10) 4,578 81,360
Current portion of notes receivable (Note 4) 867,207 198,085
Other receivables 8,548 33,899
----------- -----------
Total current assets 9,985,196 8,065,464
----------- -----------
Property and equipment, net of accumulated depreciation (Note 5) 6,304,591 8,325,726
Construction in progress, net of construction deposits received from franchisees 91,759 29,258
----------- -----------
6,396,350 8,354,984
----------- -----------
Other assets:
Deferred loan costs, net of accumulated amortization
of $2,049,700 and $1,464,100, respectively (Note 1) 2,050,069 2,608,958
Notes receivable, net of current portion (Note 4) 302,512 19,963
Deferred tax benefit (Notes 1 and 10) 1,293,006 1,419,143
Deposits 49,615 61,386
Accrued straight-line minimum rent receivable for subleases to 1,266,701 1,300,872
----------- -----------
4,961,903 5,410,322
----------- -----------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $3,104,351 and $2,233,851, respectively (Note 1) 31,847,974 32,718,474
------------ -----------
$53,191,423 $54,549,244
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities:
Accounts payable $ 376,035 $ 832,044
Sales taxes payable 105,065 129,974
Accrued interest payable 1,993,750 1,996,681
Accrued expenses (Note 6) 1,005,934 818,912
Income taxes payable 34,133 225,564
Deposits 673,277 738,542
Dividends payable 125,000 125,000
----------- -----------
Total current liabilities 4,313,194 4,866,717
----------- -----------
Capital lease obligations (Note 9) 62,214 87,603
----------- -----------
Accrued straight-line minimum rent payable (Note 1) 2,113,057 2,176,523
----------- -----------
Long-term debt (Note 7) 40,000,000 40,000,000
----------- -----------
Commitments and contingencies (Note 9)
Stockholder's equity (Note 11):
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 (7,133,105) (6,417,662)
----------- -----------
6,702,958 7,418,401
----------- -----------
$53,191,423 $54,549,244
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-25-
<PAGE> 26
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 29, 1997 JUNE 30, 1996
----------------- -----------------
<S> <C> <C>
Revenue:
Cookie and beverage sales $22,374,973 $24,718,712
Batter sales to franchisees 11,270,395 10,104,241
Franchise royalties 4,729,310 4,288,846
Franchise sales - existing and new stores 1,602,285 1,156,753
Other - net 65,534 115,165
----------- -----------
Total revenue 40,042,497 40,383,717
----------- -----------
Operating expenses:
Cost of sales 18,615,205 19,522,528
Retail store occupancy 7,054,793 7,379,160
Other retail store expenses 1,019,046 1,315,818
Selling, general and administrative expenses 7,241,470 7,106,685
----------- -----------
Total operating expenses 33,930,514 35,324,191
----------- -----------
Other (income) expenses, net:
Interest income (250,632) (56,633)
Interest expense 4,355,668 4,367,479
Amortization of deferred loan costs 585,600 572,400
----------- -----------
Total other expenses, net 4,690,636 4,883,246
----------- -----------
Income before taxes 1,421,347 176,280
State and federal income tax expense (Note 10) 886,790 415,695
----------- -----------
Net income (loss) $ 534,557 $ (239,415)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-26-
<PAGE> 27
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at June 29, 1995 $13,500,000 $336,063 $(4,997,247) $ 8,838,816
Net loss (239,415) (239,415)
Dividends declared (1,181,000) (1,181,000)
----------- -----------
Balance at June 30, 1996 13,500,000 336,063 (6,417,662) 7,418,401
Net income 534,557 534,557
Dividends declared (1,250,000) (1,250,000)
----------- -----------
Balance at June 29, 1997 $13,500,000 $336,063 $(7,133,105) $ 6,702,958
=========== ======== =========== ===========
</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 CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FIFTY-TWO FOR THE FIFTY-TWO
WEEK PERIOD WEEK PERIOD
ENDED ENDED
JUNE 29, 1997 JUNE 30, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 534,557 $ (239,415)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation 1,939,700 1,853,790
Amortization of cost in excess of fair value of net assets acquired (goodwill) 870,500 869,651
Amortization of deferred loan costs 585,600 572,400
Net gain on sales and disposals of property, equipment, and inventory (550,164) (402,303)
Net (decrease) increase in accrued straight-line minimum rent payable and
receivable, net (29,295) 85,985
Changes in assets and liabilities:
(Increase) in accounts receivable (194,789) (550,500)
Decrease (increase) in inventory 95,387 (139,637)
(Increase) in prepaid expenses (52,069) (99,976)
Decrease (increase) in income tax receivable 155,789 (8,206)
Decrease in current deferred tax benefit 76,782 175,427
Decrease in other receivables 25,351 128,500
Decrease (increase) in deferred tax benefit 126,137 (54,107)
Decrease (increase) in other assets 11,771 (6,627)
(Decrease) in accounts payable (456,009) (461,635)
(Decrease) increase in sales taxes payable (24,909) 1,884
(Decrease) increase in accrued interest payable (2,931) 5
Increase (decrease) in accrued expenses 187,022 (1,096,735)
(Decrease) increase in income taxes payable (191,431) 225,564
(Decrease) in deposits (65,265) (21,970)
--------------- ----------------
Net cash provided by operating activities 3,041,734 832,095
--------------- ----------------
Cash flows from investing activities:
Acquisitions of property and equipment, including net increase
in construction in progress, net of construction deposits received from franchisees (1,084,301) (1,913,503)
Proceeds from sales and disposals of property and equipment 452,745 1,083,428
Proceeds from collection of notes receivable 474,286 448,329
--------------- ----------------
Net cash used for investing activities (157,270) (381,746)
--------------- ----------------
Cash flows from financing activities:
Payment of deferred loan costs (26,711) 0
Principal repayments under capital lease obligations (25,389) (16,602)
Dividends paid (1,250,000) (1,383,900)
--------------- ----------------
Net cash used for financing activities (1,302,100) (1,400,502)
--------------- ----------------
Net increase (decrease) in cash and cash equivalents during period 1,582,364 (950,153)
Cash and cash equivalents, beginning of period 3,301,627 4,251,780
--------------- ----------------
Cash and cash equivalents, end of period $ 4,883,991 $ 3,301,627
=============== ================
</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 CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FIFTY-TWO FOR THE FIFTY-TWO
WEEK PERIOD WEEK PERIOD
ENDED ENDED
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid for:
Interest: $ 4,358,599 $ 4,367,473
============ ===========
State and federal income taxes $ 727,095 $ 118,500
============ ===========
</TABLE>
Cash paid during the fiscal years ended June 29, 1997 and June 30, 1996 for
state and federal income taxes represents payments made by Great American
Cookie Company, Inc. (the `Company') to governmental authorities and to
Cookies USA, Inc. (`Cookies USA'), the sole stockholder of the Company,
pursuant to a tax sharing agreement between the two companies. The companies
file consolidated federal tax returns. In accordance with the tax sharing
agreement, the Company will pay Cookies USA an amount equal to the federal
income tax liability calculated on a separate basis for the Company. (See
Note 10.)
Supplemental schedule of non-cash financing and investing activities:
During the fifty-two weeks ended June 29, 1997, notes receivable with face
amounts totaling $1,352,596 were received from unrelated franchisees in
connection with the sale of 8 Company-operated stores.
During the fifty-two weeks ended June 29, 1997, the Company exchanged
accounts receivable from unrelated franchisees totaling $91,026 for fixtures
and equipment and leasehold improvements representing retail cookie stores
previously licensed by the franchisees.
During the fifty-two weeks ended June 30, 1996, notes receivable with face
amounts totaling $296,363 were received from unrelated franchisees in
connection with the sale of 2 Company-operated stores.
During the fifty-two weeks ended June 30, 1996, the Company exchanged
accounts receivable from unrelated franchisees totaling $155,842 for
fixtures and equipment and leasehold improvements representing retail cookie
stores previously licensed by the franchisees.
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.)
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.
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. This
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 29, 1997 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, the notes' fair value at June 29, 1997, based on quoted
market values, is approximately $40,400,000.
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.
-30-
<PAGE> 31
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
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 29, 1997 and June 30, 1996 consist of
short-term commercial paper. These investments are stated at cost,
which approximates market.
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 in the year incurred, 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
statement of operations.
Depreciation is provided using accelerated methods over the estimated
useful lives of the assets which are as follows:
<TABLE>
<CAPTION>
<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 pre-tax net loss by $214,000.
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 store's unamortized balance in leasehold improvements and
fixtures and equipment is recorded as a loss on store closing.
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 (see 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 periodically 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 29, 1997.
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.
-31-
<PAGE> 32
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
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.
RECLASSIFICATIONS
Certain fiscal year 1996 amounts have been reclassified to conform to
fiscal year 1997 presentation.
2. INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Raw ingredients $ 237,204 $ 218,512
Batter, including retail stores 367,454 454,005
Beverage syrup 55,473 75,635
Paper goods and packaging supplies 168,073 190,375
Purchased icing and decorative toppings held for resale 52,371 106,531
Equipment held for resale 75,042 78,799
Marketing and miscellaneous supplies held for resale 336,290 319,954
----------- -----------
$ 1,291,907 $ 1,443,811
=========== ===========
</TABLE>
3. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Rent $ 1,158,181 $ 1,171,721
Other 69,197 3,588
----------- -----------
$ 1,227,378 $ 1,175,309
=========== ===========
</TABLE>
-32-
<PAGE> 33
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:
<TABLE>
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Notes receivable $ 1,169,719 $ 218,048
Less current portion 867,207 198,085
------------ ------------
Notes receivable, net of current portion $ 302,512 $ 19,963
============ ============
</TABLE>
Notes receivables are due from various franchisees and principally
result from the sale of existing Company-operated stores to
franchisees. Each note is guaranteed by the purchaser and
collateralized by the assets sold. Short-term notes generally carry an
interest rate of 15% per annum and are intended to serve as interim
financing until the franchisee can secure long-term financing from a
third party lender. Notes classified as non-current are generally due
in monthly installments of principal and interest, with the interest
rates ranging between 9% and 12.5% per annum. The aggregate maturities
of the notes receivable are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 867,207
1999 65,390
2000 68,983
2001 56,686
2002 33,700
Thereafter 77,753
------------
$ 1,169,719
============
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 6,829,757 7,724,036
Furniture, fixtures, and equipment 3,228,241 3,239,989
------------ ------------
11,058,793 11,964,820
Less accumulated depreciation (4,754,202) (3,639,094)
------------ ------------
Property and equipment - net $ 6,304,591 $ 8,325,726
============ ============
</TABLE>
-33-
<PAGE> 34
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Employee compensation including payroll taxes $ 379,187 $ 317,599
Employee bonuses 280,493 20,000
Construction expenses 14,588 59,252
Professional fees 115,133 107,500
Other 216,533 314,561
------------ ------------
$ 1,005,934 $ 818,912
============ ============
</TABLE>
7. LONG-TERM DEBT
Notes payable at June 29, 1997 and June 30, 1996 represent notes
issued on December 10, 1993. Notes payable are described as follows:
10.875% senior secured notes payable due January 15, 2001,
Series B. Interest accrues daily and is payable
semi-annually on January 15 and July 15. $40,000.00
==========
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 11.)
8. 401(K) PROFIT SHARING PLAN
The Company provides a defined contribution profit-sharing plan for
all employees meeting certain requirements. On February 14, 1997, the
Company amended the plan to include a pre-tax savings provision in
accordance with Section 401(k) of the Internal Revenue Code ("the
Plan").
Under the Plan, eligible employees may contribute as much as 15% of
their compensation up to the federal statutory limit, with the Company
matching 25% of the first 6% of compensation contributed by the
employee. The Company's matching portion of Plan contributions
resulted in expense of $9,283 in fiscal 1997. During fiscal 1996, no
amounts were expensed or contributed to the Plan by the Company.
-34-
<PAGE> 35
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
generally contain escalating rental payments and various provisions
for contingent rental payments based on sales volume. Future minimum
lease payments, including scheduled escalating rental payments, are as
follows:
<TABLE>
<CAPTION>
FISCAL PERIOD SUBLEASES TO
ENDING JUNE LEASES FRANCHISES NET
----------- ------ ---------- ---
<S> <C> <C> <C>
1998 $ 9,792,211 $ 6,658,319 $ 3,133,892
1999 9,127,663 6,218,598 2,909,065
2000 8,132,980 5,530,849 2,602,131
2001 6,925,037 4,767,873 2,157,164
2002 5,831,774 3,859,155 1,972,619
Thereafter 12,655,892 8,386,341 4,269,551
------------ ------------ -------------
$ 52,465,557 $ 35,421,135 $ 17,044,422
============ ============ =============
</TABLE>
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.
For the fifty-two week periods ended June 29, 1997 and June 30, 1996,
gross rent expense (including mall pass-through charges) was
approximately $14,135,000 and $13,332,000, while sublease income
(including mall pass-through charges) was approximately $10,533,000
and $9,628,000, 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, net of interest
expense, is $62,214.
In connection with the sale of existing Company-operated stores to
franchisees, the Company has guaranteed certain lease renewals to the
respective franchisee. If such leases are not obtained, then
predetermined payments shall be made to the franchisees as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OF NUMBER OF AMOUNT OF
LEASE EXPIRATION LEASE RENEWALS GUARANTEE
---------------- -------------- ---------
<S> <C> <C>
1998 2 $ 70,851
1999 1 74,843
2000 1 23,885
2001 - -
2002 1 60,000
----------
$ 229,579
==========
</TABLE>
As of June 29, 1997, the Company has not recorded any liability due to
the above guarantees as these amounts represent loss contingencies
which management believes are not probable.
-35-
<PAGE> 36
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
The Company is committed to purchases of certain raw materials from
various suppliers over the next year at fixed prices. At June 29,
1997, these purchase commitments totaled approximately $1,900,000.
From time to time the Company is subject to claims and legal actions
in the ordinary course of its business. Other than the matter
discussed in Note 14, the Company is not a party to any material
litigation and is not aware that any such litigation is threatened.
10. INCOME TAXES
The Company and Cookies USA will file consolidated federal income tax
returns for the fiscal period ending June 29, 1997, and the Company
will reimburse Cookies USA for its share of the consolidated federal
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 the federal 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 29, 1997.
The following information has been determined based upon the
provisions of Statement of Financial Accounting Standards No. 109:
<TABLE>
<CAPTION>
FOR THE FOR THE
FIFTY-TWO FIFTY-TWO
WEEK PERIOD WEEK PERIOD
ENDED ENDED
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Income tax provision:
Current: federal $ 575,954 $ 263,557
state 107,917 31,007
---------- ----------
683,871 294,564
---------- ----------
Deferred: federal $ 172,481 $ 108,380
state 30,438 12,751
---------- ----------
202,919 121,131
---------- ----------
$ 886,790 $ 415,695
========== ==========
</TABLE>
-36-
<PAGE> 37
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
The differences between income taxes at the statutory federal and
state income tax rates and the income tax expense reported in the
statement of operations are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
FIFTY-TWO FIFTY-TWO
WEEK PERIOD WEEK PERIOD
ENDED ENDED
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<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 23.3% 187.5%
Other 1.0% 10.3%
------ -----
62.3% 235.8%
====== =====
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Current:
Other $ 4,578 $ 81,360
---------- ----------
$ 4,578 $ 81,360
========== ==========
Non-current:
Depreciation $ 840,806 $ 896,800
Other 452,200 522,343
---------- ----------
$1,293,006 $1,419,143
========== ==========
</TABLE>
11. DIVIDENDS - REQUIREMENTS AND RESTRICTIONS
Great American Cookie Company, Inc. is a 100% subsidiary of Cookies
USA and the sole operating unit of the consolidated entity. As of June
29, 1997, Cookies USA has outstanding securities, excluding unpaid
dividends, consisting of $10 million of Subordinated Notes, $10.5
million of Senior Preferred Stock, $2.5 million of Junior Class A
Preferred Stock, $750,000 of Junior Class B Preferred Stock and
$250,000 of common stock. Great American Cookie Company, Inc. is the
sole source of cash for Cookies USA to pay interest, principal
payments, or dividends on Cookies USA's outstanding securities.
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. 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.
-37-
<PAGE> 38
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
The 10,500 shares of $1.00 par Senior Preferred Stock issued by
Cookies USA are 6% cumulative convertible shares. A share of the
Senior Preferred Stock is convertible at any time at the option of the
holder into 1.1308 shares of Cookies USA Common Stock. The holders of
the Senior Preferred Stock are entitled to certain anti-dilution
protection to maintain their percentage of ownership in Cookies USA.
Accumulated dividends on the Senior Preferred Stock 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. As
of June 29, 1997, Cookies USA has accrued $2,238,658 for unpaid
dividends due to the holders of the Senior Preferred Stock.
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 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 Junior Class A and B Preferred Stock have no
conversion, preemptive, voting or subscription rights. As of June 29,
1997, Cookies USA has accrued $577,431 for unpaid dividends due to the
holders of the Junior Class A and B Preferred Stock.
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
-38-
<PAGE> 39
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
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.
12. COMPANY AND FRANCHISED STORES
As of June 29, 1997, there were 100 Company-operated outlets and 263
franchised outlets in operation, while there were 115 Company-operated
outlets and 253 franchised outlets in operation as of June 30, 1996.
During the fifty-two week period ended June 29, 1997, the Company
earned initial license fees of $300,000 from the sale of 12 new
in-line stores to franchisees. Additionally, the Company earned
$75,000 from license transfer, upgrade and other fees.
During the fifty-two week period ended June 30, 1996, the Company
earned initial franchise fees of $275,000 from franchisees opening 11
new in-line stores. Additionally, the Company earned $21,000 from
license transfer and upgrade fees.
13. RELATED PARTY TRANSACTIONS
The majority owners of the Common Stock of Cookies USA, Inc. are
affiliated with the holders of the $10 million of Subordinated Notes
issued by Cookies USA. The holders of the Senior Preferred Stock of
Cookies USA are also some of the holders of the Common Stock of
Cookies USA. The holders of the Junior Class A and B Preferred Stock
of Cookies USA are also affiliated with the majority of holders of the
Common Stock of Cookies USA. (See Note 11.)
A franchisee who owns 12 franchise outlets is related to one of the
Company's directors. During the fifty-two week periods ended June 29,
1997 and June 30, 1996, the Company had sales of batter and supplies
of approximately $476,000 and $497,000 to this related party. The
Company also received royalty revenues of approximately $199,000 and
$202,000 for the fifty-two week periods ended June 29, 1997 and June
30, 1996, respectively. As of June 29, 1997 and June 30, 1996, this
franchisee owed the Company approximately $34,000 and $91,000,
respectively.
14. SUBSEQUENT EVENTS
On September 12, 1997, nine Great American Cookies franchisees filed a
lawsuit against the Company and certain other parties alleging certain
anticipatory breaches of contract and violations of certain state,
franchise and unfair trade practice laws. These allegations were made
as a result of discussions held between the shareholder of Great
American Cookies and Mrs. Fields Original Cookies, Inc. ("Mrs.
Fields") regarding the possibility of Mrs. Fields acquiring all of the
outstanding shares of Common Stock of Cookies USA, Inc. As of
September 24, 1997, no agreement with Mrs. Fields has been reached nor
has the Company been served with this lawsuit. The company believes
that the claims of the plaintiffs are without merit and intends to
vigorously defend itself against the claims. Nevertheless, this action
is at its earliest stages, and it is not possible at this time to
determine the outcome of the lawsuit or the effect of its resolution
on the Company's financial position or operating results.
-39-
<PAGE> 40
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> 41
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) 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 1,300,872 1,157,948
to franchisees (Note 1) ----------- -----------
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.
-41-
<PAGE> 42
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.
-42-
<PAGE> 43
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
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.
-43-
<PAGE> 44
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.
-44-
<PAGE> 45
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.
-45-
<PAGE> 46
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.
-46-
<PAGE> 47
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
-47-
<PAGE> 48
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 30, JUNE 29,
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>
-48-
<PAGE> 49
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
Notes receivable 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>
-49-
<PAGE> 50
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.
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>
-50-
<PAGE> 51
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
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.
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 29, 1997, 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.
-51-
<PAGE> 52
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
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>
-52-
<PAGE> 53
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.
-53-
<PAGE> 54
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 trnasfer and
upgrade fees.
-54-
<PAGE> 55
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.
-55-
<PAGE> 56
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.................... 53 Director and Secretary 1977
Arthur S. Karp...................... 59 Director 1977
Adam E. Max......................... 39 Director, Assistant Secretary, and Vice President 1993
Thomas H. Quinn..................... 49 Director 1993
David W. Zalaznick.................. 42 Director 1993
David B. Barr....................... 34 President, Chief Financial Officer, and Treasurer 1996
Thomas H. Lynch..................... 58 Executive Vice President - Store Development 1984
W. James Squire, III................ 50 Senior Vice President - Franchising 1993
Betty W. Ansley..................... 68 Vice President - Administration and Assistant Secretary 1978
Daniel L. Breault................... 48 Vice President - Store Operations 1996
</TABLE>
-56-
<PAGE> 57
MICHAEL J. COLES is a co-founder of the Company and has served as a
Director 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. Mr. Coles served as Chairman of
the Board of the Company from June 1977 until December 1996.
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., Fannie May Holdings, 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. and serves as a Director of Motors and
Gears, Inc. in addition to serving as a Director of 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 Motors and Gears, 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. Prior
to joining the Company, from March 1991 to May 1994, Mr. Barr was a division
finance manager for Pizza Hut, Inc., a subsidiary of PepsiCo., 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-Franchising, 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.
-57-
<PAGE> 58
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses compensation paid by the Company to its
executive officers for the fiscal year ended June 29, 1997:
<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION COMPENSATION($)
NAME AND ---------------------------------- ------------------------------
PRINCIPAL POSITION YEAR SALARY($) BONUS($) NON-COMPETE OTHER
- -------------------------------------- ---- --------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Michael J. Coles...................... 1997 $ 40,879 $ - $ 44,293 $ 3,013(3)
Director and Secretary (1) 1996 150,000 - 100,000 5,856(3)
1995 150,000 - 100,000 5,729(3)
David B. Barr......................... 1997 $ 155,000 $ - $ - $ 6,746(3)
President, Chief Financial Officer, 1996 141,673 - - 5,856(3)
and Treasurer 1995 123,486 35,000 - 5,729(3)
Thomas H. Lynch....................... 1997 $ 127,080 $ - $ - $ 6,746(3)
Executive Vice President- 1996 127,080 - - 5,856(3)
Store Development 1995 127,080 40,000 - 6,729(3)
5,590(4)
W. James Squire, III.................. 1997 $ 100,000 $ 50,485 $ - $ 6,746(3)
Senior Vice President- 1996 100,000 56,000 - 5,856(3)
Franchise Sales 1995 100,000 10,000 - 6,729(3)
5,590(4)
Daniel L. Breault..................... 1997 $ 120,538 $ - $ - $ 6,746(3)
Vice President - Operations(2) 1996 46,785 - - 2,455(3)
</TABLE>
Footnotes:
(1) Employment as Chief Executive Officer ceased on December 10, 1996.
(2) Employment commenced January 29, 1996.
(3) Represents premiums paid for health, life & disability insurance.
(4) Allocated contribution to Profit Sharing Plan.
Employment Agreements
Mr. Coles and Mr. Karp
In connection with the Acquisition, the Company entered into
employment agreements with Mr. Coles and Mr. Karp ("Coles and Karp"). The
employment agreements provide that Coles and Karp will be employed for an
initial term of five years, although either they 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 and Mr. Coles' employment with the Company ceased on December 10, 1995
and December 10, 1996, respectively,
-58-
<PAGE> 59
Under each employment agreement, Coles and Karp received 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, and separate from the employment
agreement, Coles and Karp are 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 both Coles and Karp will be entitled to receive a
second annual bonus (to a maximum of $350,000, although the Board of Directors
may increase the amount to be paid or declare a bonus in its sole discretion)
of 35% of the amount by which the annual consolidated Operating Cash Flow of
Cookies USA, as defined in the agreements, exceeds the following amounts for
each respective year:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($ 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, 1996 and 1997 did not exceed the above described noted targets and an
additional bonus was not paid.
Even though Coles and Karp ceased employment, each is entitled to
receive a bonus, if earned, in respect to the two fiscal years following the
cessation of their employment. The Company is not required in any event to pay
a bonus with respect to any fiscal year ending after 1998.
Each employment agreement contains a provision that prohibits Coles
and Karp 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.
Mr. Breault
Effective January 29, 1996, the Company entered into an employment
agreement with Mr. Breault, the Company's Vice President of Operations. Under
the agreement, Mr. Breault receives an annual salary of no less than $116,483
and is eligible to earn an annual bonus of $50,000 based upon meeting certain
performance targets. The agreement also has customary provisions for vacation
and fringe benefits.
The agreement provides for the employment of Mr. Breault for a rolling
twenty-four month period with such employment to be terminated upon the
occurrence of any of the following events (a) Mr. Breault's death, (b) Mr.
Breault's becoming disabled and remaining disabled for a substantially
continuous period of six months or greater, (c) mutual written agreement
between Mr. Breault and the Company, (d) written notice of termination from the
Company to Mr. Breault for any reason or no reason at all, or (e) written
notice of termination from the Company for "just cause" as defined in the
agreement. If the Company terminates Mr. Breault under provision (d) above,
then the Company must pay Mr. Breault 24 months of salary and bonus.
Stock Option Agreements.
In connection with the Acquisition, Cookies USA entered into
Non-Qualified Stock Option Agreements (the "Stock Option Agreements") with
Coles and Karp. Under the Stock Option Agreements, Coles and Karp are granted
an option to purchase 5,600 shares of Common Stock of Cookies USA at an
exercise price of $2.23 per share. Once vested, the options may be exercised
any time until the tenth anniversary of their issuance. Upon consummation of
the Acquisition and (a) after the exercise of warrants to purchase 8% of the
Common Stock of Cookies USA issued to the purchasers of the Notes, but before
the conversion of the Senior Preferred Stock, the shares of Common Stock
issuable under the Stock Option Agreements would represent 11.1% of the Cookies
USA Common Stock, and (b) after (i) exercise of such warrants and (ii)
conversion of the Senior Preferred Stock, the shares of Common Stock issuable
under the Stock Option Agreements would equal 9.9% of the Cookies USA Common
Stock.
-59-
<PAGE> 60
The options will become vested at the rate of 20% per year for each
fiscal year in which a Cookies USA's consolidated Operating Cash Flow (as
defined in Coles' and Karp's employment agreements) equals or exceeds the
following amounts for each respective year:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($ 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 Coles or Karp cease 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.
-60-
<PAGE> 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Great American Cookies 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 Cookies'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 Cookies' Common Stock owned by the directors and executive
officers of Great American Cookies:
<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
-61-
<PAGE> 62
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 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.
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 12 franchised Great American Cookies 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.
-62-
<PAGE> 63
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
Page
----
Schedule II-- Valuation and Qualifying Accounts....... 66
(3) Exhibits Index
The exhibits filed with or incorporated by reference in this
report are listed in the Exhibit Index beginning on page 64.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of fiscal 1997.
-63-
<PAGE> 64
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.**
12 -- Computation of Ratio of Earnings to Fixed Charges (as amended).**
27 -- Financial Data Schedule (for SEC use only).
</TABLE>
* 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.
-64-
<PAGE> 65
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 29, 1997 By: /s/ David B. Barr
----------------------------------------
David B. Barr, President,
Chief Financial Officer and Treasurer
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/ David B. Barr President (Principal Executive Officer), September 29, 1997
- ------------------------------ Chief Financial Officer, and Treasurer
David B. Barr (Principal Financial Officer)
/s/ Adam E. Max Director and Assistant Secretary September 29, 1997
- ------------------------------
Adam E. Max
/s/ Thomas H. Quinn Director September 29, 1997
- ------------------------------
Thomas H. Quinn
/s/ David W. Zalaznick Director September 29, 1997
- ------------------------------
David W. Zalaznick
</TABLE>
-65-
<PAGE> 66
GREAT AMERICAN COOKIE COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Retirements
-----------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Classification Fiscal Period Expenses Accounts Deductions of Fiscal Period
-------------- ------------- ---------- ---------- ---------- ----------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
<S> <C> <C> <C> <C> <C>
For the Fifty-Two Fiscal Weeks Ended June 29, 1997...... 0 0 0 0 0
======= ======= ======== ======= ========
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
======= ======= ======== ======= ========
</TABLE>
-66-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JUNE 29, 1997 AND THE STATEMENT OF OPERATIONS FOR THE FIFTY-TWO WEEK
PERIOD ENDED JUNE 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-29-1997
<EXCHANGE-RATE> 1
<CASH> 4,883,991
<SECURITIES> 0
<RECEIVABLES> 3,861,800
<ALLOWANCES> 0
<INVENTORY> 1,291,907
<CURRENT-ASSETS> 9,985,196
<PP&E> 11,058,793
<DEPRECIATION> 4,754,202
<TOTAL-ASSETS> 53,191,423
<CURRENT-LIABILITIES> 4,313,194
<BONDS> 40,000,000
0
0
<COMMON> 13,500,000
<OTHER-SE> (6,797,042)
<TOTAL-LIABILITY-AND-EQUITY> 53,191,423
<SALES> 33,645,368
<TOTAL-REVENUES> 40,042,497
<CGS> 18,615,205
<TOTAL-COSTS> 33,930,514
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,941,268
<INCOME-PRETAX> 1,421,347
<INCOME-TAX> 886,790
<INCOME-CONTINUING> 534,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534,557
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
