<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 33-76306
GREAT AMERICAN COOKIE COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1295221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4685 FREDERICK DRIVE, S.W.
ATLANTA, GEORGIA 30336
(Address of principal executive offices)
(404) 696-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
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<PAGE> 2
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of December 29, 1996 and June 30, 1996
Statement of Operations for the thirteen week periods ended
December 29, 1996 and December 28, 1995
Statement of Operations for the twenty-six week periods ended
December 29, 1996 and December 28, 1995
Statement of Changes in Stockholder's Equity for the twenty-six
week period ended December 29, 1996
Statement of Cash Flows for the twenty-six week periods ended
December 29, 1996 and December 28, 1995
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
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<PAGE> 3
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 29, JUNE 30,
1996 1996
------------ --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,328,917 $ 3,301,627
Accounts receivable - trade 2,022,474 1,675,584
Inventory 1,668,599 1,443,811
Prepaid expenses 1,261,219 1,175,309
Income tax receivable 204,234 155,789
Current deferred tax benefit 75,663 81,360
Current portion of notes receivable 584,052 198,085
Other receivables 1,170 33,899
----------- -----------
Total current assets 11,146,328 8,065,464
----------- -----------
Property and equipment, net of accumulated depreciation 7,064,478 8,325,726
Construction in progress, net of construction deposits received from franchisees 68,175 29,258
----------- -----------
7,132,653 8,354,984
----------- -----------
Other assets
Deferred loan costs, net of accumulated amortization
of $1,750,300 and $1,177,000, respectively 2,322,758 2,608,958
Notes receivable, net of current portion 141,740 19,963
Deferred tax benefit 1,419,143 1,419,143
Deposits 60,528 61,386
Accrued straight-line minimum rent receivable for subleases to franchisees 1,288,016 1,300,872
----------- -----------
5,232,185 5,410,322
----------- -----------
Cost in excess of fair value of net assets acquired (goodwill), net of
accumulated amortization of $2,669,051 and $1,798,551, respectively 32,283,274 32,718,474
----------- -----------
$55,794,440 $54,549,244
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 752,408 $ 832,044
Sales taxes payable 158,947 129,974
Accrued interest payable 1,997,969 1,996,681
Accrued expenses 927,386 839,479
Income taxes payable 972,412 225,564
Deposits 756,281 738,542
Dividends payable 125,000 125,000
----------- -----------
Total current liabilities 5,690,403 4,887,284
----------- -----------
Capital lease obligations, net 53,883 67,036
----------- -----------
Accrued straight-line minimum rent payable 2,137,802 2,176,523
----------- -----------
Long-term debt 40,000,000 40,000,000
----------- -----------
Commitments and contingencies
Stockholder's equity
Common stock, no par value, 2,000 shares authorized:
210 shares issued and outstanding 13,500,000 13,500,000
Additional paid-in capital 336,063 336,063
Accumulated deficit (5,923,711) (6,417,662)
----------- -----------
7,912,352 7,418,401
----------- -----------
$55,794,440 $54,549,244
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTEEN FOR THE THIRTEEN
WEEK PERIOD ENDED WEEK PERIOD ENDED
DECEMBER 29, 1996 DECEMBER 28, 1995
----------------- -----------------
<S> <C> <C>
Revenue:
Cookie and beverage sales $ 6,369,721 $ 7,086,741
Batter sales to franchisees 3,244,272 2,929,395
Franchise royalties 1,369,818 1,233,156
Franchise sales - existing and new stores 97,968 303,039
Other - net (219) 36,647
----------- -----------
Total revenue 11,081,560 11,588,978
----------- -----------
Operating expenses:
Cost of sales 4,864,280 5,441,172
Retail store occupancy 1,649,943 1,803,363
Other retail store expenses 259,302 355,211
Selling, general and administrative expenses 1,566,635 1,634,214
----------- -----------
Total operating expenses 8,340,160 9,233,960
----------- -----------
Other (income) expenses, net
Interest income (59,446) (10,056)
Interest expense 1,090,245 1,104,319
Amortization of deferred loan costs 143,100 143,100
----------- -----------
Total other expenses, net 1,173,899 1,237,363
----------- -----------
Income before taxes 1,567,501 1,117,655
State and federal income tax expense 678,338 465,361
----------- -----------
Net income $ 889,163 $ 652,294
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX FOR THE TWENTY-SIX
WEEK PERIOD ENDED WEEK PERIOD ENDED
DECEMBER 29, 1996 DECEMBER 28, 1995
------------------ ------------------
<S> <C> <C>
Revenue:
Cookie and beverage sales $12,193,673 $12,939,964
Batter sales to franchisees 5,666,276 5,131,338
Franchise royalties 2,468,552 2,268,998
Franchise sales - existing and new stores 883,276 457,576
Other - net (29,373) 64,954
----------- -----------
Total revenue 21,182,404 20,862,830
----------- -----------
Operating expenses:
Cost of sales 9,442,712 9,832,359
Retail store occupancy 3,398,007 3,543,257
Other retail store expenses 508,305 627,843
Selling, general and administrative expenses 3,387,346 3,315,647
----------- -----------
Total operating expenses 16,736,370 17,319,106
----------- -----------
Other (income) expenses, net
Interest income (92,276) (24,370)
Interest expense 2,180,615 2,208,378
Amortization of deferred loan costs 286,200 286,200
----------- -----------
Total other expenses, net 2,374,539 2,470,208
----------- -----------
Income before taxes 2,071,495 1,073,516
State and federal income tax expense 952,544 583,728
----------- -----------
Net income $ 1,118,951 $ 489,788
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX WEEK PERIOD ENDED DECEMBER 29, 1996
--------------------------------------------------------------
ADDITIONAL
COMMON PAID IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT EQUITY
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $13,500,000 $336,063 $(6,417,662) $7,418,401
Dividends -- -- (625,000) (625,000)
Current period net income -- -- 1,118,951 1,118,951
----------- -------- ----------- ----------
$13,500,000 $336,063 $(5,923,711) $7,912,352
=========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 7
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX FOR THE TWENTY-SIX
WEEK PERIOD WEEK PERIOD
ENDED ENDED
DECEMBER 29, 1996 DECEMBER 28, 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net income $1,118,951 $ 489,788
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation 893,617 803,448
Amortization of cost in excess of fair value of net assets acquired (goodwill) 435,200 434,351
Amortization of deferred loan costs 286,200 286,200
Net gain on sales and disposals of property and equipment (508,125) (169,017)
Net (decrease) increase in accrued straight-line minimum rent
receivable and payable (25,865) 83,240
Changes in assets and liabilities
Increase in accounts receivable (372,479) (529,078)
Increase in inventory (201,788) (266,052)
Increase in prepaid expenses (85,910) (75,377)
Increase in income tax receivable (48,445) 0
Decrease in current deferred tax benefit 5,697 195,997
Decrease (increase) in other receivables 32,729 (49,388)
Increase in deferred tax benefit 0 387,359
Decrease (increase) in deposits 858 (62,819)
Decrease in accounts payable (79,636) (212,909)
Increase in sales taxes payable 28,973 56,626
Increase in accrued interest payable 1,288 24,171
Increase (decrease) in accrued expenses 87,907 (319,286)
Increase in income taxes payable 746,848 0
Increase (decrease) in deposits 17,739 (64,439)
---------- -----------
Net cash provided by operating activities 2,333,759 1,012,815
---------- -----------
Cash flows from investing activities
Acquisitions of property and equipment, including net increase in construction
in progress, net of construction deposits received from franchisees (393,787) (1,268,928)
Proceeds from sales and disposals of property and equipment 284,131 383,689
Acceptance of notes receivable (2,224) 0
Proceeds from collection of notes receivable 443,564 263,154
---------- -----------
Net cash provided by (used for) investing activities 331,684 (622,085)
---------- -----------
Cash flows from financing activities
Principal repayments under capital lease obligations (13,153) (7,493)
Dividends paid (625,000) (827,900)
---------- -----------
Net cash used for financing activities (638,153) (835,393)
---------- -----------
Net increase (decrease) in cash and cash equivalents during period 2,027,290 (444,663)
---------- -----------
Cash and cash equivalents, beginning of period 3,301,627 4,251,780
---------- -----------
Cash and cash equivalents, end of period $5,328,917 $ 3,807,117
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE> 8
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX FOR THE TWENTY-SIX
WEEK PERIOD WEEK PERIOD
ENDED ENDED
DECEMBER 29, 1996 DECEMBER 28, 1995
------------------ ------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $2,179,327 $2,184,207
========== ==========
State and federal income taxes $ 3,550 $ 3,550
========== ==========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
During the twenty-six weeks ended December 29, 1996, notes receivable with face
amounts totaling $932,894 were received from unrelated franchisees in
connection with the sale of 6 Company-operated stores.
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE> 9
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Great American Cookie Company, Inc. is an operator and franchisor of
mall-based specialty retail cookie outlets and manufacturer of cookie
batter which is sold to Company-operated and franchised retail stores.
The accompanying financial statements of Great American Cookie Company,
Inc. (the "Company") for the thirteen weeks ended and for the twenty-six
weeks ended December 29, 1996 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position of the Company, and the results of
its operations and its cash flows for the periods presented. However,
these results are not necessarily indicative of the results for any other
interim period or the full year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Management believes that the
disclosures included in the accompanying interim financial statements and
footnotes are adequate to make the information not misleading, but should
be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended June 30,
1996. Earnings per share is not presented, as the Company is
wholly-owned.
2. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 29, JUNE 30,
1996 1996
------------ --------
<S> <C> <C>
Notes receivable $725,792 $218,048
Less: current portion 584,052 198,085
-------- --------
Notes receivable, net of current portion $141,740 $ 19,963
======== ========
</TABLE>
Notes receivable are due from various franchisees and principally result
from the sale of existing Company stores to franchisees. Each note for the
sale of a store is guaranteed by the purchaser and collateralized by the
assets sold. Most notes are due in monthly installments of principal and
interest, with the interest rates ranging from 9% to 12.5% per annum.
-9-
<PAGE> 10
GREAT AMERICAN COOKIE COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF COOKIES USA, INC.)
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 29, JUNE 30,
1996 1996
------------ -----------
<S> <C> <C>
Land $ 240,000 $ 240,000
Building 760,795 760,795
Building and leasehold improvements 7,088,859 7,724,036
Furniture, fixtures, and equipment 3,141,038 3,227,210
Vehicles 12,779 12,779
----------- -----------
11,243,471 11,964,820
Less: accumulated depreciation (4,178,993) (3,639,094)
----------- -----------
Property and equipment -- net $ 7,064,478 $ 8,325,726
=========== ===========
</TABLE>
4. LONG-TERM DEBT
Notes payable as of December 29, 1996 and June 30, 1996 represent notes
issued in connection with the acquisition of the Company on December 10,
1993. Notes payable are described as follows:
<TABLE>
<S> <C>
10.875% senior secured notes payable due January
15, 2001, Series B, (the "Notes"). Interest
accrues daily and is payable semi-annually
on January 15 and July 15. $40,000,000
===========
</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.
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of the results of operations of Great
American Cookie Company, Inc. (the "Company") for the thirteen weeks ended
December 29, 1996 compared to the results of operations for the thirteen weeks
ended December 28, 1995 and for the twenty-six weeks ended December 29, 1996
compared to the twenty-six weeks ended December 28, 1995 is below. The factors
cited in the following discussion as contributing to changes in operating
results are listed in order of importance; however, unless otherwise indicated
in such discussion, the quantitative importance of any such factors cannot be
determined by management and is not stated.
THIRTEEN WEEKS ENDED DECEMBER 29, 1996 (SECOND QUARTER OF FISCAL 1997) COMPARED
TO THIRTEEN WEEKS ENDED DECEMBER 28, 1995 (SECOND QUARTER OF FISCAL 1996)
Company and Franchise Store Activity
As of December 29, 1996 there were 98 Company-operated stores and 232
franchised stores in operation. The store activity for the second quarter of
fiscal 1997 and second quarter of fiscal 1996 is summarized as follows:
<TABLE>
<CAPTION>
SECOND QUARTER SECOND QUARTER
OF FISCAL 1997 OF FISCAL 1996
-------------------- --------------------
COMPANY- COMPANY-
OPERATED FRANCHISED OPERATED FRANCHISED
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Stores open as of beginning of the quarter 101 229 110 221
Stores opened (including relocations) 0 3 5 2
Stores closed (including relocations) (1) (2) (1) (1)
Stores sold to franchisees (3) 3 (4) 4
Stores acquired from franchisees 1 (1) 1 (1)
--- --- --- ---
Stores open as of the end of the quarter 98 232 111 225
Satellite locations as of the end of the quarter 10 30 12 36
--- --- --- ---
Total outlets as of the end of the quarter 108 262 123 261
=== === === ===
</TABLE>
The above activity results in 1,298 Company-operated equivalent store
weeks and 2,988 franchisee-operated equivalent store weeks during the thirteen
week period ended December 29, 1996 compared to 1,429 Company-operated
equivalent store weeks and 2,898 franchisee-operated equivalent store weeks
during the thirteen week period ended December 28, 1995.
Total Revenue
Total revenue decreased $507,000 or approximately 4.4% during the second
quarter of fiscal 1997 compared to the second quarter of fiscal 1996. Each of
the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores decreased
$717,000, or approximately 10.1%, during the second quarter of fiscal
1997 compared to the second quarter of fiscal 1996. The decrease in
revenue from Company-operated retail stores was attributable to (a)
an approximately 9.2% 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 0.9%. On a comparable
store basis, for those stores which were Company-operated in both
fiscal 1997 and 1996, sales volumes increased 2.6% during the
quarter. The average retail sales volume decreased at the same time
that comparable store sales volumes increased due to some stores not
being
-11-
<PAGE> 12
Company-operated in both fiscal 1997 and 1996, including those Company stores
with higher than average sales volumes which were sold to franchisees in fiscal
1997 and 1996.
- Batter sales to franchisees increased $315,000, or approximately
10.7%, during the second quarter of fiscal 1997 compared to the
second quarter of fiscal 1996. The increase in batter sales to
franchisees was primarily attributable to (a) a 7.6% increase in the
volume of batter sold per franchisee-operated equivalent store week,
and (b) an approximately 3.1% increase in franchisee-operated
equivalent store weeks.
- Franchise royalties increased $137,000, or approximately 11.1%,
during the second quarter of fiscal 1997 compared to the second
quarter of fiscal 1996. The increase in franchise royalties was
attributable to (a) an increase in the average retail sales volume
per franchisee-operated store of 8.0%, and (b) an approximately 3.1%
increase in franchisee-operated equivalent store weeks. On a
comparable store basis, for those stores which were
franchisee-operated in fiscal 1997 and 1996, management estimates
franchisees' sales volumes increased 5.2% during the quarter.
- Revenue from franchise sales decreased $205,000, or approximately
67.7%, during the second quarter of fiscal 1997 compared to the
second quarter of fiscal 1996. Revenue from selling existing and new
stores to franchisees is summarized as follows (rounded):
<TABLE>
<CAPTION>
SECOND QUARTER SECOND QUARTER
FISCAL 1997 FISCAL 1996
-------------- --------------
<S> <C> <C>
Number of licenses sold to franchisees
- existing stores 3 4
- new stores 3 2
Cash and notes from sale of existing stores $ 200,000 $ 694,000
Less: net book value of existing stores sold (177,000) (452,000)
--------- ----------
Revenue from sale of existing stores 23,000 242,000
--------- ---------
Revenue from license fees for new stores 75,000 50,000
Revenue from other fees 0 11,000
--------- ---------
Revenue from license fees
for new stores and other fees 75,000 61,000
--------- ---------
Total revenue from sale of existing
and new stores to franchisees $ 98,000 $ 303,000
========= =========
</TABLE>
- Other revenue decreased $37,000, or approximately 101%, during the
second quarter of fiscal 1997 compared to the second quarter of
fiscal 1996. The decrease in other revenue is primarily attributable
to (a) a decrease in sales of miscellaneous supplies to franchise
stores, and (b) a decrease in construction assistance revenue for
construction assistance performed by the Company for the franchisees.
Cost of Sales
Cost of sales decreased $577,000, or approximately 10.6%, during the
second quarter of fiscal 1997 compared to the second quarter of fiscal 1996.
The decrease in cost of sales was primarily attributable to (a) a decline in
cookie and beverage sales due to less Company-operated retail stores, (b) a
decrease in the cost of paper supplies within Company-operated retail stores,
(c) an increase in wholesale batter margins, offset by (d) an increase in
batter sales to franchisees.
-12-
<PAGE> 13
Retail Store Occupancy
Retail store occupancy costs decreased $153,000, or approximately 8.5%,
during the second quarter of fiscal 1997 compared to the second quarter of
fiscal 1996. The decrease was primarily attributable to (a) a decrease in rent
expense as a result of a decrease in Company-operated equivalent store weeks,
and (b) a decrease in repairs and maintenance costs.
Other Retail Store Expenses
Other retail store expenses decreased $96,000, or approximately 27.0%,
during the second quarter of fiscal 1997 compared to the second quarter of
fiscal 1996. The decrease in other retail store expenses was primarily
attributable to (a) a decrease in smallwares purchases due to the opening of 4
less Company stores in the second quarter of fiscal 1997 versus the second
quarter of fiscal 1996, and (b) a decrease in Company-operated equivalent store
weeks.
Selling, General and Administrative
Selling, general and administrative expenses decreased $68,000, or
approximately 4.1%, during the second quarter of fiscal 1997 compared to the
second quarter of fiscal 1996. This decrease was primarily attributable to (a)
a decrease in travel costs due to less frequent store reviews by field
supervisors, (b) a decrease in the cost of office supplies and postage at the
support center (home office) in Atlanta, and (c) a decrease in data processing
expense as a result of the Company incurring start-up costs in the second
quarter of fiscal 1996 related to its conversion to an in-house payroll
processing system, offset by (d) an increase in professional service fees, and
(e) an increase in franchise sales advertising.
Other Expenses, Net
Other expenses, net, decreased $63,000, or approximately 5.1%, during the
second quarter of fiscal 1997 compared to the second quarter of fiscal 1996.
The decrease was primarily attributable to (a) an increase in interest income,
and (b) a decrease in interest expense.
Net Income
Net income increased $237,000, or approximately 36.3%, for the second
quarter of fiscal 1997 compared to the second quarter of fiscal 1996. The
increase in net income was primarily attributable to (a) an approximately 16.4%
increase in operating income, (b) a 5.1% decrease in other expenses, net,
offset by (c) a 45.8% increase in state and federal income tax expense.
-13-
<PAGE> 14
TWENTY-SIX WEEKS ENDED DECEMBER 29, 1996 (FISCAL 1997 YEAR-TO-DATE) COMPARED TO
TWENTY-SIX WEEKS ENDED DECEMBER 28, 1995 (FISCAL 1996 YEAR-TO-DATE)
Company and Franchise Store Activity
As of December 29, 1996 there were 98 Company-operated stores and 232
franchised stores in operation. The store activity for fiscal 1997 year-to-date
and for fiscal 1996 year-to-date is summarized as follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
YEAR-TO-DATE YEAR-TO-DATE
-------------------- --------------------
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) 0 5 9 8
Stores closed (including relocations) (1) (3) (1) (2)
Stores sold to franchisees (8) 8 (5) 5
Stores acquired from franchisees 3 (3) 1 (1)
--- --- --- ---
Stores open as of the end of the quarter 98 232 111 225
Satellite locations as of the end of the quarter 10 30 12 36
--- --- --- ---
Total outlets as of the end of the quarter 108 262 123 261
=== === === ===
</TABLE>
The above activity results in 2,656 Company-operated equivalent store
weeks and 5,907 franchisee-operated equivalent store weeks during the
twenty-six week period ended December 29, 1996 compared to 2,830
Company-operated equivalent store weeks and 5,731 franchisee-operated
equivalent store weeks during the twenty-six week period ended December 28,
1995.
Total Revenue
Total revenue increased $320,006 or approximately 1.5% during the
twenty-six weeks ended December 29, 1996 compared to the twenty-six weeks ended
December 28, 1995. Each of the Company's revenue sources is discussed below:
- Cookie and beverage sales at Company-operated retail stores decreased
$746,000, or approximately 5.8%, during the twenty-six weeks ended
December 29, 1996 compared to the twenty-six weeks ended December 28,
1995. The decrease in revenue from Company-operated retail stores was
attributable to (a) an approximately 6.1% decrease in Company-operated
equivalent store weeks, offset by (b) a 0.3% increase in the average
retail sales volume for Company-operated stores. On a comparable
store basis, for those stores which were Company-operated in both
fiscal 1997 and 1996, sales volumes increased 3.1%.
- Batter sales to franchisees increased $535,000, or approximately
10.4%, during the twenty-six weeks ended December 29, 1996, compared
to the twenty-six weeks ended December 28, 1995. The increase in
batter sales to franchisees was primarily attributable to (a) a 7.3%
increase in the volume of batter sold per franchisee-operated
equivalent store week, and (b) an approximately 3.1% increase in
franchisee-operated equivalent store weeks.
-14-
<PAGE> 15
- Franchise royalties increased $200,000, or approximately 8.8%, during
the twenty-six weeks ended December 29, 1996 compared to the
twenty-six weeks ended December 28, 1995. The increase in franchise
royalties was attributable to (a) an increase in the average retail
sales volume per franchisee-operated store of 5.7%, and (b) an
approximately 3.1% increase in franchisee-operated equivalent store
weeks. On a comparable store basis, for those stores which were
franchisee-operated in fiscal 1997 and 1996, management estimates
franchisees' sales volumes increased 3.9%.
- Revenue from franchise sales increased $426,000, or approximately
93.0%, during the twenty-six weeks ended December 29, 1996 compared to
the twenty-six weeks ended December 28, 1995. 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 8 5
- new stores 5 6
Cash and notes from sale of existing stores $1,327,000 $ 801,000
Less: net book value of existing stores sold (574,000) (504,000)
---------- ----------
Revenue from sale of existing stores 753,000 297,000
---------- ----------
Revenue from license fees for new stores 125,000 150,000
Revenue from other fees 5,000 11,000
---------- ----------
Revenue from license fees
for new stores and other fees 130,000 161,000
---------- ----------
Total revenue from sale of existing
and new stores to franchisees $ 883,000 $ 458,000
========== =========
</TABLE>
- Other revenue decreased $94,000, or approximately 145%, during
the twenty-six weeks ended December 29, 1996 compared to the
twenty-six weeks ended December 28, 1995. The decrease in other
revenue is primarily attributable to (a) a decrease in sales of
miscellaneous supplies to franchise stores, (b) a decrease in
construction assistance revenue for construction assistance performed
by the Company for the franchisees, and (c) non-recurring payments
received from mall developers in fiscal 1996.
Cost of Sales
Cost of sales decreased $390,000, or approximately 4.0%, during the
twenty-six weeks ended December 29, 1996 compared to the twenty-six weeks ended
December 28, 1995. The decrease in cost of sales was primarily attributable to
(a) a decline in cookie and beverage sales due to less Company-operated retail
stores, (b) a decrease in the cost of paper supplies within Company-operated
retail stores, (c) an increase in wholesale batter margins as a result of a
price increase enacted in October 1996, offset by (d) an increase in batter
sales to franchisees.
Retail Store Occupancy
Retail store occupancy costs decreased $145,000, or approximately 4.1%,
during the twenty-six weeks ended December 29, 1996 compared to the twenty-six
weeks ended December 28, 1995. The decrease was primarily attributable to (a) a
decrease in rent as a result of a decrease in Company-operated equivalent store
weeks, and (b) a decrease in repairs and maintenance costs.
-15-
<PAGE> 16
Other Retail Store Expenses
Other retail store expenses decreased $120,000, or approximately 19.0%,
during the twenty-six weeks ended December 29, 1996 compared to the twenty-six
weeks ended December 28, 1995. The decrease in other retail store expenses was
primarily attributable to (a) a decrease in smallwares purchases due to the
opening of 8 less Company stores for fiscal 1997 year-to-date versus fiscal
1996 year-to-date, and (b) a decrease in Company-operated equivalent store
weeks.
Selling, General and Administrative
Selling, general and administrative expenses increased $72,000, or
approximately 2.2%, during the twenty-six weeks ended December 29, 1996
compared to the twenty-six weeks ended December 28, 1995. This increase was
primarily attributable to (a) an increase in professional service fees, (b) an
increase in marketing costs due to the development and rollout of new holiday
in-store advertising and point of sale materials, offset by (c) a decrease in
travel costs due to less frequent store reviews by field supervisors, (d) a
decrease in the cost of office supplies and postage at the support center (home
office) in Atlanta, and (e) a decrease in data processing expense as a result
of the Company incurring start-up costs in fiscal 1996 related to its
conversion to an in-house payroll processing system.
Other Expenses, Net
Other expenses, net, decreased $96,000, or approximately 3.9%, during the
twenty-six weeks ended December 29, 1996 compared to the twenty-six weeks ended
December 28, 1995. The decrease was primarily attributable to (a) an increase
in interest income, and (b) a decrease in interest expense.
Net Income
Net income increased $629,000, or approximately 128%, for the twenty-six
weeks ended December 29, 1996 compared to the twenty-six weeks ended December
28, 1995. The increase in net income was primarily attributable to (a) an
approximately 25.5% increase in operating income, (b) a 3.9% decrease in other
expenses, net, offset by (c) a 63.2% increase in state and federal income tax
expense.
-16-
<PAGE> 17
FIXED CHARGE COVERAGE
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented below as management believes that certain investors find it to be
a useful tool for measuring the ability to service debt. EBITDA does not
represent net income or cash flows from operations as these terms are defined
by generally accepted accounting principles and does not necessarily indicate
whether cash flows have been or will be sufficient to fund cash needs. Adjusted
EBITDA includes adjustments to EBITDA used in the indenture for the 10.875%
senior secured notes payable due January 15, 2001, Series B to calculate
compliance with the Fixed Charge Coverage Ratio per such indenture, consisting
of adding back interest income and the elimination of certain non-cash charges,
including losses on the sale of fixed assets and accrual of lease expense in
excess of cash paid. Unaudited EBITDA and Adjusted EBITDA are calculated as
follows (000's omitted):
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
THIRTEEN WEEK THIRTEEN WEEK TWENTY-SIX WEEK TWENTY-SIX WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 29, 1996 DECEMBER 28, 1995 DECEMBER 29, 1996 DECEMBER 28, 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income $ 889 $ 652 $1,119 $ 490
Add:
Depreciation 433 428 894 803
Amortization of goodwill 217 217 435 434
Interest expense,
net of interest income 1,030 1,094 2,088 2,184
Amortization of debt
issue costs 143 143 286 286
Provision for income taxes 678 465 953 584
------ ------ ------ ------
EBITDA 3,390 2,999 5,775 4,781
Add:
Other non-cash items 29 44 47 74
Interest income 59 10 92 24
------ ------ ------ ------
Adjusted EBITDA $3,478 $3,053 $5,914 $4,879
====== ====== ====== ======
</TABLE>
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 December 29, 1996 and as
of June 30, 1996 was $5.5 million and $3.2 million, respectively. The specialty
retail cookie business does not require the maintenance of significant
receivables or inventories; therefore, it is not unusual for the Company's
working capital balance to be less than $5 million.
The Company continually invests in its business through the addition of
new Company-operated stores. These store additions are reflected as long-term
assets and not as part of working capital. The Company anticipates that it will
build approximately three Company-operated stores, including relocations,
during fiscal 1997, requiring aggregate expenditures of approximately $450,000
for store opening costs. The Company anticipates that such costs will be funded
with cash generated by operations and the sale of existing Company-operated
stores to franchisees, including initial license fees. The number of
Company-operated stores to be opened may be greater or less than anticipated
depending upon a number of factors including the Company's ability to obtain
locations on acceptable lease terms and/or the Company's ability to identify
potential franchisees and to license such locations to franchisees before
construction and store opening costs are incurred. The Company's future
liquidity is dependent upon its ability to sell stores to franchisees.
-17-
<PAGE> 18
During the thirteen week period ended December 29, 1996, the Company
incurred total capital expenditures of approximately $166,000, including a net
decrease in construction in progress of $5,000. Total fiscal year-to-date
capital expenditures are approximately $394,000, which includes a net increase
in construction in progress of $39,000. The Company estimates that to
adequately maintain the Atlanta batter production facility and existing
Company-operated retail units, approximately $300,000 to $400,000 of capital
expenditures are required annually.
A portion of the consideration paid in connection with the acquisition of
the Company in December 1993 consisted of Cookies USA Senior Preferred Stock
and the cash provided by the sale by Cookies USA of Subordinated Notes, Junior
Class A Preferred Stock, Junior Class B Preferred Stock, and Common Stock. The
Company is the sole source of any cash to be paid as interest, principal
payments or dividends on such securities or to pay any other expenses,
including management fees, incurred by Cookies USA, and taxes. The Company
expects to pay dividends and tax payments to Cookies USA in amounts sufficient
to service the cash flow requirements of Cookies USA to the extent that such
payments are permitted by the terms of the Company's Senior Secured Notes and,
if additional indebtedness is incurred that restricts such payments, by the
terms of such additional indebtedness. During the thirteen week period ended
December 29, 1996 the Company declared and paid $625,000 of dividends to
Cookies USA.
After giving effect to the acquisition and the issuance of the Company's
Senior Secured Notes, the Company will not have any mandatory debt amortization
requirements until the year 2001. The Senior Secured Notes require semi-annual
interest payments of approximately $2,175,000 on January 15 and July 15. As of
December 29, 1996 the Company had a cash balance of approximately $5,329,000.
The Company anticipates that additional cash flow will be generated primarily
from the sale of existing retail stores to franchisees so that, with cash
generated from retail store and batter facility operations and royalties from
franchisees, the Company will be able to meet its debt service requirements as
well as its capital expenditure requirements for the foreseeable future.
Notwithstanding this, the Company's liquidity is dependent upon its ability to
sell both existing and new stores to franchisees.
SEASONALITY AND INFLATION
The Company's sales and profitability are subject to slight seasonal
fluctuation and are traditionally higher during the Christmas holiday season
because of various factors such as increased mall traffic and holiday gift
purchases.
The Company does not believe that historically inflation has materially
affected earnings. Most of the leases for the Company's stores contain rental
escalation clauses based upon cost increases incurred by lessors, and many of
the Company's employees are paid hourly rates related to the federal minimum
wage. The federal minimum wage increased from $4.25 to $4.75 on October 1, 1996
and will increase from $4.75 to $5.15 on September 1, 1997. These increases may
negatively impact the Company's payroll costs in the short-term, but management
believes such impact can be negated in the long-term through increased
efficiencies in its operations and, as necessary, through retail price
increases. Historically, the Company has been able to increase prices
sufficiently to match increases in its operating costs, but there is no
assurance that it will be able to do so in the future.
GOODWILL
In evaluating the Company's goodwill for possible impairment, management
has considered potential growth rates in both sales and EBITDA over the next
five years. Management ultimately became comfortable with such value based on
potential growth rates which are lower than those the Company has experienced
in the five years preceding the acquisition. The impairment review is based on
comparing the carrying amount to the undiscounted cash flows over the remaining
amortization period. No impairment is indicated as of December 29, 1996.
-18-
<PAGE> 19
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to claims and legal actions in
the ordinary course of its business. The Company is not a party to any
litigation that would have a material adverse effect on the Company or its
business and is not aware that such litigation is threatened.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended December 29, 1996.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GREAT AMERICAN COOKIE COMPANY, INC.
Date: February 12, 1997 By: /s/ David B. Barr
-------------------------------------------
David B. Barr, President,
Chief Financial Officer, and Treasurer
(Principal Financial Officer)
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AT DECEMBER 29, 1996 (UNAUDITED) AND THE STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEK PERIOD ENDED DECEMBER 29, 1996 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-29-1996
<CASH> 5,328,917
<SECURITIES> 0
<RECEIVABLES> 2,606,526
<ALLOWANCES> 0
<INVENTORY> 1,668,599
<CURRENT-ASSETS> 11,146,328
<PP&E> 11,243,471
<DEPRECIATION> 4,178,993
<TOTAL-ASSETS> 55,794,440
<CURRENT-LIABILITIES> 5,690,403
<BONDS> 40,000,000
0
0
<COMMON> 13,500,000
<OTHER-SE> (5,587,648)
<TOTAL-LIABILITY-AND-EQUITY> 55,794,440
<SALES> 17,859,949
<TOTAL-REVENUES> 21,182,404
<CGS> 9,442,712
<TOTAL-COSTS> 16,736,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,374,539
<INCOME-PRETAX> 2,071,495
<INCOME-TAX> 952,544
<INCOME-CONTINUING> 1,118,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,118,951
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
